Dr. Tamás Fézer

European and International Contract Law E-learning Text Book

TÁMOP-4.1.2.D-12/1/KONV-2012-0008

Debrecen

2014

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CONTENT

Introduction To The Law Of Contracts ...................................................................................... 5  I. Definition of a contract – Binding Promises ........................................................................... 6  

1. Subjective and Objective Theories ..................................................................................... 6  A. Common Law Legal Systems ........................................................................................ 6  B. Convention on International Sale of Goods (CISG) .................................................... 10  C. International Law (UNIDROIT) .................................................................................. 10  D. Principles of European Contract Law (PECL) ............................................................ 10  

2. Doctrine of Consideration ................................................................................................ 11  A. Common Law .............................................................................................................. 11  B. CISG ............................................................................................................................ 12  C. UNIDROIT Principles ................................................................................................. 12  D. PECL ........................................................................................................................... 12  E. Analysis of common law and international approaches .............................................. 13  

II. Formation of a contract ........................................................................................................ 14  1. Formation of Contracts under Civil Law ......................................................................... 14  

A. German Law ................................................................................................................ 14  B. Italian Law ................................................................................................................... 14  

2. Formation of Contracts under English Law ..................................................................... 14  III. Interpretation of Contracts .................................................................................................. 16  

1. Interpretation of Contracts under Civil Law .................................................................... 16  A. German Law ................................................................................................................ 16  B. Italian Law ................................................................................................................... 16  

2. Interpretation of Contracts under Common Law ............................................................. 16  IV. Relevance of Good Faith in Contract Law ......................................................................... 18  

1. Good Faith under national laws ........................................................................................ 18  2. Good Faith in International and European Contract Law ................................................ 19  3. Pre-contractual Obligations .............................................................................................. 21  

A. Germany ...................................................................................................................... 21  B. Italy .............................................................................................................................. 21  C. England ........................................................................................................................ 22  

V. Harmonizing Contract Law in the European Union ............................................................ 23  1. Scope and Importance of Harmonization ......................................................................... 23  2. Private International Law ................................................................................................. 24  

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3. Consumer Protection Perspective ..................................................................................... 27  4. Principles of European Contract Law .............................................................................. 29  

VI. International Sale of Goods ................................................................................................ 31  1. Scope and application of the Convention ......................................................................... 31  

A. Transactions Covered in CISG .................................................................................... 31  B. Opting In and Opting Out ............................................................................................ 32  C. Sale Defined ................................................................................................................. 32  D. Goods Defined and Exclusions ................................................................................... 32  E. Contractual Issues ........................................................................................................ 33  F. Model Case on the Scope of CISG .............................................................................. 34  

2. Interpreting the Convention .............................................................................................. 34  A. Interpreting the CISG .................................................................................................. 35  B. General Principles ........................................................................................................ 35  C. Rules of Private International Law .............................................................................. 35  

3. Interpreting the Sales Contract ......................................................................................... 35  A. Combining the Objective and the Subjective Approach ............................................. 36  B. Negotiations ................................................................................................................. 36  C. Model Case for Interpretation ...................................................................................... 36  D. Practices and Usages ................................................................................................... 37  E. Form of the Sales Contract .......................................................................................... 37  

3. Formation of the Contract ................................................................................................ 37  A. The Offer ..................................................................................................................... 37  B. The Acceptance ........................................................................................................... 38  C. Model Case for Formation ........................................................................................... 39  D. Model Case for Rejection ............................................................................................ 40  

4. General Standards for Performance ................................................................................. 40  A. Avoidance .................................................................................................................... 41  B. Requests for Specific Performance .............................................................................. 41  C. Seller’s Basic Obligations ............................................................................................ 41  D. Buyer’s Basic Obligations ........................................................................................... 42  E. Model Case for the Paying the Price ............................................................................ 43  

5. The Passing of Risk .......................................................................................................... 43  6. Remedies .......................................................................................................................... 46  

A. Buyer’s Remedies ........................................................................................................ 46  B. Model Case for Avoidance .......................................................................................... 47  C. Seller’s Remedies ........................................................................................................ 47  D. Remedies Available to Both Buyers and Sellers ......................................................... 48  

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E. Model Case on Damages ............................................................................................. 49  7. Excuses for Non-Performance .......................................................................................... 49  

A. Force Majeure .............................................................................................................. 49  B. Model Case for Force Majeure .................................................................................... 50  C. Dirty Hands Rule ......................................................................................................... 50  

8. Exercises to the Application of the CISG ........................................................................ 50  VII. English Contract Law ....................................................................................................... 53  

1. Formation of a contract .................................................................................................... 53  2. Offer ................................................................................................................................. 53  3. Acceptance ....................................................................................................................... 53  4. Consideration ................................................................................................................... 54  5. Contractual intention ........................................................................................................ 55  6. Form ................................................................................................................................. 55  7. Contents of a contract ....................................................................................................... 55  

A. Express terms ............................................................................................................... 55  B. Implied terms ............................................................................................................... 56  

8. The End of a Contract ...................................................................................................... 57  A. Expiration .................................................................................................................... 57  B. Termination .................................................................................................................. 57  C. Vitiation ....................................................................................................................... 59  D. Misrepresentation ........................................................................................................ 59  E. Mistake ......................................................................................................................... 59  F. Frustration .................................................................................................................... 60  

9. Damages/Remedies .......................................................................................................... 60  A. Specific Performance ................................................................................................... 61  B. Injunction ..................................................................................................................... 61  

VIII. Nature of French Contract Law ....................................................................................... 62  1. Theory and effect of contracts .......................................................................................... 62  2. Interpretation of contracts ................................................................................................ 62  3. Classification of Contracts ............................................................................................... 63  4. The formation process ...................................................................................................... 63  

A. Offer ............................................................................................................................ 63  B. Acceptance ................................................................................................................... 64  C. Special Rules of Electronic Commerce ....................................................................... 64  D. Nullity .......................................................................................................................... 65  

5. Non-performance of Obligations and Remedies .............................................................. 65  A. Conditions of liability .................................................................................................. 66  

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B. Penalty Clauses ............................................................................................................ 66  C. Right to Withhold Performance ................................................................................... 66  D. Forced Performance ..................................................................................................... 66  E. Right to Terminate the Contract .................................................................................. 67  

IX. Novelties in German Contract Law .................................................................................... 68  1. Scope of the Reform ......................................................................................................... 68  2. Remedies in Case of Breach ............................................................................................. 69  

A. System of Remedies .................................................................................................... 69  B. Urging the Debtor to Perform ...................................................................................... 70  

Closing Remarks ...................................................................................................................... 73  

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INTRODUCTION TO THE LAW OF CONTRACTS

Law has many functions in modern societies. The most notable one is a regulatory function that governs relationships in society with not only providing mandatory norms or behavioral patterns to individuals but an effective way of settling debates arisen from violations against such duties. The regulatory function of law is somewhat confusing if we take into account the multiple columns and areas of law. Some offer model norms to create behavioral patterns (e.g. civil law in general), while other areas (e.g. public law, criminal law) impose sanctions if the only accepted pattern stated by the law is infringed. However, not only legal norms create duties. Modern societies acknowledge the existence of free will and autonomy of individuals when allowing parties to form voluntary obligations, most commonly toward each other in the form of a contract. Contracts can be treated as binding promises toward another individual (natural and juridical persons as well) that constitute duties that are enforceable using the system of law. Contractual freedom is an essential element as it grants an almost unrestricted freedom regarding the will to conclude a contract, the form of the contract, choose the contractual partner and most importantly to determine the content of the contract. This autonomous concept of contract law supports the idea that not only the legislator but individuals (again, bot natural and juridical persons) have the capacity to enact obligations. While legal norms are binding to all members of the society, contractual obligations are most commonly enact specific duties just in the relative relationship of the parties involved in the agreement. Contract law is an undeniably essential element of every legal system as it completes the structure of law. Contract law has significantly different models in jurisdictions, most notably when it comes to the conclusion on how to distinguish nonbinding promises from binding contractual obligations. As contract necessarily bears the possibility of enforcement, it remains a vital question on what elements a legal system requires when labeling certain promises contracts, while others remain in the uncertain territory of nonbinding promises. Even if private international law marks the applicable law in most situations, we cannot deny that contract law has an important international character regulating and keeping international commerce in the loop. Actors in the international business market favor predictable and unified rules when it comes to settle a dispute arisen from an international contractual debate. Still, international law is considered patchy when it comes to a unified law of contracts that could serve as a real guideline in international business relations. On the other hand, multiple treaties, conventions and other sources of international business law contain relevant rules of contracts and under the frames of the European Union we can see a growing dimension of legislation that covers contractual questions. The purpose of this textbook is to systemize the structure of international contract law and finds the place of a special European Union contract law. Beside the obviously very important United Nations Convention on the International Sale of Goods (hereinafter: the Vienna Convention or CISG), contract law also has a close connection with other treaties, such as the settlement of business disputes in international law, transportation issues and financial background, payment methods in international commerce. However, this textbook does not deal with these questions and focuses exclusively on classic contract law problems.

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I. DEFINITION OF A CONTRACT – BINDING PROMISES It seems to be an obvious set of criterions when we would like to draw the line between binding promises (contracts) and nonbinding promises without any enforcing power. Still, different legal regimes provide various answers to this otherwise easy question. If it comes to the definition of contract we may state that contracts are mutual promises by two or more parties with full consent in order to achieve certain legally relevant effects. This mutual consent is, however, hard to find in some situations, therefor common law and civil law legal systems can be quite different when it comes to the real subjective definition of contracts. In order to understand the various concepts behind contract, we have to analyze competing theories under the following regulatory instruments:

• United States Restatement of Law (Second) • International Institutes for the Unification of Private Law (UNIDROIT) Principles of

International Commercial Contracts 2004 (hereinafter: UNIDROIT Principles) • Principles of European Contract Law 1999-2003 prepared by Commission on

European Contract Law (hereinafter: PECL) • Vienna Convention (CISG) on the International Sale of Goods 1980

In this chapter, we follow a case-based approach as both the subjective and objective theories of the definition of a contract can be experienced mostly in judicial practice, rather than in legislative instruments. However, definitive elements of a contract (binding promise) may also be relevant in legislative sources, especially in civil law legal systems. In order to prove what differences exist in various legal systems when it comes to the interpretation of a contract, we should focus on the following factors:

• What constitutes (mutual) consent between contractual parties? • Is consideration an essential element of a binding promise? • Are there any ways to derogate the Roman law rule of ‘pacta sunt servanda’

(promises must be kept and performed)? When it comes to the international dimension of contract law, most international treaties and conventions put a significant emphasis on the above listed questions. However, these international instruments often build their own regime using legal institutions of either the civil law or the common law legal systems. It is not rare to see a combined or mixed theory of contract law in such treaties. On the other hand, some of this intended mix is a result of compromises. If an international organization wishes to convince the most states to ratify the convention – that should be the primary goal of these international instruments – certain leniency must be shown toward both legal systems. 1. Subjective and Objective Theories A. Common Law Legal Systems In common law legal systems the leading case to subjective theory is the Raffles v. Wichelhaus (England 1864) case, the infamous Peerless case1 as most common lawyers know it. Facts: Raffles (Plaintiff) contracted to sell 125 bales of Surat cotton to Wichelhaus (Defendant). The goods were to be shipped from Bombay to Liverpool, England on the ship 1 Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng. Rep. 373 (Ex. 1864)

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“Peerless”. Neither party was aware that there were two ships names “Peerless” carrying cotton from Bombay to Liverpool, one arriving in October and the other in December. Wichelhaus thought he had purchased the cotton arriving on the October ship, but Raffles sent his cotton on December ship. Wichelhaus refused to accept delivery of the cotton arriving on the December ship and Raffles brought this lawsuit for breach of contract. If a latent ambiguity arises that shows that there had been no meeting of the minds, have the parties given mutual assent to contract? According to the court, no it is not. If a latent ambiguity arises that shows that there had been no meeting of the minds, there is no mutual assent to contract. Issues: Is parol evidence admissible to determine the meaning each party had assigned regarding a latent ambiguity? Yes. Parol evidence is admissible to determine the meaning each party had assigned regarding a latent ambiguity. Subjective intention is of no avail unless stated at the time of the contract. The words “to arrive ex Peerless” only means that if the vessel is lost on the voyage the contract is to be at an end. It would be a question for the jury as to whether both parties meant the same ship called Peerless. That would be so if the contract were for the sale of a ship called the Peerless but this is only for a sale of cotton aboard that ship. Holding and rule: Court found no contract because no ‘consensus ad idem’, no agreement on same thing. A latent ambiguity appeared when the contract did not specify which ‘Peerless’ was intended. There is nothing on the face of the contract to show that any particular ship called Peerless was meant but the moment it appears that two ships called the Peerless were about to sail from Bombay, there is a latent ambiguity. Parol evidence will be admissible for determining the actual meaning that each party assigned to that ambiguity. From the evidence presented, each party attached a different meaning to that ambiguity. If different meanings were intended on a material term of a contract, there is no mutual assent and there is no contract. Judgment was for Wichelhaus. Restatement (Second) Section 20(1): If the misunderstanding concerns a material term and neither party knows or has reason to know of the misunderstanding, there is no contract. Parol evidence is admissible to determine the meanings of terms when a latent ambiguity arises later. In Masterson v. Sine2 for another parol evidence contract law case in which the court held that parol evidence cannot be used to modify the terms of a contract if an agreement is complete. Dallas and Rebecca Masterson (Plaintiffs) owned a ranch as tenants in common which they conveyed by grant deed to Dallas’ sister and her husband (i.e. Sine, Defendants). Masterson reserved an option to repurchase the ranch within ten years in exchange for the consideration paid by Sine, plus the depreciation value of any improvements. Dallas later went bankrupt. Rebecca and Dallas’ trustee in bankruptcy (P1) brought a declaratory judgment action to establish their right to exercise the option. At a bench trial the court determined that the parol evidence rule precluded admission of extrinsic evidence offered by Ds to show that the parties wanted the property kept in the Masterson family, and that the option was therefore personal to the grantors and could not be exercised by the trustee in bankruptcy. The court entered judgment in favor of P and D appealed on the grounds that the option provision was too uncertain to be enforced and extrinsic evidence as to meaning should not have been admitted. Issues: 1) Under what circumstances should evidence of oral collateral agreements be excluded? 2) How must the court determine whether a collateral agreement is such that it might naturally have been made as a separate agreement?

2 Masterson v. Sine, 68 Cal.2d 222, 436 P.2d 561, 65 Cal. Rptr. 545 (1968)

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Holding and Rule (Traynor): 1) Evidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled. 2) When determining that a collateral agreement is such that it might naturally be made as a separate agreement, the court must look to the actual experience and dealings between the parties as they view the status of such a collateral agreement. The court held that it was error for the trial court to exclude extrinsic evidence that the option was personal to the grantors and therefore non-assignable. If an agreement is complete, parol evidence cannot be used to vary, contradict, or add to the terms of the contract. If an agreement is partial, parol evidence can be shown to prove the elements of the contract not reduced to writing. It must be determined whether the parties intended the written agreement to be the final and complete embodiment of the terms; i.e., whether the agreement was an integration. The court held that if the contract states that there are no previous understandings or agreements not contained in the writing and thus clearly it expresses the parties’ intentions to nullify antecedent understandings or agreements, it need look no further for merger clauses. Otherwise, any collateral agreement must be examined to determine if the parties intended them to be included in, excluded from, or otherwise be affected by the writing. Circumstances at the time of the writing may be used to determine whether there has been an integration. Restatement 1st Section 240 (1)(b) permits proof of a collateral agreement if such an agreement would be naturally made by parties similarly situated as were the parties to the written agreement. UCC 2-202 states that parol evidence is not admissible if the additional terms are such that, if agreed upon, they would certainly have been included in the written contract. Thus they would exclude the evidence in still fewer instances. The option contract did not explicitly provide that it contained the complete agreement. The deed does not address assignability. This was a deed and from the very nature of deeds, the formalized structure does not lend itself to the insertion of collateral agreements and makes it less likely that all the terms of such an agreement were included. Even when there is no explicit agreement that contractual duties shall be personal, courts will presume that intent if the circumstances indicate that performance by substituted persons would be different from that contracted for (Restatement 150). The court held that under these facts, it appeared that the collateral agreement would have been made as a separate agreement; parol evidence of the issue of assignability must be allowed. Disposition: Reversed. Dissent (Burke): The right of an optionee to transfer his option to purchase property is one of the basic rights accompanying the option, unless limited by the language of the option itself. To allow an optionor to resort to parol evidence to support his assertion that the written option is not transferable is to authorize him to limit the option by attempting to restrict and reclaim rights with which he has already parted. There was nothing ambiguous about the granting language of the option and not the slightest suggestion in the document that the option was to be non-assignable. To permit such words of limitation to be added by parol is to contradict the absolute nature of the grant and to directly violate the parol evidence rule. Raffles usually cited as example of subjective theory of contract. Existence of contract requires actual agreement of parties. Must have a “meeting of the minds”. Some consequences of applying the subjective theory: Contract making may become less secure. It is always a question of fact (rather than a question of law) whether party truly intended to be bound. Discovering such facts might be very confusing and uncertain and evidence may also be complicated in the process. The subjective theory also provides a possibility of strategic behavior to the party when contract turns out to be undesirable to him or her. Just a quick example for the latter uncertainty: What if the price of cotton rose or fell

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between October and December? Subjective theory may serve as an excellent excuse to the buyer or the seller to derogate the binding effect of the selling or buying promise based on the no meeting of the minds principle. This is why the United States experienced a shift to the objective theory of contracts in the first third of the 20th century. Judge Learned Hand stated: “A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake, or something else of the sort.” (citation is from the case Hotchkiss v. National City Bank, D.C., 200 F. 287, 293.). The Restatement (First) of Contracts, §230, illus. 1 (1932) said: “. . . A promises to sell, and B promises to buy certain patents. A intends to sell only English patents on a certain invention. B understands that A promises to sell the English, French, and American patents on the invention. If a reasonably intelligent person . . . would understand the agreement to state a promise to sell the English and American patents, but not the French patents, there is a contract and A and B are bound by that meaning.” Despite the corrective nature of the objective theory, we can still find serious criticisms against it. The best explanation is coming from Arthur Corbin who criticized the objective theory like this: “[T]to hold that, although A intends to sell Blackacre and B intends to buy Whiteacre, A must convey and B must accept Greenacre because their [contract] would so be understood by C or by a large community of third persons, is to hold justice up to ridicule. (Corbin on Contracts §539, at 81.) If we combine the two theories, parties may apply them in the following potential situations:

• One party claims there is no contract; it is just a joke. • Agreements to agree when one party says did not intend to be bound until formal

agreement signed. • Language used in contract has special meaning between parties or in the trade.

Current U.S. law is defined in the Restatement (Second) of Contracts §201 (1981). The rule is known as the ‘Whose Meaning Prevails’ Principle. Restatement §201(1) Where the parties have attached the same meaning to a promise or agreement or term thereof, it is interpreted in accordance with that meaning. Restatement §201(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made Restatement §201(2)(a), (b) (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. Restatement §201(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

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If we analyze the Restatement approach, it has subjective element (§1) and it also has a significant objective element (§2). We may best characterize it as a modified, modern objective approach of contracts in the United States. B. Convention on International Sale of Goods (CISG) Art. 8. of the United Nations Conventions on the International Sale of Goods (CISG) provides detailed rules on how to interpret a contract and what elements constitute a binding promise between the parties. CISG Article 8(1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. CISG Article 8(2) If the preceding paragraph is not applicable, statements made by and other conducts of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. CISG Article 8(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. It is not difficult to see that the CISG contains a ranked combination of the subjective and the objective theory. While the main rule is definitely a clear example to the subjective theory, in case there is no evidence to support the party’s intent, CISG moves toward the more objective interpretative theory of objectiveness. This latter approach, however, bears some uncertainty as well, since the judge gets to interpret who is considered as a reasonable person of the same kind in the given circumstances. C. International Law (UNIDROIT) International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts (2004) also provides a detailed explanation on the interpretation of a contract. Under UNIDROIT Principles, Art. 4.1 (1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances. The UNIDROIT Principles follow a very similar pattern to the CISG. However, UNIDROIT Principles suggest that reservation mentalis or individual interpretation of one party shall not be the base of interpreting the entire contract. Only mutual intention must be taken into account and the more objective approach only comes as second if this mutual intent cannot be identified. D. Principles of European Contract Law (PECL) Principles of European Contract Law (1999-2003) prepared by Commission on European Contract Law Art. 2:102 clearly defines what intention means:

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The intention of a party to be legally bound by contract is to be determined from the party's statements or conduct as they were reasonably understood by the other party. European Principles, Art. 5:101 has general rules of 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. (3) If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it under the same circumstances. PECL is not a binding document and, as for today, it serves as a collection or recommendation of potential unification on European contract law. Textual interpretation is, however, never followed and recommended by PECL, mainly because this approach would not serve the international – or should we say European – dimension of the Principles. We must note that in most national laws textual analyzes is a major tool when it comes to the interpretation of a contract and its terms. Due to obvious language barriers, this should never be the case in international contracts. The subjective and objective theory combination is evident in PECL as well, since only the ranked combination of the two provides a flexible enough rule to the judge in an actual debate. 2. Doctrine of Consideration The core question is always: Why should promises be enforced? Both Civil Law and Anglo-American Law (the “common law”) have long provided legal remedy for breach of contract. But reasons for enforcement continue to be debated. Traditional answer of common law was doctrine of consideration: promise is legally enforceable if supported by consideration. A. Common Law First, we must distinguish doctrine and policy. Doctrine is considered to be a legal principle used by courts and scholars to resolve legal issue. On the other hand, policy is a reason for acceptance of legal principle. Consideration is clearly a doctrine in common law countries, but what is the policy? In order to answer to this question, first we have to take a look at the brief history of the consideration doctrine. 13th century English law recognized two predecessors to modern contracts:

• Writ of covenant: sealed instrument • Writ of debt: required specific sum of money owed

Neither provided full remedy equivalent to modern breach of contract in particular, debt required specific sum owed and not available if promisor had died. During the 15th and 16th century, English courts gradually recognized new writ that is basis of modern contract, the writ of assumpsit. Assumpsit replaced covenant and debt. Unlike earlier writs, which had clear limits, assumpsit did not. Courts gradually developed requirements. Plaintiff must plead factors defendant considered in making promise. These factors or “considerations” became formal requirements. The leading case in this respect is Hamer v. Sidway (NY 1891).

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Facts: There was a wedding celebration and the promise was made between William Story, Sr. uncle of William Story, 2d. Uncle, in presence of guests and family, promised that if nephew “would refrain from drinking, using tobacco, swearing and playing cards or billiards for money until he became twenty-one years of age he would pay him a sum of $5,000”. Nephew “assented” and fully performed. Uncle died and estate refused to pay. Issue: Estate argued no consideration because nephew benefited rather than harmed by refraining from various activities. Decision and Rule: Court finds promise enforceable. Consideration consists of either a benefit received by promisor or detriment suffered by promisee because of promise. Nephew suffered detriment because refrained from doing things that had right or power to do. Modern U.S. Law still requires consideration to enforce standard contract. Restatement (Second) of Contracts §17. Requirement of a Bargain (1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. Modern U.S. law has moved away from benefit/detriment test. Consideration consists of any performance or promise that is bargained for and given in exchange for promise. Restatement (Second) of Contracts §71 Requirement of Exchange, Types of Exchanges (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. B. CISG CISG §11 A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirements as to form. It may be proved by any means, including witnesses. CISG does not care about consideration and any equilibrium between performance and counter performance. CISG admits that bargain is a matter of free trade and only the contractual parties may decide whether they require any counter performance or not. C. UNIDROIT Principles UNIDROIT Principles, Article 2.1 (Manner of Formation) A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement. Capability of showing sufficient agreement is decided by the intent of the parties rather than consideration according to the UNIDROIT Principles. Unlike in common law legal systems, one-sided promises without any counter performance or counter promise on the other side may be binding if the intention to form binding agreement can be proved. D. PECL European Principles, Art. 2:101, Conditions for the Conclusion of a Contract (1) A contract is concluded if:

(a) the parties intend to be legally bound, and (b) they reach a sufficient agreement without any further requirement.

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(2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses. Art. 2:107, Promises Binding Without Acceptance A promise which is intended to be legally binding without acceptance shall be binding. PECL explicitly contains definition of promises without acceptance, showing that consideration is clearly not an essential marker of a contract and the binding effect. E. Analysis of common law and international approaches None of the legal systems will enforce all promises. We need rules to be able to distinguish between promises that should be enforced and those that should not. Consideration doctrine does poorly in this aspect. Even in common law countries, it historically based rather than on policy. Under the consideration doctrine many serious commercial promises are not enforceable. International approach – that heavily relies on civil law principles – seems better as a matter of policy. If intention to be legally bound is present, it should also be sufficient. If there is concern about particular types of agreements like, for example, charitable donations or real estate, civil law legal systems contain special rules for these.

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II. FORMATION OF A CONTRACT Formation of a contract is usually based on mutual consent (agreement) of the parties. This principle is known as the problem of offer and acceptance. In this chapter, we take a closer look at both civil law and common law legal systems, in order to decide what requirement an offer and an acceptance must fulfill in order to make parties conclude a binding agreement that is known as a contract. 1. Formation of Contracts under Civil Law A. German Law According to the German Civil Code (Bürgerliches Gesetzbuch, as known as BGB) freedom of contract is an essential principle in contract law. Therefor, law should not intervene in the content, type and form of a contract made by two or more parties and must the provide the greatest freedom possible to parties in order to shape their will into the form of a contract. This is why there is no numerus clausus of determined contract types. Requirement for a contract to be concluded under German law, according to sec. 145 et seq is that one party makes an offer (Angebot) and another party accepts this offer (Annahme). For a contract to be enforceable the parties need to agree on its essential content (essentialia negotii): (i) parties; (ii) subject; (iii) place of performance; and (iv) any other rights and obligations. There is no need for an actual “bargain” (i.e. consideration). Specific forms are required for certain types of contracts (i.e. notarial form for donations and real estate contracts). However, the form is not part of the essential content of a contract. Therefore, upon certain circumstances, if not correct, it can be cured. B. Italian Law Freedom of contract is also important and alive in Italian law. The standard way for entering into a contract is through a contractual offer (made by one party) and the acceptance of such contractual offer (by the other party) (article 1326 of the Italian Civil Code). Under Italian law (article 1325 of the Italian Civil Code), a contract to be enforceable requires: (i) the agreement between the parties; (ii) the so called causa (i.e. the essence of the contract); (iii) the object; and (iv) to the extent it is requested for specific contracts, a specific form (i.e. written and/or notarial form – the requirement of the written form mainly regards contracts related to real estate). The object of a contract is the obligation thereto. It must be: possible, legal, determined or determinable (article 1346 of the Italian Civil Code). The requirement of the causa corresponds to the essence of the contract and need to be legal (i.e. it must not violate mandatory provisions). There is no need for an actual “bargain” (i.e. consideration). 2. Formation of Contracts under English Law Freedom of contract is acknowledged under English law as well. Under English law voluntary promises cannot be enforced: for a contract to be entered into there is always the need for: (i) an offer made by one party and accepted by another one; (ii) consideration; and (iii) the intent to create a legal relation. A contract to be valid needs to contain a “bargain”: each party must do something for the other (i.e. consideration). Court will not assess whether the consideration is fair (i.e. it can be nominal). There is no need for a consideration for something that has been done in the past (i.e. past consideration) or consideration where one party is already legally

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obliged to act (i.e. by statutory law). Instead, a promise contained in a deed is enforceable, even without consideration. However, deeds require special formalities (i.e. written form and witnesses). In practice, lack of consideration is rarely an issue, as courts tend to find that even the most modest and minor undertake is sufficient and qualifies as consideration or counter performance.

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III. INTERPRETATION OF CONTRACTS After having read about the common law history and application of the objective and subjective theories of interpretation, let us take a closer look at some specific rules in both civil law and common law legal systems. 1. Interpretation of Contracts under Civil Law A. German Law Contracts are interpreted from an objective perspective (objektive Vertragsauslegung) and according to the principle of good faith (Treu und Glauben), according to sec. 157, sec. 242 German Civil Code. In case an objective interpretation is not consistent with the understanding of both parties, the subjective view of the parties is decisive (falsa demonstratio non nocet) (i.e. subjective interpretation criteria prevail). The understanding of the parties shall be proved with any kind of evidences (i.e. behavior of the parties, pre-contractual and contractual exchange of e-mails and letters). In case a contract contains an invalid provision or an unintentional gap, this gap must be filled with a provision that is as closely as possible to what the parties would have agreed, taken into account their economic motivation in the contract. The invalidity of one (sub-)clause does not harm the rest of the contract (as long as the contract is not considered as Terms & Conditions) (geltungserhaltende Reduktion). B. Italian Law In Italy the interpreter is guided in the interpretation of contracts by a series of articles of the Italian Civil Code, particularly 1362 to 1371 stating subjective and objective interpretation criteria: subjective interpretation criteria prevail. Subjective interpretation criteria: the interpreter is expected to establish the intention of the parties first of all on the basis of literal meaning of the contract. Should the literal meaning be clear, the interpreter should verify its consistence with the intention of the parties with any other external elements of the contract (i.e. parties’ behavior, pre-contractual and contractual exchange of e-mails and letters). Objective interpretation criteria: such criteria should be applied only when the literal meaning of the contract it is not clear and it is not possible to reconstruct the intention of the parties by elements outside the contract. Therefore, the contract shall be interpreted in accordance with the good faith principle. If the language of the contract is clear enough, the interpreter cannot apply any other interpretation criteria contained in the interpretation rules of the Italian Civil Code (i.e. the purpose of the contract). 2. Interpretation of Contracts under Common Law In England the interpreter of a contract is expected to establish the mutual intention of the parties on the basis of the document itself (i.e. objective interpretation criteria prevail). The wording of the provisions has to be understood according to its plain and literal meaning; even if the interpreter will attempt to read the provisions in a manner that does not lead to absurdity or inconsistency with the remaining provisions, it will not be possible to construe the contract in a manner that runs against the language. The importance of the literal interpretation is strengthened also by the interpretation rule according to which reference in the contract to a certain case will exclude that the contract applies to other corresponding

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cases that have not been expressly mentioned: expressio unius est exclusio alterius. The literal meaning prevail as far as meets the intention of the parties.

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IV. RELEVANCE OF GOOD FAITH IN CONTRACT LAW Good faith is both a general private law principle and it may also be a specific principle in contract law. In case a legal system applies good faith, it must be considered both in the formation stage and during performance. The most obvious example to applying the good faith principle in contract law is German law. Germany has long history of good faith both in statutory law and in case law. At the formation stage it may be essential in order to adjudge whether a contract (binding promise) has been formed and also, in case a contract has not been concluded between parties, pre-contractual liability exists or not and if so, on what base. In this chapter, we take a closer look at the application or non-application and relevance of the good faith principle in German, Italian and English law along with its importance in connection with establishing pre-contractual liability of parties for the non-conclusion of a contract. On the other hand, we have to examine how good faith plays a role in international contract law using CISG and UNIDROIT Principles and the connecting case law. 1. Good Faith under national laws The general principle of good faith (Treu und Glauben) applies to pre-contractual scenarios and to contracts (sec. 242 German Civil Code) at the same time in Germany. There are several specific obligations that arise out of the general concept of good faith under German law, prior to and during the lifetime of a contract, sec. 242 German Civil Code:

• Obligation not to act in contradiction to previous behaviour and not to make contradicting statements (venire contra factum proprium) (both pre-contractual and contractual).

• Obligation to respect the contract (pacta sunt servanda) (contractual). • General obligation to respect other party’s interest and to mitigate damages (the scope

of this obligation is uncertain) (contractual). Italian law contains a general clause on good faith under article 1175 of the Italian Civil Code. Specific clauses on good faith in the phase of negotiations are set out under article 1337 of the Italian Civil Code, which states that the parties shall behave in good faith in the phase of the negotiations and the formation of the contract. Article 1375 of the Italian Civil Code states that the parties shall perform in good faith the obligations set out under a contract. This results, among others, in duties of: (i) disclosure; (ii) cooperation; and (iii) protection of the other party’s rights and goods. In England, by default, there is no good faith principle (neither pre-contractual nor contractual). However a general principle of reasonableness should apply. There are some exceptions to these rules for certain types of contracts, such as implied terms as set forth in specific statutory law (mainly for the protection of the consumer) or such as insurance contracts, where the insured party is supposed to disclose information to the insurance company. Definition of duty of good faith in, or in relation to the negotiation of, B2B contracts, as: “playing fair, coming clean or putting one’s cards face upwards on the table.” (Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433). However, “good faith” has never be deemed applicable. Very recent developments: Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB). According to such case a duty to act in good faith can be implied into a contract in the same way as any other term. As a consequence: obligations not to undercut and knowingly provide false information implied into contract. However, such principles have not yet been dealt in other judgments.

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2. Good Faith in International and European Contract Law Principles and rules commanding the observance of good faith and fair dealing in relationships governed by the law of obligations, in particular those created by contract, are common stock of most legal systems. In the German Civil Code (BGB), the observance of "Treu und Glauben mit Rücksicht auf die Verkehrssitte" - embodied in such general provisions as §§ 157, 242 BGB, but repeated throughout the code in more specific contexts - has become a legal principle of such pervasive influence that it is sometimes claimed the codified provisions could be dispensed with; the whole system of private law (or, more modestly, certain parts of it such as unjust enrichment) might be taken as a mere embodiment of the principle and could, in theory, be administered by reference to "Treu und Glauben" only. These are, of course, exaggerations, not taken seriously by the majority of legal writers, by the courts or by the legislator, but they are worth mentioning at the outset, if only because of the arguments by which they are usually rebutted: The certainty of law and its application would be abandoned entirely if each case, each individual solution had to be based on such uncertain principles. The common existence and use of general provisions and rules on good faith and fair dealing leads us to expect that they will also be found in legal texts aimed at the unification of certain sectors of private law for purposes of international transactions. Art. 1.7 of the UNIDROIT Principles of International Commercial Contracts states: Each party must act in accordance with good faith and fair dealing in international trade. The parties may not exclude or limit this duty. In addition, the official commentary lists a great number of provisions as constituting "a direct or indirect application of the principle of good faith and fair dealing", so that it "may be considered to be one of the fundamental ideas underlying the Principles. Likewise, Art. 1.106 of the Principles of European Contract Law states: In exercising his rights and performing his duties each party must act in accordance with good faith and fair dealing. The parties may not exclude or limit this duty. The commentary to Art. 1.106 of these Principles explains: "This article sets forth a basic principle running throughout the Principles", and "particular applications of this rule appear in specific provisions", examples of which are also supplied. By contrast, Art. 7(1) CISG - to take as a last example the most successful attempt to date to unify the law governing certain parts of transborder legal relations - reads: "In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application in the observance of good faith in international trade", thus covering only the application of the Convention, rather than the parties' rights and obligations, their exercise and performance directly. Similar to the irresistible force of fundamental laws of nature such as the law of gravity, the principle that not only the interpretation of the Convention, but also the evaluation of the relations, rights and remedies of the parties, should be subject to the principle of good faith and fair dealing has found its way into the Convention, its understanding by the majority of legal writers and its application by the courts. The respective discussions regarding Art. 7 CISG reveal, however, a first and important distinction: The application of the principle in regard to a set of norms, thereby claiming normative character in itself, on the one hand and the application to individual contractual relations and thereby restricted to the circumstances of the particular case and not claiming abstract and normative force on the other hand. But the distinction is only clear in theory - and therefore, the discussions of the implementation and its reach under Art. 7 para (1) or para (2) CISG seems to me highly theoretical, too -, because very often a decision applying the principle to the facts of a given case and a particular contract, later

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becomes the reference and source of a more general rule, implemented into the normative text itself. This may be even more likely in legal systems that are not yet as familiar with the technique of distinguishing as common law jurists. Anyway, in regard to CISG, academic commentators have already begun to flesh out what good faith and fair dealing could and should mean in specific cases and situations to which the CISG has to be applied, and have developed more or less generalized rules. What would be the function of the good faith principle when it comes to settling a contract law dispute in international commerce? Even the most detailed code or contract will not deal with every issue imaginable. Details of minor importance can be left to the courts: Minima non curat praetor. It can safely be left to the courts to decide that a debtor owing his creditor 10,000 euros is not allowed to tender them in bags full of small coins or knocking at his creditor's door at 4 a.m. to pay. Normally, such behavior would not be conforming to "Treu und Glauben mit Rücksicht auf die Verkehrssitte", although situations are imaginable where it might be justified. But this cannot be regulated in a code and must be left to the courts. This, exactly, was the function the German legislator attributed to § 242 BGB, and no more. It certainly is a field of application for Art. 1.7 UNIDROIT Principles as well: If a time for payment is fixed in the contract, so that the debtor must perform on this date under Art. 6.1.1, a bag full of coins tendered at 1 p.m. in the morning on the fixed date is not "an earlier performance" under Art. 6.1.5, but it may be refused under Art. 1.7. Even if the credit arrangement between a bank and its customer provides that the bank may stop further payments on the granted credit "at will", it goes without saying that it cannot stop to honor its obligation under the credit line agreement without any reasonably justifiable cause. But since the situations in which such a stop order or a demand for acceleration repayment might occur are so manifold, it would overburden a code to deal with all possible and imaginable fact situations, the more so since experience teaches us that no detailed regulation could ever be complete anyway. While these minima are gaps that no reasonable legislator would try to fill - and therefore leave to the application of general clauses such as Art. 1.7 -, the principle of good faith and fair dealing or "Treu und Glauben mit Rücksicht auf die Verkehrssitte" is also indispensable in order to fill larger gaps or to clarify meanings left uncertain by the drafters of the code (or a similar body of provisions such as a contract) either intentionally, e.g. because they could not agree upon one of several solutions, or, more often, unintentionally. "Gaps" in the context of this analysis, therefore, include not only obvious "holes" in a legal text, but also - and probably more frequently - those provisions which turn out either to be too narrow or too unclear to cover certain issues or are even regarded as wrong. Therefor the concept of good faith and fair dealing may help to clarify or to develop the meaning of certain phrases and words in order to make them cover and solve new issues not considered by the drafters of the respective code. It would be easy to find dozens of examples in German law, because the growing age of a code such as the BGB necessarily means that situations and issues occur that could not have been foreseen by the drafters, so that the meaning of certain concepts have to be adjusted by a "Treu und Glauben" interpretation to cover the new problems. It is much more difficult to find similar shortcomings in a newer set of provisions such as the UNIDROIT Principles. The gap-filling function of the principle of good faith and fair dealing is most often used, however, to create and implement new obligations on the parties, which were neither agreed by them in their contract nor laid down in the applicable provisions of law. Again, these anxilliary and implied obligations may have the character of "minima", i.e. details too small to be taken care of by the drafter of legal provisions. More important are, of course, those additional obligations based on good faith and fair dealing which are needed to complete the network of duties and obligations in a given contract in order to achieve the aims of the parties in concluding their particular agreement.

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Since Art. 5.2 lit. (c) UNIDROIT Principles expressly recognizes implied obligations based on good faith and fair dealing, it is not necessary to take direct recourse to Art. 1.7 as the basic norm, but this is only a technical. Good faith and fair dealing can be the basis of new remedies not foreseen in the respective code or set of provisions. Again, differences between an older code like the German BGB and modern sets of provisions are obvious: a right to an adjustment of contracts because of a change of circumstances was developed in Germany on the basis of § 242 BGB (Treu und Glauben), while the Principles treat these situations as hardship cases (Art. 6.2.2) and grant adequate remedies in Art. 6.2.3, eliminating the need to develop solutions based on the general principle of good faith and fair dealing. 3. Pre-contractual Obligations Good faith is also an important principle when it comes to the examination of pre-contractual liability. It is especially a hardship case when a party is driven to the conclusion that a contract is most likely to be formed and therefore he or she takes costly efforts in order to prepare for future performance. Hence, when the contract fails in the formation stage, this party may seek for compensation on the bases of violating the good faith principle. Briefly, we should take a closer look at some national models when it comes to liability for pre-contractual obligation breaches. A. Germany During contract negotiations prior to signing, the parties have only secondary contractual obligations arising in connection with good faith principle. Is there an obligation to sign a contract? This is an obvious question that must be decided before we jump to the conclusion that engaging into negotiations may be a good starting point to identify a duty to sign. In Germany law, there is never an obligation to sign a contract, disregarding the fact how serious and developed the negotiation phase was between parties. However, if negotiations are very close to signing already and one party walks away without any reason, then there can be an obligation to compensate the other party for damages incurred. In this case there is a very limited definition of damages: only expenses occurred in connection with negotiations and certainly no loss of opportunity can be recovered. Non-binding letters of intent (LoI) or memorandums of understanding (MoU) may include break-up fees if specified in the actual LoI or MoU (see: freedom of contract in terms of content). Written pre-contract (Vorvertrag) may require signing of the contract as it already forms a binding promises to conclude the final contract in the future. Unless specific circumstances are successfully proved, both parties must keep this promise they undertook in the pre-contract. As previously seen, a contract can be considered formed and enforceable when an offer (containing all the essentialia negotii) is made by one party and is accepted by another one. The actual formation of a contract is determined on a case by case basis in Germany. B. Italy Parties shall carry out the negotiations for the entering into an agreement in good faith (article 1337 of the Italian Civil Code). The interruption of the negotiations might entail a pre-contractual liability only upon the occurrence of the following two conditions:

• In the meanwhile the counterpart has matured a reasonable expectation of the entering into the contract;

• The interruption of the negotiations is completely unjustified.

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Under pre-contractual liability, the damages that can be compensated only cover cost and expenses arising in connection with the negotiations and any loss of opportunity. As previously seen, a contract can be considered formed and enforceable when an offer (containing all the essential content under article 1325 of the Italian Civil Code) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case-by-case basis. C. England Pre-contractual liability mainly falls under tortious liability (i.e. only reliance losses) and statutory liability (where applicable): mainly obligations aimed to avoid a contract from entering into existence inadvertently (i.e. oral contracts) or misrepresentations. The approach of English law is primarily based on the assumption that each party is to take care of its own interests, to acquire the information that it deems necessary, and to provide for a contractual regulation that is adequate for the purpose that that party has. In case of unjustified breach of negotiations, by default no rights to compensation. In fact, any costs and expenses arisen to that point can be compensate only if specifically agreed in advance between the parties. As previously seen, a contract can be considered formed and enforceable when an offer (containing a specific consideration; and made with the intent to create a legal relation) is made by one party and is accepted by another one. The actual formation of a contract shall be determined on a case-by-case basis.

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V. HARMONIZING CONTRACT LAW IN THE EUROPEAN UNION 1. Scope and Importance of Harmonization Contract law is a classic and major field of private law. Contracts are typical forms of commercial activities, business relations. The common market is more than a simple customs union, it’s a common space for businesses and consumers. Expanding the market from a national level to a European one is not without difficulties. Although private law originally was not part of the competences of the European Communities, we can hardly find private law issues that do not have a certain connection with business activities. Freedom of goods and services, freedom to provide services and freedom of establishment are all in close connection with many private law issues. The European Parliament adopted a decision in 1989: Resolution on Action to Bring into Life the Private Law of the Member States. With this new purpose the European Union probably started the most difficult legal challenge in its history. Private law in the Member States is different and even if the majority of the states belonging to the civil law legal system, national civil codes have various concepts for private law issues. Another difficulty in the way of harmonization is the fact that private law has its roots in the unique history, economic, culture and special legal development of a country. It’s not easy to give up these old rules and legal institutions to reach a uniformed regulation of private law on a European level. In the European Union civil law and common law states can be found and the distance between the two legal régimes seemed to be insurmountable. But this is obvious that on a common European market businessmen and consumers are negotiating a contract with companies and individuals from another Member State of the EU, and none of them wish to apply the law of the other country. The diversity of contract law rules is a giant obstacle in the way of a real common market. Certain unification is unavoidable. Contract law is one these hot private law topics and probably the most urgent to be harmonized. How can contract law be so different in a modern world, when international business relations are not brand new phenomenon of law? One of the most notable differences is the conception of consideration. Traditionally countries following the Roman law traditions focus on mutual consent of the parties rather than consideration. A promise can be binding even if there is no consideration on the other side. As against the Anglo-Saxon legal systems place consideration to the center of a contractual relation. Without consideration, contract does not exist. Gift or bargain gives the dividing line. This small difference has a remarkable impact on the structure of contract law. Validity of contracts, legal enforcement to fulfill contractual obligations and termination of a contract, all depend on the formation of a contract. Even if a group of member states agree on the relevance or non-relevance of consideration, conceptions and legal institutions vary on other topics. Cases of breach of a contract can be written as an exhaustive list or as a general rule that have to be filled with content from case to case. Non-performance, delay and impossibility of performance can have different consequences in the national laws. Some of the remedies are not available if the breach was not from an actionable conduct. Interest for late payment has different rules on calculation in many member states. Termination of a contract can happen with mutual consent, agreement or with resignation. And another problematic issue is the judicial competence in contractual relations. Freedom of contract is a general principle that ensures that parties can choose the type of their contractual relationship, fill the contract with their own rules if these rules are not violation of the law. Civil Codes usually offers a list of possible provisions for contracts that parties can easily overwrite with mutual consent. That is why modification happens with mutual consent, with another agreement of the parties. Some member states give power to the

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judge to modify the contractual relationship in a legal procedure solving the legal debate. Other states find this conception way too far from the original principle, freedom of contract. Another aspect of difference is the so-called internal diversity of contract law. Many western European states adopted special rules for consumer contracts to protect the interest of consumers, while others treated these relations under the general rules of contracts. Contracts between legal entities often have different rules and especially in the eastern European countries a limited conception of freedom existed for these relations. Harmonization almost seemed impossible. Generally in the European Union harmonizing national laws have three alternatives. The strict and most effective way is unification. The EU instrument of unification is the regulation. This special source of law is directly applicable in every member state without implementation or transformation. A regulation results total harmonization, unification as it does not allow member states to modify, supplement or amend the rules of the regulation. It seems to be the most desirable way of harmonization but we don’t have to forget about the fact that the EU institutions adopt these regulations, and in these institutions member states are represented and they have to agree on the rules, even if with not full consent but with a remarkable majority. Contract law is a private law issue that conflicts cultural interest in the member states, so harmonizing with regulations is not common in the area of EU contract law. Another way of harmonization is much more flexible. Directives appoint the desired goals but provide free hands to member states to adopt national law and fulfill these goals. Even if the final result can be the same but legal institutions and instruments are usually different. Directives give the opportunity for the member state to achieve the common goals with its own instruments that fit in their cultural and legal traditions. Directives give a certain period of time for member states to implement. The harmonization of private law uses mainly directives. It’s a slower and less effective way of harmonization than unifying with regulations, but easier to get across the EU interest in the EU institutions. Finally we should not forget about the well-known way of harmonization in an international level. International treaties between states are often used. These treaties were not enacted by EU institutions. They are simple international treaties between member states applying the rules of public international law. Still, sometimes these treaties mean the last straw for the EU to harmonize certain issues. The Roman Treaty that established the European Communities encouraged member states to strengthen EU and common market purposes with establishing international treaties. 2. Private International Law In such a heterogeneous community as Europe the European Union started the harmonization of contract law with private international law rules. Even if the national rules on contracts are different but if private international law rules are the same or at least quite similar, this can be a major helping hand for parties entering into a contract. Private international law rules choose the applicable law in private law relations. The rules point to the exact legal system and its rules, we have to apply in a legal relation contains a relevant international element. If our buyer is from Germany, the seller is Dutch and they entered into a contract in Italy but the performance happened in the UK, private international law rules decide with no doubt which law will be applicable for this contractual relation. These rules point only one legal system. The name, private international law is deceptive. The rules are not international, as every state has its own system of Private International Law rules. PIL rules are adopted by national legislators but regulate international relations. So it matters which court, which forum will rule the case. If parties start the legal process in Germany, the German court will find the applicable law using the German PIL code. Such as contract law, private international law

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was different in the member states. A relatively easy and fast harmonization and temporary solution for the difference of contract rules were the harmonization of private international law rules in the EU. It’s a security for parties if they know that the applicable law will be decided on the same ground in the UK as in Germany, no matter which forum, which court will rule the case. Originally the European Commission initiated a decision-making process to adopt an EU regulation on private international law rules of contracts. But this initiative failed as there was no consent in the Council, member states could not agree on every topic. Finally the Commission drafted an international treaty and encouraged member states to sign it. As we talked about it, international treaties between member states are outside the EU competence but last solutions in lost cases. In 1980 member states signed the Rome Convention on the Law Applicable to Contractual Obligations. The Convention entered into force in 1991. Why was it a convenient solution for member states to sign an international treaty rather than agreed on an EU regulation? While regulations do not allow restrictions, an international treaty under the international public law rules permit restrictions. Restrictions ensure that a state can sign the treaty even if it does not agree with all articles. It simply has to file a restriction on the problematic articles, and these articles will not be binding for him. The success of harmonization was partial as many of the member states lived with the opportunity of restriction. Rules of the Rome Convention were applicable if more than one national law seemed to be applicable in the actual contractual obligation. The treaty was also applicable if one of these potential laws was not a national law of an EU member state. For example if a Chinese seller and a German buyer have a legal debate in connection with their contract and they initiate a legal procedure in Germany, both German and Chinese law have a connection with the actual contract and the court used the rules of the Rome Convention to find the applicable law even if it was the Chinese law. Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation) replaced the Rome Convention providing truly unified rules to determine the applicable law to contracts. This Regulation applies to contractual obligations in civil and commercial matters in the event of a conflict of laws. It does not apply to revenue, customs or administrative matters, or to evidence and procedure. Nor does the Regulation apply to the obligations relating to the following:

• a natural person’s status or legal capacity; • family relationships; • matrimonial property regimes; • negotiable instruments such as bills of exchange, checks and promissory notes; • arbitration and choice of court; • law of companies and other corporate or unincorporated bodies; • the binding of a principal or a company to a third party; • trusts; • dealings that occur before a contract is concluded; • insurance contracts, except those defined in Article 2 of Directive 2002/83/EC

concerning life assurance. Any law indicated in this Regulation should be applied, even if it is not that of a Member State. The parties to a contract are to choose the governing law. It may be applied to only a part or the whole of the contract. Provided that all the parties agree, the applicable law may be changed at any time. If the law chosen is that of a country other than that relating most closely to the contract, the provisions of the latter law need to be respected. If the contract relates to

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one or more Member States, the applicable law chosen, other than that of a Member State, must not contradict the provisions of Community law. Where the parties have not chosen the applicable law for contracts for the sale of goods, provision of services, franchises or distribution, it will be determined based on the country of residence of the principal actor carrying out the contract. For contracts concerning immovable property, the law of the country where the property is located is applied, except in the cases of temporary and private tenancy (maximum six consecutive months). In such cases the applicable law is that of the landlord’s country of residence. In the case of sale of goods by auction, the law of the country of the auction will apply. With regard to certain financial instruments governed by a single law, the applicable law will be that law. If none, or more than one of the above rules apply to a contract, the applicable law will be determined based on the country of residence of the principal actor carrying out the contract. If, however, the contract is related more closely to another country than provided by these rules, the law of that country will be applied. The same applies when no applicable law can be determined. For the following types of contract, the Regulation lays down options for the selection of applicable law and determines the law to be applied in the absence of choice:

• contracts for the carriage of goods – in the absence of choice, the applicable law will be that of the country of residence of the carrier, provided that this is also the place of receipt or delivery, or the residence of the consignor. Otherwise, the law of the country to which the delivery will be made will apply;

• contracts for the carriage of passengers – the applicable law may be chosen from either the country of residence of the passenger or carrier, the country where the central administration of the carrier is located, or the country of departure or destination. In the absence of choice, the law of the country of residence of the passenger will apply, provided that it is also the place of departure or destination. Yet, if the contract is more closely related to another country, then the law of that country will apply;

• consumer contracts between consumers and professionals – the applicable law is that of the country of residence of the consumer, provided that this is also the country where the professional carries out his/her activities or to which his/her activities are directed. The parties may also, based on freedom of choice, apply another law, as long as it provides the same level of protection to the consumer as that of his/her country of residence;

• insurance contracts – in the absence of choice, the applicable law will be that of the country of residence of the insurer. However, if the contract is more closely related to another country, that country’s law will apply;

• individual employment contracts – the applicable law may be determined on the basis of the freedom of choice principle, provided that the level of protection granted to the employee remains the same as with the applicable law in the absence of choice. In the latter case, the law governing the contract will be that of the country where, or from where, the employee carries out his/her tasks. If this cannot be determined, the applicable law will be that of the country where the place of business is located. However, if the contract is more closely related to another country, that country’s law will apply.

The law this Regulation determines as applicable to a contract will regulate interpretation, performance, penalties for breaching obligations, assessment of damages, termination of obligations, instructions for actions, and penalties for invalid contracts. The Community law that establishes conflict-of-law rules for contractual obligations relating to particular matters takes precedence over this Regulation, except in the case of insurance contracts.

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The Commission will submit a report on the application of this Regulation to the European Parliament, the Council and the European Economic and Social Committee by 17 June 2013. The Regulation will apply to contracts that are concluded as from 17 December 2009. The Vienna Action Plan of 1998 acknowledged the importance of harmonized conflict-of-law rules in the implementation of the mutual recognition principle for decisions in civil and commercial matters. The joint Commission and Council program of 2000 provides measures for this harmonization. The Hague Program of 2004 reasserted the importance of pursuing work on conflict-of-law rules for contractual obligations, with its Action Plan providing for the adoption of the Rome I proposal. This ensuing Regulation replaces the Rome Convention of 1980 on the law applicable to contractual obligations, transforming it into a Community instrument and modernizing it. 3. Consumer Protection Perspective Consumer protection is a so-called “joker” reason of the European Union in many cases, when the Commission wants to harmonize a certain area in member states. Consumer protection is a relatively new field of private law in Europe as roots can be found in the United States. If one of the parties enters into a contract outside his professional-economic or business activity, briefly the consumer only wants to satisfy his personal needs, these contracts are consumer contracts. A general protection to the consumer is that the national rules of consumer protection law will be applied even if the parties specifically chose a different applicable law, other than the one effective in the place of the consumer. National law means the residence of the consumer. This is an important rule. In consumer contracts usually the seller, the business entity offers general contract terms and conditions that he prepared prior to the contract and cannot be modified for the needs of the consumer. The consumer is in a weak position in negotiations. As almost all clauses of the contract are drafted by the seller, a business entity, the consumer does not have a chance to form this contract and modify any of the articles. There is no matter if the seller chose the applicable law in these general terms and conditions, the well-known consumer protection rules of the consumer’s home country will also be applicable for this contract. The European Union did not give up the idea of harmonizing contract law. Private international law rules were just the beginning. The EU found a reason to harmonize. This reason is the consumer protection perspective. Seeing the difficulties in unifying contract law rules the EU started the harmonization with small pieces. EU discovered that if he wants to make the member states accepted the European rules on contract law, it has to be in connection with the common market or at least a major goal of the common market. Consumer protection is the area that shows a close connection, a real link between the wish and the act: to harmonize contract law in Europe and to find a good reason for creating binding legal sources. Consumer protection law is a field that requires minimum standards in each member states to be the same and not to function as an obstacle in the common market. Creating fundamental rights for consumers helps developing the common market. Most of the well-known and traditional contractual types have an old conception and have traditional rules in every member state. These contracts are sales of goods, lease contract, loan contract, insurance contracts, agent contracts, etc. The area that is an open field for the European legislation is the atypical agreements, contracts. These contracts were created by the business life and the needs of modern trading techniques. Most of them are used in the international business relations and almost all major national civil codes miss them. Their number is growing from day to day, there are so many forms of them and legislation did not react in most of the member states. Atypical contracts were the most obvious choices for a wing-spreading EU legislation and harmonization on contracts.

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Atypical contracts cannot be found in the classic civil codes but have a close connection with consumer protection. Combining these new territories, consumer protection and atypical contracts the EU had an opportunity to start creating uniformed rules on contracts even if these rules are not applicable for traditional contract types. We are talking about contracts like timeshare, leasing, franchising, factoring and special forms of business activities, like e-commerce and contracts between parties in absentia. Most of the adopted rules in such directives focus on the consumer. The starting point is the non-equal position of the parties in a consumer contract. A consumer has less information about the product and he can be put easily into the situation in which he is unable to consider the objective significances of the product or service. In most of the cases a consumer is unable to get detailed information about the product and has no chance to discover any fault in the time of performance. Think about a product ordered online or by phone! That is why most of the EU directives create some new legal institutions that help to balance the consumer’s uneven position. A major tendency in the EU directives on contracts is to give rights for the consumer to get real and true information on goods and services before he enters into a contract. Products can be very complex and have a lot of significances: complicated mechanical or electronic equipment, some truly strange and brand new products (just think about the popular TV-shop commercials and offers). The directives wish to have the same rules in every member states about the freedom of information for the customer. The customer has a right to get a detailed description on the goods and services before signing the contract. It does not matter what kind of contract it is or which method parties intend to use to establish the contract (electronic way, phone, fax, etc.), the seller has to give him a detailed description with full information. Information about the seller, it helps identify the seller later, information on the product and general rules in connection with the contract itself: price, shipping, additional fees, termination of the contract, etc. If the consumer decides to enter into a contract with the seller, the seller has to send a written brochure on the above-mentioned information along with a description on the consumer’s right, the rights stated in the directive. Normally in the civil law legal systems a contract contains only those rules that parties overwrote with mutual consent. All other rights and obligations in the civil code are automatically applicable. But in this case the seller has to repeat these rules of the law in this description to inform the consumer about his rights. One of the most important legal institutions is the consumer’s right to cancel the contract after performance. This institution is strange as it gives right to the consumer to terminate the contract after the performance. Generally we can say that the right to cancellation can be used in the contractual relationships only before performance and without proving any significant fault or breach on the side of the other party. This special right to cancellation gives a unique instrument to the hand of the consumer. Normally after performing the contracts, sending the payment, getting the product none of the parties can claim the restoration of the original situation. The buyer has only warranty rights if the product, the performance was defective. The EU directives introduce a special claim for the consumer to use the right to cancellation without proving any significant breach or fault. For a limited period of time after the performance, consumer can simply change his mind. If he decides that the product is no longer needed, he can cancel the contract. 14 days after the performance the consumer can send the product back and has a right to get the purchasing price back. This is an objective right of the consumer, there is no need to prove a fault of the performance. This right is useful as usually the consumer faces the product after payment when he gets it in the mail. Even if the product is perfect and not defective, the consumer has this right to cancel the contract without proving breach or defect.

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A dramatic sanction can be found in the directives if the seller does not fulfill his duty to provide information to the consumer: the consumer’s right to cancel the contract is increasing from 14 days to 1 year and 14 days. 4. Principles of European Contract Law The last aspect of harmonization is a new project, the so-called Principles of European Contract Law (PECL). The European Union gave an assignment to academic lawyers to find the common cores of contract law and make a comparative analysis on national contract rules in the EU member states. The Lando Commission started to work in 1981. With a few exceptions the members of the Commission of European Contract Law have been academics, but many of the academics are also practicing lawyers. The Members have not been representatives of specific political or governmental interests, and they have all pursued the same objective, to draft the most appropriate contract rules for Europe. In some respects the Principles may be compared with the American Restatements. The Principles are also "soft law", but their main purpose is to serve as a first draft of a part of a European Civil Code. The Principles have therefore been established by a more radical process. No single legal system was their basis. The Commission paid attention to all the systems of the Member States, but not every of them have had influence on every issue dealt with. The rules of the legal systems outside of the EU have also been considered. So have the American Restatement on the Law of Contracts and the existing conventions, such as The United Nations Convention on Contracts for the International Sales of Goods (CISG). Some of the Principles reflect ideas which cannot be found in the law of any state. In short, the Commission has tried to establish those principles which it believed to be best under the existing economic and social conditions in Europe. An attempt has been made to draft short rules that are easily understood by the prospective users of the Principles such as practicing lawyers and business people. The work was first published in 1999. Now we focus on some basic rules of the Principles. The main principles of the work are good faith, fair dealing and duty to co-operate. Cooperation is a requirement to give full effect to the contract. A contract is concluded if the parties intend to be legally bound and they reach a sufficient agreement without any further requirements. The intention of a party to be legally bound by contract is to be determined from the party's statements or conduct, as they were reasonably understood by the other party. The Principles also contains rules on general conditions and terms of a contract. Terms not individually negotiated have to be brought appropriately to a party’s attention or these terms will not be the part of the contract. The Merger Clause is an important rule of the Principles. Merger clause makes it clear whether prior statements or agreements are part of the contract or not. This can be crucial in a legal debate how to interpret the contractual relation of the parties. The Merger Clause says that if a written contract contains an individually negotiated clause stating that the writing embodies all the terms of the contract, any prior statements, undertakings or agreements which are not embodied in the writing do not form part of the contract. And another significant rule of formation is the binding effect of promises. A promise which is intended to be legally binding without acceptance is binding. A good example can be a promise for donation or gift. This idea reflects the civil law conception that does not emphasize the importance of consideration. The Principles used the German contract law traditions for the place and time of performance. If the place of performance is not fixed by the parties, money has to be paid at the creditor’s place of business at the time of the conclusion of the contract. In every other case, when the obligation is not about paying money, the place of performance is the debtor’s place of business.

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Early performance means performance before the time fixed in the contract. The party has a right to decline the performance before the due date except where acceptance of the tender would not unreasonably prejudice its interests. The currency of payment is determined by the place of performance if parties did not state otherwise. Appropriation of performance is important when a party has several obligations. The main rule is that the performing party can declare to which obligation the performance is to be appropriated. If the performing party doesn’t make such a declaration, the other party can choose. In the absence of an appropriation of either party the performance is appropriated to that obligation which satisfies one of the criteria in this sequence:

• the obligation which is due or is the first to fall due; • the obligation for which the creditor has the least security • the obligation which is the most burdensome for the debtor • the obligation which has arisen first.

If none of the preceding criteria applies, the performance is appropriated proportionately to all obligations. The Principles uses the definition of fundamental non-performance. Instead of listing the cases of breach, they use a unified definition for breach. A non-performance of an obligation is fundamental to the contract if:

• Strict compliance with the obligation is of the essence of the contract – parties’ original intent decides whether an obligation is of the essence of the contract or not.

• The non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result. Foreseeability in the interpretation of member states using this definition in their national civil codes, is objective and usually independent from the subjective significances of the person. Judges examine the contractual relation and the circumstances and not personal skills and abilities.

• Finally breach is fundamental if the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party's future performance. This is a solely subjective sentence as the term ‘rely on the other party’s future performance’ cannot be measured with objective elements.

A party's non-performance is excused if it proves that it is due to an impediment beyond its control and that it could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences. Finally the Principles regulate what kind of remedies the other party is entitled in case of breach and non-performance. It’s important that these remedies can be cumulated and the party can choose any of them or more of them. The only exception is if a party's non-performance is excused, the aggrieved party cannot claim performance and damages. As you can see harmonizing contract law in the European Union is a difficult challenge. The European Union started the harmonization in three fields: private international law rules, consumer protection rules and atypical contracts. The Principles of European Contract Law indicates the intention of the EU to create a European Civil Code. But this goal does not seem to be a reality now. Directives and regulations can help unifying contract law and the new tendency in Europe that courts consider foreign court decisions when interpreting rules of the national code definitely points to the good direction.

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VI. INTERNATIONAL SALE OF GOODS There are only a small number of contract types with such significant importance as a sale of goods transaction. Not only because sale of goods is one of the old contract types, since countertrade is historically even more ancient, but due to generality of needs this contract should satisfy in both domestic and international commerce. This is why the United Nation drafted some common rules for sale of good contracts in order to ensure that variety and diversity in national laws would not keep business actors away from international transactions, most notable from buying and selling transactions. The United Nations’ Convention on Contracts For the International Sale of Goods (CISG or the Vienna Convention) is no question the most important international convention in the area of contract law. Despite its nature regulating a specific form of contracts, the convention contains many important elements that are considered being guidelines in disputes regarding other international contracts. Not only the rules and actual provisions of CISG bear significant importance but the attached case law as well, while the latter one is not developed by international forums but national courts and arbitration committees. This is why our purpose in this chapter is to analyze CISG provisions along with some judicial interpretation. CISG also provides an excellent opportunity to see what contract law traditions developed in national legal systems made it to become international norms. While most of the choices CISG adopted in its text resemble civil law legal institutions, several common law solutions may be found in the convention as well. CISG was adopted in 1980 and in effect since January 1st 1988. In 2014 there were 83 state parties that ratified the convention all over the globe, including Canada, Mexico, China, Russian Federation, France, the United States and Germany. Among the states never ratified CISG we may found some European Union member states such as the United Kingdom, Ireland, Malta, Portugal. Other states decided to opt out are South Africa, Venezuela, Indonesia, Vietnam, Thailand, Malaysia while these states play an important role in international commerce. 1. Scope and application of the Convention A. Transactions Covered in CISG CISG Applies to Contracts for the International Sale of Goods. Although this seems to be an easy rule, the definition of a sale of goods contract might be challenging to determine. In reality, there are multiple varieties of this common and simple transaction. This is why CISG provide helping hand in order to interpret the scope of the convention. The following conditions must be met to qualify the transaction as one under the scope of CISG: 1. The sale must be international. It means that the buyer and seller must have their places of business in different states. To identify what place of business means, CISG tries to narrow down the possible interpretations. As for the real seat, business evidence, common law residence, etc. definitions, CISG follows a much broader concept. Not the main seat of administration or the headquarters determine whether the business is related to a state signatory of the convention but the place that has the closest connection with the transaction. It might be a warehouse if the goods are sold or transported from or to that address. It can also be the seller’s factory if the future dispute arises from defective performance, etc.

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2. Additionally to the condition mentioned under (1), either both of the states must be contracting parties to the convention, or the rules of private international law must lead to the application of the law of a contracting state (choice of law clause). We should note that following the rules of private international law that usually allows contracting parties to choose the governing law – that may even point to a third state’s national law - CISG may apply even if the buyer’s and seller’s places of business are not in a contracting state, in case parties deliberately and explicitly choose CISG as governing law. On the other hand even if these two conditions are met, CISG may not be applicable as the final provisions of the Convention allow a ratifying state, if it wishes, to declare that it will apply the CISG only when the buyer and seller are both from contracting states. B. Opting In and Opting Out The parties to a contract may exclude or modify the CISG’s application by a “choice of law” clause. Whether parties can exclude a domestic law and adopt the CISG in its place depends on the rules of the state where the case is heard. This clause of the Convention makes it very clear that CISG is just like the rules of national contract law in a civil law country, where unless parties specifically derogate or exclude the application of these so-called model rules in a Civil Code for contracts, rules shall apply. The opting out clause, however supports freedom of contract allowing parties to derogate, modify, overwrite of completely exclude the application of CISG in their relationship. We must emphasize that such derogation or exclusion can only be valid and binding if it is explicitly mentioned in the contract. Otherwise if the two conditions we discussed earlier are met, courts and arbitration committees must apply the provisions and rules of the Convention. C. Sale Defined Text of the CISG does not directly define a sale in order to implement a broader concept and not to restrict the scope and applicability of the Convention. The implied definition that courts tend to follow is broad enough to cover almost all transactions that focus on the pass of title (ownership) over certain goods. This approach is also relevant in the laws of the United States. According to the U.S. Uniform Commercial Code (UCC) sale is the passing of title from the seller to the buyer for a price. The implied definition courts and arbitration committees are following: The delivery of the goods and their supporting documentation by the seller and the payment of their price by the buyer. D. Goods Defined and Exclusions Just as the CISG does with sale, the Convention does not directly define goods either. The drafters assumed that the CISG only applies to goods that are movable and tangible so real estate sales are out of the scope of the Convention. This is in accord with relevant international usage. It is easy to understand why real estate sales were taken out of the Convention’s scope. In most cases the applicable law to a real estate transaction enjoys exclusivity due to the protective nature of national private international law rules. Rei sitae, the place where the real estate is determines applicable law. While the CISG does not particularly define goods, it lists the sales and goods that are excluded from its coverage. Sales transactions that are excluded: 1. Goods bought for personal, family or household use. This exclusion does not apply unless the seller knew or ought to have known that the goods were bought for personal use or

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consumption. In a case when the buyer ordered a very high-tech, state of the art computer from the seller, the court rejected the buyer’s defense. The buyer wanted to exclude the applicability of CISG as he ordered the computer for personal use. As the computer was not to be used by private individuals and the seller only sold these special computer configurations to satisfy business needs. The buyer never informed seller that he had ordered the computer for personal use. The case was relevant from a consumer protection perspective. As CISG does not deal with consumer contract and was never intended to provide protection to consumers, rather to satisfy the needs of international commerce, the buyer in this case could not use the protective rules – mostly information duties on the seller’s side – of his country of origin. 2. Auction sales. Auction is a process of buying and selling goods (or services) by offering them up or bid, taking bids, and then selling them to the highest bidder. Auctions have specific nature and therefor CISG – that intends to provide uniform rules – does not cover them. 3. Sales on execution or otherwise by authority of law. Another sensitive issue. When a public authority is involved in the transaction, the pass of title happens under the personal law of the authority, therefor it is very rare the national laws allow international rules to intervene in such transactions. Some goods are also specifically excluded by CISG: 1. Stocks, shares, investment securities, negotiable instruments or money. 2. Ships, vessels, hovercraft or aircraft (but not their parts if sold individually, separately!). 3. Electricity. Even if energy is considered tangible by most domestic laws, sales of electricity have special rules. We also have to deal with mixed sales as a common transaction in the international market. Mixed sales and services contracts are treated by the CISG as sales of goods, unless “the preponderant part of the obligations” of the seller “consists in the supply of labor or other services.” While we know very little about the intention of drafters, preponderant probably means more than half. Whether this is measured by the cost, the sale price, or by some other basis is not clear. Contracts for goods to be manufactured are sales (future sales) unless the buyer undertakes to supply a substantial part of the materials. Substantial, in this case, is probably less than half. E. Contractual Issues The CISG only deals with the formation of contracts and the remedies available to the buyer and seller. The CISG specifically excludes questions about:

• The legality of the contract (e.g. contraband) • The competency of the parties • The rights of third parties • Liability for death or personal injury

When the CISG applies, domestic law is preempted. It is a crucially important clause as CISG shall prevail and completely preempt domestic law unless parties state otherwise. The reason

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for the existence of the preemption clause is that the CISG’s basic function is to establish uniform rules for international sales contracts. CISG applies to contractual issues. CISG preempts the local law even if the local law gives a different name to a particular remedy. CISG preempts the local law even if the local law adds additional elements to a matter that is contractual in nature. F. Model Case on the Scope of CISG Asante Technologies, Inc. v. PMC-Sierra, Inc. (United States District Court, Northern District of California, 2001) Facts: Asante, a Delaware corporation with its headquarters in California, ordered component parts for the switchers it manufactures from PMC-Sierra, a Delaware corporation with its headquarters in British Columbia. Four of the five orders were placed through Unique Tech., one of PMC-Sierra’s authorized distributors in California, but the fifth was sent by fax directly to PMC-Sierra in BC. Asante sued PMC-Sierra in a California court. PMC-Sierra had the suit removed to a US federal court. Asante now challenges the removal (laws of the U.S. includes international treaties). Note that both the U.S. and Canada are parties to the CISG. Issues: Does federal jurisdiction attach to claims governed by CISG? Were the parties from two different CISG states? Relevant laws: (1) 28 USC §1331(a) gives US district courts jurisdiction over claims that arise under “treaties of the US.” (2) CISG applies when the parties are from two different CISG states. A distributor is ordinarily not an agent. (3) CISG is the law of both California and BC (because of federal supremacy rules). (4) The well-pleaded complaint rule says that a federal cause of action arises only when the plaintiff’s well-pleaded complaint raises issues of federal law. The introductory text of CISG says that it is meant to establish uniform rules to promote international trade. Reasoning: (1) CISG is a U.S. treaty and therefore U.S. district courts may hear complaints that arise under it. (2) Unique Tech. is a distributor and Asante is not bound by its actions. The transaction was thus between Asante and PMC-Sierra, both from different CISG contracting states, so the CISG applies. (3) The parties’ choice of law clause adopted “California law.” California law, however, includes the CISG; so the CISG is not excluded. (4) While Asante’s complaint only refers to California law, the CISG is actually that law. This is because the CISG is a federal treaty that is meant to preempt all state laws. This can be seen from the CISG statement that it is meant to establish uniform international trade rules. To hold otherwise would defeat this purpose. Order: Asante’s motion to remand the case to the state court is denied. 2. Interpreting the Convention When interpreting the provisions of the CISG, courts and arbitration committees shall apply the following basic principle: The goal of the CISG is the creation of a uniform body of international commercial sales law. This is why the forum must consider the following sources, in the following order: 1. The Convention. 2. The general principles on which the Convention is based. 3. The rules of private international law.

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A. Interpreting the CISG To interpret the words of the CISG itself, we must consider: 1. The international character of the Convention. 2. The need to promote uniformity in the Convention’s application. 3. The obligation to observe good faith. There are various methods on how to interpret the Convention.

• “Plain meaning”: Look at the words of Convention itself. It is a grammatical and linguistic form of interpretation. While in most legal systems, law uses its own terminology, the CISG is drafted to use plain language in order to avoid interference with national legal terminologies. This is why it is considered a huge mistake by the forum if it calls its own national law during the interpretation. No matter what a specific word means under national law, in case it is recognized as a legal term, plain meaning must be observed.

• Travaux preparatoires: Look to the CISG’s legislative history to determine its intent. • Precedent: Use case law to interpret. Precedent is a tricky thing when it comes to the

interpretation of the Convention. While most laws have some coherent interpretation in judicial practice, the CISG does not have it as it is interpreted and applied by various national forums or international arbitration committees. While theoretically these national forums are not bound to look out to the practice of foreign courts, the CISG wishes them to do so.

B. General Principles The CISG calls for courts to look to the general principles on which the Convention is based when interpreting its provisions. On the other hand, the CISG gives no list of general principles. We may still deduct some general principles from the text of the CISG. These principles can be found among the obligations and duties of parties. Suggested principles that appear, in varying forms, throughout the convention:

• Each party must communicate information needed by the other party. • Parties have the obligation to mitigate damages resulting from a breach.

One thing is for sure. The CISG requires that general principles be derived only from rules given within the Convention itself. C. Rules of Private International Law Rules of private international law may be used only when:

• The Convention itself does not directly settle a matter. • The matter cannot be resolved by the application of a general principle derived from

the Convention itself. It is well-known fact that private international law rules vary from country to country. Some states have enacted private international law codes (most civil law states). Some states rely exclusively on case law (e.g. U.S.). The reason for allowing courts to turn to the rules of private international law: the Convention avoids the possibility that courts will adopt interpretive aids on an entirely ad hoc basis. 3. Interpreting the Sales Contract

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A. Combining the Objective and the Subjective Approach When it comes to the interpretation of the actual sales contract, the CISG provides a detailed method on how to apply the otherwise competing principles and approaches in domestic law (see: chapter on the objective and subjective theory). Varying approaches in domestic law exist. 1. The subjective approach: Look at what was in the minds of the contracting parties at the time they made their contract. This is the preponderant rule in many civil law countries. 2. The objective approach: Look only at the circumstances as they would seem to an impartial bystander. It is a commonly accepted rule in the common law countries. The CISG’s approach is a combination of the two approaches: 1. Use the subjective intent of a speaker. Only do so if “the other party knew or could not have been unaware” of the speaker’s intent. 2. When a speaker’s intent is not clear look at “objective” intent (secondary). The party’s statements and other conduct “are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.” B. Negotiations The CISG Art. 8(3) directs courts interpreting contracts to give “due consideration … to all relevant circumstances,” including:

• The negotiations leading up to the contract. • The practices the parties have established between themselves. • The parties’ conduct after they agree to the contract.

The purpose of Art. 8(3) is to do away with the technical rules that domestic courts sometimes use to interpret contracts. A great example is the common law’s parol evidence rule that sates written contract preempts all former agreements between parties. Caveat: The CISG allows parties to “derogate from or vary the effect of” any of the provisions of the Convention. If the parties include a contract term (often called an “integration clause”) directing a court to ignore all prior or contemporaneous agreements, the court will have to give effect to that term C. Model Case for Interpretation MCC-Marble Ceramic, Inc. v. Ceramica Nuova D’Agostino SpA (United States Eleventh Circuit Court of Appeals, 1998) Facts: MCC’s president (who did not speak Italian) signed a pre-printed contract form in Italian in Italy with Ceramica for the purchase of tiles. The contract specified price, quality, quantity, delivery, and payment. On its reverse side it specified the procedure to follow if the tiles delivered by Ceramica were non-conforming. Under the signature line on the front was a statement in Italian that said that the buyer was aware of all of the conditions of the reverse of the form. Later, when Ceramica sent non-conforming tiles, MCC did not follow the procedure specified on the reverse of the signed form. Instead, it reduced the amount of its payment to Ceramica (as it is entitled to do under the UN CISG). Later yet, when Ceramica did not satisfy several orders, MCC sued for breach of contract. Ceramica responded that it was under no obligation to deliver the order because MCC had not fully paid for previous shipments and had not followed the procedure for complaining of non-conforming shipments. MCC sought to introduce evidence to show that the terms on the reverse of printed contract form were not

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intended to be part of the contract. The trial court rejected MCC’s offered evidence and relied solely on the terms of the contract. It granted Ceramica’s motion for summary judgment. Issues: (1) Must the subjective intent of the parties be considered in determining the term of a CISG contract? (2) Does the parol evidence rule apply to CISG contracts? Relevant laws: (1) CISG Art. 8(1) requires courts to consider “a party’s subjective intent as long as the other party to the contract was aware of that intent.” (2) CISG Art. 8(3) directs courts to give “due consideration to … negotiations.” Explanation: (1) MCC’s offered evidence attempted to show that the seller did not intend to be bound by the terms on the reverse of the form and that the buyer knew of this. This is exactly the evidence that Art. 8(1) requires a court to consider. (2) Art. 8(3) is a clear rejection of the parol evidence rule. Order: Summary judgment is reversed and the case is remanded. D. Practices and Usages The CISG states that parties are bound by “any practices which they have established between themselves” including:

• Usages the parties agree to. • Usages the parties knew or ought to have known and which, in international trade, are

widely known to, and regularly observed by, parties of contracts of the type involved in the particular trade concerned.

Usage is a customary way of doing something. It is a custom or practice and is a commonly accepted source in international business law. Usages are not written and therefor the content is dynamically changes from time to time. Parties must refer to such usages and prove their existence in order to make the forum apply them in their actual debate. Usances are different from usages. Usances are collected usages and bear written form. While usages are subsidiary applicable without explicit intent to do so, usances can only be applied if parties agree to do so. E. Form of the Sales Contract Most delegates at the CISG Convention felt that a writing requirement is inconsistent with modern commercial practice. The Soviet delegates insisted that a writing requirement is important for protecting their country’s longtime pattern of making foreign trade contracts. The CISG compromises as most international treaty usually does. The CISG Art.11 explicitly states that no writing is required. According to Art.96: Unless the contracting state of one of the parties to a contract made a declaration at the time of ratification requiring that the contract be in writing. 3. Formation of the Contract A contract is formed when an offer to buy or sell a good is accepted A. The Offer Offer is defined by the Convention: A proposal addressed to specific persons indicating an intention by the offeror to be bound to the sale or purchase of particular goods for a price. In order for a communication to be an offer it must meet with certain criterions:

• The offeror must communicate an intention to be bound.

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• The proposal must be definite. A proposal is sufficiently definite if it describes the goods, and states or provides a means for determining the quantity. A proposal should also state or provide a means for determining the price. Otherwise the price will be: The price generally charged at the time of the contract for like goods sold under comparable circumstances in the trade concerned.

• The proposal must be addressed to one or more specific persons. Proposals made to the public are invitations to negotiate, unless the contrary is clearly indicated.

The effectiveness of an offer is a crucial question at the stage of formation of a contract. An offer becomes effective only after it reaches the offeree. Offers may be withdrawn any time before they reach the offeree. Offers that promise that they are irrevocable can be withdrawn prior to their reaching the offeree. Regarding revocation the Convention specifically states that offfers that do not state that they are irrevocable can be revoked anytime before the offeree dispatches an acceptance. This method is very similar to the English common law’s “post box” rule. The posting rule (or mailbox rule in the United States, also known as the "postal rule" or "deposited acceptance rule") is an exception to the general rule of contract law in common law countries that acceptance of an offer takes place when communicated. Under the posting rule, that acceptance takes effect when a letter is posted (that is, dropped in a post box or handed to a postal worker). In plain English, the "meeting of the minds" necessary to contract formation occurs at the exact moment word of acceptance is sent via post by the person accepting it, rather than when that acceptance is received by the person who offered the contract. Firm offers are specific offers regulated by the CISG. The CISG rule: An offeror’s promise to keep an offer open for a fixed period is enforceable. Requirements: The offeror must expressly state the offer is irrevocable, or The offeror’s conduct must imply that the offer is firm. The promise of irrevocability does not have to be signed and does not have to be in writing. Also, there is no time limitation in the Convention. B. The Acceptance A contract comes into existence at the point in time when an offer is accepted. Acceptance is a statement or conduct by the offeree indicating assent that is communicated to the offeror. The form or mode in which an offeree must express assent. Any form or mode is allowed (see: common law “same form rule”) The offeree must communicate his assent to the offeror. This is why the question of silence has critical importance. Generally, silence or inactivity does not, in and of itself, constitute acceptance. The only exception is where a party voluntarily assumes the duty to respond, silence will constitute acceptance. Time of Acceptance: Acceptance must be received by the offeror within the time period specified in the offer. If no time period is given: Acceptance must be received within a “reasonable” time. If the offer is oral, acceptance must be made immediately unless the circumstances indicate otherwise. When it comes to the responsibility for delays in communicating acceptance, the CISG uses the “receipt rule”: The offeree is responsible for insuring that the acceptance gets to the offeror. Reason for using this rule is because it is the offeree who chooses the medium

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through which to send a response, it is the offeree who is better able to avoid the risk of loss or delay (risk allocation) Assent by Performance of an Act: If the offeror asks for performance of an act rather than the indication of acceptance, the acceptance is effective at the moment the act is performed. Caveat: An act does not constitute acceptance if the offeree is required to notify the offeror first. The notification requirement may be in the offer or in the form of a trade usage. Withdrawal: An offeree may withdraw his acceptance any time before or simultaneous with its receipt. Rejection is another common source for legal debates in connection with international sales transactions. A rejection becomes effective when it reaches the offeror. If an offeree dispatches both a rejection and an acceptance at the same time, the one which reaches the offeror first will be the one given effect. Acceptance with modifications is also covered by the Convention. A would-be acceptance that contains material differences from the offer is a counter-offer. There is a list of terms in the Convention that constitute material differences:

• Price. • Payment. • Quality of the goods. • Place or time of delivery. • The extent of one party’s liability to the other. • The manner of settling disputes.

Additions that are not material are proposals for addition that will become part of the contract unless the offeror promptly objects. C. Model Case for Formation United Technologies International, Inc. v. Magyar Légiközlekedési Vállalat (MALÉV) (Hungary, Metropolitan Court of Budapest, 1992) Facts: Pratt and Whitney (P&W) offered to sell Malév Hungarian Airlines (MHA) either two or three PW4000 series engines for installation in a Boeing aircraft or two or three PW4100 series engines for installation in an Airbus aircraft. The offer stated different prices for the different series engines. It also said that it was subject to Hungarian and US government approval. One week later, MHA sent a letter accepting the offer for the PW4000 series engines. When MHA stepped back from going forward with the purchase, P&W sued to obtain a declaratory judgment that a contract existed. Issues: (1) Was there an offer? (2) Was there an acceptance? (3) Was the requirement of governmental approval meant to be a condition precedent or condition subsequent? Relevant laws: CISG Art. 14(1) provides that “a proposal addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance.” And “a proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provisions for determining the quantity and the price.” Art. 18(1) defines an acceptance as “a statement … indicating assent to an offer.” Art. 32: “a contract is concluded at the moment when an acceptance of an offer becomes effective,” Explanation: (1) The offer described the goods, and the fact the buyer had the right to choose between the listed engines does not affect the description of the engines. The offer stated a

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quantity, even though the buyer could choose between two or three engines. The offer stated a price and the offer stated a time for delivery. Thus, there was a valid offer. (2) MHA’s letter unambiguously stated its acceptance. A contract was therefore concluded at the time of acceptance. (3) The offeror did not mean for the proposed government approval to function as either a condition precedent or subsequent, but as only the need to obtain appropriate licenses, etc. Order: The parties entered into a contract. D. Model Case for Rejection Filanto, SpA v. Chilewich International Corp. (United States District Court, Southern District of New York, 1992.) Facts: Chilewich (a U.S. export-import firm) had a contract to deliver footwear to Russia. This contract contained an arbitration provision that called for all disputes to be arbitrated in Moscow. Chilewich then engaged Filanto (an Italian corporation) to supply it with footwear that Chilewich had contracted to deliver to Russia. Chilewich’s correspondence to Filanto said that the arbitration provision in the Russian contract was to be part of their contract as well. Filanto supposedly sent Chilewich a counteroffer rejecting the arbitration provision. Chilewich meanwhile proceeded to obtain a letter of credit benefiting Filanto and proceeded as if there was a contract. Filanto, however, signed a contract on August 7th that contained this provision, although it said in its cover letter that it was not bound by the provision. When a dispute arose and Filanto sued in a US court, Chilewich invoked the arbitration provision and asked the court to dismiss Filanto’s suit. Issues: (1) Was the August 7th reply a counteroffer? (2) If it was, was there a contract anyway based on unobjected to performance? Relevant laws: A reply that purports to be an acceptance but contains material (such as the rejection of an arbitration provision) additions, limitations, or modifications are a rejection of the offer and a counteroffer. If the offeree knows that the offeror has begun performance and fails to notify the offeror within a reasonable time that it objects to the terms of the contract, it will be deemed to have assented to those terms. Explanation: (1) The objections to the arbitration provision in the August 7th cover letter were a material modification amounting to a rejection of the offer. (2) Because Chilewich went ahead with the contract (getting the letter of credit) and Filanto did not timely object, Filanto accepted the terms of the Chilewich’s proposed contract. Order: Case dismissed; the matter must be arbitrated in Moscow. 4. General Standards for Performance One of the most notable invention of the CISG is that it differentiates between Fundamental breach situations and ordinary breach cases. When one party substantially fails to deliver what the other reasonably anticipated receiving is considered as a fundamental breach. This requires the breach of an important duty stated by the contract. However, in order to decide which obligations are important main duties and which are considered side obligations, intent of the parties must be taken into account. Legal consequences or available remedies depend on whether the breach was fundamental or ordinary. Common consequences of the breach may be avoidance and request for specific performance.

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A. Avoidance Avoidance is defined as the right to be excused from having to perform any obligation required by the contract (not the same as cancellation!). In order to avoid a contract, there are specific requirements listed in the CISG

• The other party must have committed a fundamental breach. • The injured party must notify the other party.

The effect of avoidance is that only the obligation to perform is set aside. Avoidance does not affect any provision in the contract concerning the settlement of disputes (such as arbitration, choice of law, or choice of forum clauses), or any other provisions governing the rights and duties of the parties “consequent upon the avoidance of the contract.” This is why avoidance does not relieve the violating party from the obligation. B. Requests for Specific Performance An injured party may ask a court “to require performance” if the other party fails to carry out its obligations. A court is not obliged to order specific performance unless the court can do so under its own domestic rules. In civil law countries it is an obligation for the court, while in common law countries the court has discretional power in this regard. C. Seller’s Basic Obligations The seller’s basic obligations are the following:

• To deliver the goods. • To hand over any documents relating to the goods. • To insure that the goods conform to the contract.

If the contract fails to specify how the seller is to perform the CISG provides rules to fill in the gaps regarding place for delivery and time for delivery. Place for delivery is the place agreed in the contract, otherwise:

• The first carrier’s place of business if the contract involves the carriage of goods, or • The place where the parties knew the goods were:

o located, or o were to be manufactured or produced.

Time for delivery is the date fixed in the contract, otherwise:

• Within a reasonable time after the making of the contract. • If a time period is provided, the seller may deliver at any time within that period,

unless the contract expressly says that the buyer is to choose the time. As we have seen it in the definition of the sales contract, turning over of relevant documents is another main obligation of the seller. These documents may provide a helping hand to the buyer in order to use the products, the goods for the purpose he was intended to use for. At the time and place for delivery, seller must turn over any documents relating to the goods that the contract requires. Conformity of goods is the measurement standard for contractual performance. In case the goods do not meet the conformity criterion, we may face with defective performance. This is why the seller must deliver goods that are:

• Of the quantity, quality, and description required by the contract, and

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• Which are contained or packaged in the manner required by the contract. In order to determine conformity there are rules stated in the CISG:

• First of all rules agreed to by the parties. • Otherwise, the goods do not conform to the contract unless they are:

o Fit for the ordinary purposes of such goods. o Fit for the particular purposes that:

§ were expressly or impliedly made known to the seller at the time of the conclusion of the contract, and

§ the buyer reasonably relied upon the seller’s skill and judgment. o Of the same quality as a sample or model provided by the seller. o Contained or packaged in a same manner that is:

§ Usual for such goods, or § Adequate to preserve and protect the goods.

Goods also do not conform if they are subject to third party claims. Third party claims include the assertions of ownership or the rights in intellectual property. Third party claims may not mean that the seller breached his obligation. In case of waiver a buyer may waive a seller’s obligation to conform either expressly or impliedly, if the buyer knew or “could not have been unaware” that the goods were non-conforming. It is the buyer’s obligation to examine the goods delivered to him. The buyer must examine the goods for defects within as short a period as is practicable after delivery. If the goods are shipped, the examination may be deferred until after the goods have arrived at their destination. If the goods have to be redirected or redispatched, examination may be deferred until after the goods have arrived at their new destination. The buyer must notify the seller of any defects he discovers within a reasonable time after delivery or within a reasonable time after discovering the defect. If the buyer fails to do so he waives his right to require performance. The seller will not be responsible for a defect that arises more than two years after delivery, unless:

o He knew or ought to have known of a non-conformity and did not disclose it to the buyer (male fidei), or

o The contract establishes a longer period of guarantee. What constitutes a notice is not clearly described in the CISG. It probably must be sufficient to inform the seller of the problem. However, the CISG knows the institution of curing defects: A seller who delivers goods early may correct or “cure” any defect up to the agreed date for delivery. The cure may not cause the buyer any unreasonable inconvenience or expense. Even if the seller does make a cure, the buyer retains the right to claim any damages that are provided for in the CISG. D. Buyer’s Basic Obligations The CISG lists the obligations of the buyer. Most importantly, the buyer must pay the contract price. The buyer must take whatever preliminary steps are necessary under the contract or any laws or regulations to enable payment to be made. The buyer also has to pay the price at the time and place designated in the contract. If no time is specified, the buyer is to pay when the goods or the documents controlling their disposition are delivered. The buyer must pay even if the seller makes no formal request. The buyer may delay payment until he has had time to examine the goods. If no place for payment is specified, the buyer is to pay at:

o The agreed place for the delivery of either the goods or their controlling documents, or

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o The seller’s place of business. Another important obligation of the buyer it to take delivery. The buyer must cooperate with the seller to facilitate the transfer, and actually “take over the goods.” A buyer who fails to cooperate will be responsible for any resulting costs. A buyer who fails to take delivery assumes the risk for any damage to the goods after that time. E. Model Case for the Paying the Price The Natural Gas Case (Austria, Supreme Court, 1996) Facts: Buyer agreed to buy natural gas for itself and a third party. Seller agreed to ship gas from the U.S. Buyer agreed to obtain a letter of credit, but told seller that its bank needed to know the place of loading in order to issue the letter. Seller agreed to provide the place of loading, but never did so. Later, the seller told buyer that its U.S. supplier would not agree to export the gas to buyer in Belgium. The third party bought gas from another source for an additional $141,131. Buyer then sued seller to recover the $141,131 for the third party plus $15,000 in loss profits for itself. Seller asserted: that it was not liable because the buyer had never obtained the letter of credit; if it was liable, that the buyer had avoided the contract and the damages should be calculated accordingly, that the buyer was not entitled to loss profits and that the buyer/third party failed to mitigate the damages. Issues: (1) Had the buyer breached by not obtaining the letter of credit? (2) Had the seller breached? (3) Was the contract avoided? (4) Was the buyer entitled to lost profits? (5) Had the buyer failed to mitigate? Relevant Laws: (1) A defendant cannot complain that a plaintiff failed to fulfill its obligations when the defendant’s own failure to act caused the plaintiff’s inaction. CISG Art. 41 says that a seller must deliver goods free from any right or claim of third parties. (2) A non-breaching party’s intention to avoid must be clear to the breaching party for there to be an avoidance. (3) A plaintiff is entitled to loss of profits only if the defendant was aware of an intended resale. (4) The defendant has the burden of proving that the plaintiff failed to mitigate. Explanation: (1) The buyer did not breach, because the failure to provide a letter of credit was caused by the seller’s failure to provide the place of loading. (2) The seller breached by failing to obtain clearance for the export of the gas and failing to deliver the gas. (3) The buyer never notified the seller that it was avoiding the contract. Notification of the amount of losses incurred is not a notification of avoidance. (4) When merchantable goods are sold to a merchant, resale is presumed. Indeed, seller knew that this was the case. Lost profits, therefore, are an appropriate measure of damages. (5) The seller failed to show how the buyer could have mitigated. 5. The Passing of Risk Passing of risk is the shifting of responsibility for loss or damage from the seller to the buyer. Once the risk passes the buyer must pay the agreed-upon price for the goods involved. Only if the buyer can show that loss or damage was due to an act or omission of the seller is he excused from paying the price. The buyer must absorb the cost of any loss, or lodge a claim against his insurer. The CISG allocates risk by considering the agreement of the parties and the means of delivery. Agreement of the parties also counts. The parties may agree to allocate risk among themselves and to specify when the risk will pass between them. Commonly this is done through the use of trade terms. The most common trade terms regime is the International Chamber of

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Commerce’s INCOTERMS 2010 system that is considered as a usance. These set of trade terms provide systemized and generalized solutions in transportation situations. Seven of these trade terms are available in any mode of transportation, while four out of the altogether eleven terms are designed especially for carriage of goods by the sea. 1. EXW Ex Works “Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e.,works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. 2. FCA Free Carrier “Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point. 3. CPT Carriage Paid To “Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. 4. CIP Carriage And Insurance Paid To “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.” 5. DAT Delivered At Terminal “Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. 6. DAP Delivered At Place “Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

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7. DDP Delivered Duty Paid “Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities. 8. FAS Free Alongside Ship “Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. 9. FOB Free On Board “Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. 10. CFR Cost and Freight “Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. 11. CIF Cost, Insurance and Freight “Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.” There may be various means of delivery under the CISG. Goods transported by carrier is the most common way of delivery under international sales contracts. In this case the prerequisite for the risk to pass is that the goods must be clearly identified to the contract. These contracts may be shipment contracts, transshipment contracts, in transit contracts or destination contracts. Shipment contracts are defined: The seller is to deliver the goods to a carrier for shipment and does not require them to be delivered to a particular place. In this case risk passes when the goods are handed over to the first carrier. Transshipment contracts are defined: The seller is to deliver the goods to a carrier for shipment at a named place. Risk passes when the goods are handed over to the carrier at that place.

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In transit contracts are contracts made after the goods are already aboard a carrier. Risk passes at the time the contract is made. Exception: If the seller knew or ought to have known that the goods had been lost or damaged, and he did not disclose this to the buyer, the risk does not pass to the buyer. Destination contracts are contracts when the seller is to arrange transportation to a named place of destination. Risk passes when the goods are handed over or otherwise placed at the buyer’s disposal at the place of destination. The other solution for delivery is when goods are delivered without being transported. In such situations the goods are not shipped but are handed over directly to the buyer. Risk passes when the goods are handed over or otherwise placed at the buyer’s disposal. 6. Remedies A. Buyer’s Remedies The buyer’s remedies are cumulative. “Cumulative” means that the right to recover damages is not lost if a buyer exercises any other available remedy. The buyer’s remedies are also immediate. “Immediate” means that a court or arbitral tribunal may not grant the seller grace period in which to comply with a buyer’s demand for a remedy. This is contrary to the practice in some civil law countries. Remedies unique to the buyer are specific performance, avoidance, reduction in price, refusing early delivery, refusing excess quantity. Specific performance is available only in states where the local law provides for such a remedy. If it is available, the buyer may ask that the seller either deliver substitute goods, or make repairs. Prerequisites:

o buyer cannot have avoided the contract or resorted to some other inconsistent remedy; o buyer must first notify the seller that the goods are non-conforming; o if the buyer asks for substitute goods, the non-conformity must amount to a

fundamental breach. Avoidance. The CISG’s provisions for avoidance by a buyer are patterned after German law, especially in the Convention’s adoption of the German Nachfrist notice. A buyer may avoid a contract if either:

o the seller commits a fundamental breach, or o the buyer gives the seller a Nachfrist notice and the seller rejects it or does not

perform within the period it specifies. A buyer’s Nachfrist notice is the fixing of an additional period of time of reasonable length for performance by the seller of his obligations. The period must be definite and the obligation to perform within that period must be clear. During the Nachfrist period the seller is entitled to correct (i.e., “cure”) the non-conformity at his own expense. A cure may not be made if the breach is fundamental and the buyer chooses to avoid the contract. Once the Nachfrist period has run, or once the fundamental breach becomes clear, the buyer has a reasonable time in which to avoid the contract. Reduction in Price. Prerequisites:

• The seller must have delivered non-conforming goods. • The buyer must have accepted them. • The seller must not be responsible for the non-conformity.

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• The buyer must not be entitled to damages. There is a formula for determining the price reduction in the CISG. The price is to be reduced by that ratio of:

o the value at the time of delivery of the goods actually delivered, to o the value that conforming goods would have had at the time of delivery.

Here is an example for that. Idaho potatoes sold at $3.50/bushel for delivery in Jakarta. Potatoes got damaged in transit by act of nature. Undamaged potatoes are worth $4.00/bushel if purchased in Jakarta. Damaged potatoes are worth $2.80/bushel. The price reduction ratio is: $2.80/$4.80=7/10. Applying this ratio, the reduced price the buyer pays is $3.50 x 7/10 = $2.45. B. Model Case for Avoidance The Shoe Seller’s Case (Germany, Court of Appeals, Frankfurt am Main, 1994) Facts: The plaintiff delivered shoes to the defendant. Delivery was late and the shoes did not completely conform to the sample the plaintiff-seller had originally shown to the defendant-buyer. When the defendant-buyer refused to pay on two invoices, the plaintiff-seller brought suit. On appeal, the defendant argued that she was entitled to invoke the remedy of avoidance because of the plaintiff’s late delivery and the nonconformity of the goods. Issue: Is the remedy of avoidance available to the defendant? Relevant Laws: (1) Avoidance is only allowed after a buyer gives the seller a Nachfrist notice and defines an additional fixed period in which the seller is to make delivery. (2) There is no nonconformity in cases where a buyer is able to use some of the goods. Explanation: The buyer did not give the seller a Nachfrist notice. The buyer also was able to use some of the goods delivered. Order: Decision in favor of the plaintiff is affirmed. C. Seller’s Remedies Seller’s remedies mirror those of the buyer. Seller’s remedies are also both cumulative and immediate. Remedies unique to the seller are specific performance, avoidance, obtaining missing specifications. Specific performance. The availability of this remedy depends on the domestic rules applicable to the court hearing the suit. If the remedy is available, a seller may ask the buyer to either take delivery and pay the contract price, or perform any other obligation required by the contract. Avoidance. A seller may only avoid a contract if there has been a fundamental breach, or following a Nachfrist notice, the buyer refuses to cure any defect in his performance. Obtaining missing specifications. If the buyer does not produce the measurements that the seller needs by the date specified in the contract, or within a reasonable time after the seller asks for them, the CISG allows the seller to ascertain them himself. The seller must inform the buyer of what he has done and must set a reasonable time period for the buyer to supply different specification. If the buyer does not respond, the seller’s specifications become binding.

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D. Remedies Available to Both Buyers and Sellers Suspension of performance. In response to threats of nonperformance a party may stop performing. In response to threats of nonperformance after the goods have been shipped: A party may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. Caveat: This relates only to the rights in the goods as between the buyer and the seller. Should a third person acquire legal rights in the goods, the CISG will not apply - instead domestic law applies. Grounds for suspending performance are if it becomes apparent that the other party will not perform a substantial part of his obligations as a result of:

o A serious deficiency in his ability to perform. o A serious deficiency in his creditworthiness. o A deficiency in his conduct in preparing to perform. o A deficiency in his conduct in performing.

The suspending party must give notice. Suspending party must resume his obligations under the contract if the other party provides adequate assurances of his capability to perform. Avoidance in anticipation of a fundamental breach. We have to distinguish this remedy from those that apply uniquely to the buyer and seller. Those remedies only apply after an offending party has committed a fundamental breach. This remedy applies as soon as “it is clear” that the other party “will commit a fundamental breach.” Likely cases in which this remedy could be invoked:

o The specific goods promised to the buyer are wrongfully sold to a third party. o The seller’s only employee capable of producing the goods dies or is fired. o The seller’s manufacturing plant is sold off.

Notice requirement: The party opting to anticipatorily avoid must “if time allows” notify the other party so that the latter can “provide adequate assurance of his performance.” Avoidance of an installment contract. Avoidance of a particular installment: Allowed when there has been a breach of that installment. Avoidance of a subsequent installment: Allowed when the breach of a prior installment gives a party “good grounds” to believe that a fundamental breach of later installments will occur. Avoidance of entire contract (including past and future installments): Allowed when the installments are interdependent. Damages. Foreseeable damages: the breaching party is liable for the losses suffered by the other party that the breaching party foresaw or ought to have foreseen at the time of the making of the contract. In order to calculate damages the CISG contains two rules: 1. If an avoiding party has entered into a good faith substitute transaction: The difference between the contract price and the price received (or paid) in the substitute transaction. 2. If the avoiding party did not enter into a substitute transaction: The difference between the contract price and the current price at the time of avoidance. Current price is either the price prevailing at the place where delivery of the goods should have been made, or if there is not current price at that place, the price at such other places as serves as a reasonable substitute. Mitigation of damages: The party claiming damages must take reasonable measures to mitigate the loss. Effect of failure to mitigate: the breaching party may seek a proportionate reduction in the damages.

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E. Model Case on Damages Downs Investments PTY Ltd. v. Perwaja Steel SDN BHD (Australia, Supreme Court of Queensland, 2000) Facts: Wanless, an Australian company, agreed to sell 30,000 tons of scrap metal to Perwaja, a Malaysia company. Their contract called for Perwaja to obtain a letter of credit as soon as Wanless chartered a ship to transport the scrap. It also provided that the Brisbane, Queensland law would govern their relationship. Perwaja did not do so and Wanless treated the contract as breached. It arranged to sell the scrap to other buyers at a much lower price and it had to sub-charter the ship it had chartered, losing money on this. Wanless sued to recover damages. Issues: (1) What law governs? (2) Was there a fundamental breach? (3) Was Wanless entitled to end the contract? (4) Could Wanless have performed? (5) Was Wanless entitled to damages? (6) Had Wanless acted properly to mitigate damages? Relevant laws: (1) Queensland has adopted the CISG as the law governing the international sales of goods. (2) A fundamental breach is one that results in a detriment that substantially deprives a party of what he was entitled to expect under the contract unless the breach party could not have reasonably foreseen that result. (3) The non-breaching party may terminate a contract if the breach is fundamental. (4) A non-breaching party must be ready, willing, and able to perform in order to sue for breach. (5) A non-breaching party that suffers loss may recover damages. (6) Damages are sum loss including loss of profits. The non-breaching party must attempt to mitigate the damages. Explanation: (1) CISG governs. (2) The failure to deliver the letter of credit was a fundamental breach. It was an essential element of the contract necessary to protect Wanless from any effort by Perwaja to renegotiate the terms after Wanless had chartered the ship. (3) Wanless could terminate as the breach was fundamental. (4) Wanless had been ready, willing, and able to deliver the scrap as it had already chartered and loaded the ship. (5) Wanless is entitled to damages. (6) Wanless had tried to mitigate damages in that it promptly sub-chartered the ship. It is entitled to loss profits on the substitute sales plus the loss it suffered from sub-chartering the ship. Order: Wanless entitled to U.S. $1,280,347.80. 7. Excuses for Non-Performance Non-performance is not only a factual question but a legal one at the same time. Even if non-performance is evident, the breaching, non-performing party may find viable excuses (Defenses) that my exonerate him under the liability for non-performance. A. Force Majeure A party is not liable for damages resulting from his failure to perform if he can show that:

o his failure was due to an impediment beyond his control. o the impediment was not something he could have reasonably taken into account at the

time of contracting (unforseeable), and o he remains unable to overcome the impediment or its consequences.

The rationale for this rule is that neither party is really at fault. Typical situations may be natural disasters, wars, embargoes, strikes, breakdowns, and the bankruptcy of a supplier. There are limitations on the use of the force majeure doctrine in its scope. Scope: force majeure only excuses the breaching party from paying damages. The non-breaching party may obtain any other appropriate remedy (e.g. suspension of performance or avoidance).

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Notice: breaching party must promptly notify the other party of the impediment and its effect on his ability to perform. Basis: If a breaching party’s claim is based on the failure of a third person to perform (such as a supplier), the third person must himself be able to claim the excuse of force majeure. Duration: force majeure may only be used as long as the underlying impediment continues in existence. B. Model Case for Force Majeure Nuova Fucinati, SpA v. Fondmetall International AB (Italy, Civil Court of Monza, 1993.) Facts: A seller, in Italy, contracted in Sweden to deliver 1,000 tons of ore to a buyer, in Sweden. The seller’s costs increased by 43%, so the seller sought to use the excuse of “commercial impracticability” to avoid the contract. The buyer defended by arguing that the contract was governed by the CISG and the excuse of commercial impracticability is not available under the CSIG. Issues: (1) Does the CISG provide for the excuse of commercial impracticability? (2) Does the CISG apply to this case? (3) Is the seller excused because of commercial impracticability? Relevant laws: (1) CISG provides for the excuse of impossibility of performance (in Art. 79) but does not provide for the excuse of commercial impracticability. (2) The CISG applies if the parties are from states that are both signatories of the convention, or if the rules of private international law lead to its application. (3) The Italian code provides for the excuse of commercial impracticability. This requires the seller to show that performance is so economically burdensome that the seller does not have the resources to perform. Explanation: (1) CISG does not provide for the excuse of commercial impracticability. (2) The CISG does not apply because (a) Sweden was not a party to the CISG when the contract was signed and (b) because Italy’s rules of private international law direct the court to use Swedish law (as the contract was signed in Sweden), and Swedish law at the time did not recognize the CISG. (3) An increase of 43% in costs to the seller is not so burdensome that the seller cannot perform. Order: The seller’s case was dismissed. C. Dirty Hands Rule One party may not rely on a failure of the other party to perform to the extent that such failure was caused by the first party’s act or omission. This rule is knows as the dirty hands rule. 8. Exercises to the Application of the CISG Case A. Facts: The plaintiff is a Swiss buyer who signed a contract with the defendant, a US seller, to buy fresh frozen chicken. In the contract, two parties specified the chicken’s country of origin, quality, weight, and the package. Later, the signed the second contract regarding the same goods with a heavier weight for each. However, when the first shipments arrived, the plaintiff found that there was a misunderstanding of chicken between two parties. The chicken plaintiff wanted is the young chicken suitable for broiling and frying; however, the chicken sold by defendant is stewing chicken or called fowl. The plaintiff made protest, but the shipment under the second contract was still stewing chickens. Issues: (1) Can plaintiffs first convention of an exchange of cablegrams which preceded the formal contract be a proof to support plaintiffs claims? (2) Is there a definite trade usage that chicken meant young chicken? (3) Did the defendant really breach the warranty?

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Case B. Facts: Rotorex Corp., (Defendant) appeals the trial court decision in favor of Delchi Carrier SpA (Plaintiff) for loss of profits and other consequentials resulting from Defendant’s delivery of nonconforming goods. Defendant manufactures compressors. Plaintiff, an Italian corporation purchased compressors from Defendant for use in Plaintiff’s air conditioners after receiving a sample compressor from the company and accompanying written performance specifications. The compressors were scheduled for delivery in three shipments before May 15, 1988. Plaintiff discovered that the first shipment did not conform while the second was en route. The non-conformity resulted in lower cooling capacity and consumed more power than the sample model and specifications. After several attempts to cure, Plaintiff requested Defendant supply new compressors conforming to the original sample and specifications. Defendant refused stating the sample compressors were inadvertently communicated to Plaintiff. Plaintiff canceled the contract and filed this action under the CISG. Issue: Whether the district court decision that Defendant was liable for a fundamental breach of contract under CISG was proper. Discussion. The Under the CISG the seller must deliver goods which are of the quality, quantity and description required by the contract and the goods do not conform with the contract unless they possess the qualities of goods which the seller has held out to the buyer as a sample or model. Defendant admitted the goods did not conform to the specifications. There was thus no genuine issue of material fact regarding liability, and summary judgment was proper. There appears to be no question that Plaintiff did not substantially receive that which it was entitled to expect and that any reasonable person could foresee that sipping non-conforming goods to a buyer would result in the buyer not receiving that which he expected and was entitle to receive. Case C. Facts: Retailer in State A decides to go into the catalog sales business in State B. Both countries are parties to the CISG. Retailer purchases a mailing list from Ace Credit Card Company. The list has the names and addresses of 500,000 persons owning Ace credit cards in State B, and Retailer uses this to prepare mailing labels. John Q. Public receives a catalog addressed to him personally from Retailer. The catalog describes various types of widgets and gives prices for each one. Issues: Has the retailer made an offer to sell the widgets? If John accepts, will there be a binding contract under the CISG? Modified facts: On January 1, Seller sent a letter to Buyer offering to sell to Buyer 5,000 widgets for $25 apiece. The letter also stated: “This offer is binding and irrevocable until February 1.” On January 5, prior to Buyer’s receipt of the letter, Seller called Buyer on the telephone and left the following message on the answering machine at Buyer’s place of business: “Ignore my letter of January 1. I have decided to withdraw the offer contained in it.” On January 7, after listening to her answering machine and reading the letter that arrived that same day, Buyer sent Seller the following telegram: “I accept your offer of January 1.” Issue: Is there a contract under the CISG?

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Case D Facts: Buyer and Seller entered into s contract governed by the CISG for Seller to deliver a sophisticated computer to Buyer by January 1. Seller was late in delivering the machine, so Buyer wired Seller on January 2: “Anxious to take delivery of the computer. Hope that it arrives by February 1.” Seller delivers the computer on February 5, but Buyer refuses to accept it and declares that the contract is avoided because Seller failed to hand over the computer before the February 1 date specified in the January 2 telegram. Both Buyer and Seller agree that there has not been a fundamental breach. Issue: Is Buyer able to avoid the contract under these circumstances?

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VII. ENGLISH CONTRACT LAW 1. Formation of a contract A contract is an agreement giving rise to obligations which are enforced or recognized by law. In common law, there are 3 basic essentials to the creation of a contract: (i) agreement; (ii) contractual intention; and (iii) consideration. The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party. In deciding whether the parties have reached agreement, the courts will apply an objective test 2. Offer An offer is an expression of willingness to contract on specified terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed. There must be an objective manifestation of intent by the offeror to be bound by the offer if accepted by the other party. Therefore, the offeror will be bound if his words or conduct are such as to induce a reasonable third party observer to believe that he intends to be bound, even if in fact he has no such intention. This was held to be the case where a university made an offer of a place to an intending student as a result of a clerical error. An offer can be addressed to a single person, to a specified group of persons, or to the world at large. An example of the latter would be a reward poster for the return of a lost pet. An offer may be made expressly (by words) or by conduct. An offer must be distinguished from an invitation to treat, by which a person does not make an offer but invites another party to do so. Whether a statement is an offer or an invitation to treat depends primarily on the intention with which it is made. An invitation to treat is not made with the intention that it is to be binding as soon as the person to whom it is addressed communicates his assent to its terms. Common examples of invitations to treat include advertisements or displays of goods on a shelf in a self-service store. The famous case of Carlill v Carbolic Smoke Ball Company [1893] 2 QB 256 is relevant here. A medical firm advertised that its new drug, a carbolic smoke ball, would cure flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the advert was not to be taken as a legally binding offer; it was merely an invitation to treat, a mere puff or gimmick. However, the Court of Appeal held that the advertisement was an offer. An intention to be bound could be inferred from the statement that the advertisers had deposited £1,000 in their bank "shewing our sincerity" 3. Acceptance An acceptance is a final and unqualified expression of assent to the terms of an offer. Again, there must be an objective manifestation, by the recipient of the offer, of an intention to be bound by its terms. An offer must be accepted in accordance with its precise terms if it is to form an agreement. It must exactly match the offer and ALL terms must be accepted. An offer may be accepted by conduct (for example, an offer to buy goods can be accepted by sending them to the offeror). Acceptance has no legal effect until it is communicated to the offeror (because it could cause hardship to the offeror to be bound without knowing that his offer had been accepted). The general rule is that a postal acceptance takes effect when the letter of acceptance is posted (even if the letter may be lost, delayed or destroyed). However, the postal rule will not apply if it is excluded by the express terms of the offer. An offer which

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requires acceptance to be communicated in a specified way can generally be accepted only in that way. If acceptance occurs via an instantaneous medium such as email, it will take effect at the time and place of receipt. Note that an offeror cannot stipulate that the offeree's silence amounts to acceptance. A communication fails to take effect as an acceptance where it attempts to vary the terms of an offer. In such cases it is a counter-offer, which the original offeror can either accept or reject. For example, where the offeror offers to trade on its standard terms and the offeree purports to accept, but on its own standard terms, that represents a counter-offer. Making a counter- offer amounts to a rejection of the original offer which cannot subsequently be restored or accepted (unless the parties agree). It is important to distinguish a counter-offer from a mere request for further information regarding the original offer. An offer may be revoked at any time before its acceptance, however the revocation must be communicated to the offeree. Although revocation need not be communicated by the offeror personally (it can be made by a reliable third party), if it is not communicated, the revocation is ineffective. Once an offer has been accepted, the parties have an agreement. That is the basis for a contract, but is not sufficient in itself to create legal obligations. 4. Consideration In common law, a promise is not, as a general rule, binding as a contract unless it is supported by consideration (or it is made as a deed). Consideration is "something of value" which is given for a promise and is required in order to make the promise enforceable as a contract. This is traditionally either some detriment to the promisee (in that he may give value) and/or some benefit to the promisor (in that he may receive value). For example, payment by a buyer is consideration for the seller's promise to deliver goods, and delivery of goods is consideration for the buyer's promise to pay. It follows that an informal gratuitous promise does not amount to a contract. Consideration must be sufficient, but need not be adequate. Although a promise has no contractual force unless some value has been given for it, consideration need not be adequate. Courts do not, in general ask whether adequate value has been given (in the sense of there being any economic equivalence between the value of the consideration given and the value of any goods or services received). This is because they do not normally interfere with the bargain made between the parties. Accordingly, nominal consideration is sufficient. Consideration must not be from the past. The consideration for a promise must be given in return for the promise. Consideration must move from the promise. The promisee must provide the consideration. Traditionally, a person to whom a promise was made can enforce it only if he himself provided the consideration for it. He has no such right if the consideration moved from a third party. For example, if A promises B to pay £10,000 to B if C will paint A's house and C does so, B cannot enforce A's promise (unless B had procured or undertaken to procure C to do the work). However, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met, a third party may be able to enforce rights created in his favor by a contract which he was not a party to, and the courts are also adopting a more flexible position under the common law here. While consideration must move from the promisee, it need not move to the promisor. First, consideration may be satisfied where the promisee suffers some detriment at the promisor's request but confers no corresponding benefit on the promisor. For example, the promise to give up tenancy of a flat may be adequate consideration even though no direct benefit results to the promisor. Secondly, consideration may move from the promisee without moving to the promisor where the promisee, at the promisor's request, confers a benefit on a third party. In

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situations where goods are bought with a credit card, the issuer makes a promise to the supplier that s/he will be paid. The supplier provides consideration for this by providing goods to the customer. 5. Contractual intention An agreement, even if supported by consideration, is not binding as a contract if it was made without an intention to create legal intentions. That is, the parties must intend their agreement to be legally binding. In the case of ordinary commercial transactions, there is a presumption that the parties intended to create legal relations. The onus of rebutting this presumption is on the party who asserts that no legal effect was intended, and the onus is a heavy one. Many social arrangements do not amount to contracts because they are not intended to be legally binding. Equally, many domestic arrangements, such as between husband and wife, or between parent and child, lack force because the parties did not intend them to have legal consequences. In Balfour v Balfour [1919] 2 KB 571, a husband who worked abroad promised to pay an allowance of £30 per month to his wife, who was in England. The wife's attempt to enforce this promise failed: the parties did not intend the arrangement to be legally binding. (Note that in addition, the wife had not provided any consideration.) An agreement which is made "subject to contract" (typically, agreements for the sale of land) or a "letter of comfort" is generally unenforceable. The words normally negate any contractual intention, so that the parties are not bound until formal contracts are exchanged. 6. Form The general rule is that contracts can be made informally; most contracts can be formed orally, and in some cases, no oral or written communication at all is needed. Thus, an informal exchange of promises can still be as binding and legally valid as a written contract. There are statutory exceptions to this rule. For example: (i) a lease for more than 3 years must be made by deed: Law of Property Act 1925, ss 52, 54(2); (ii) most contracts for the sale or disposition of an interest in land must be "made in writing": Law of Property (Miscellaneous Provisions) Act 1989, s 2; (iii) contracts of guarantee are required to be evidenced in writing: Statute of Frauds, s 4. 7. Contents of a contract The terms of a contract can be divided into express terms and implied terms. A. Express terms Express terms are ones that the parties have set out in their agreement. The parties may record their agreement, and hence the terms of their contract, in more than one document. Those terms may be incorporated by reference into the contract; (for example, where a contract is made subject to standard terms drawn up by a relevant trading association). Or, a contract may be contained in more than one document even though one does not expressly refer to the other (for example, dealings which take place under a 'master contract' with a separate document being executed every time an individual contract is made). Here, the master contract lays out most of the underlying terms on which the parties are dealing, while certain specific terms – price, times for delivery, etc. – are covered in individual contracts for each specific trade. Incorporation without express reference depends

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on the intention of the parties, determined in accordance with the objective test of agreement. Once the express terms have been identified, there is the question of interpretation. The document setting out the parties' agreement must be interpreted objectively: it is not a question of what one party actually intended or what the other party actually understood to have been intended but of what a reasonable person in the position of the parties would have understood the words to mean. The starting point for ascertaining the objective meaning is the words used by the parties. These are interpreted according to their meaning in conventional usage, unless there is something in the background showing that some other meaning would have been conveyed to the reasonable person. Thus, the terms of the contract must be read against the "factual matrix"; that is, the body of facts reasonably available to both parties when they entered the contract. The "parol evidence" rule provides that evidence cannot be admitted to add to, vary or contradict a written document. Therefore, where a contract has been put in writing, there is a presumption that the writing was intended to include all the terms of the contract, and neither party can rely on extrinsic evidence of terms alleged to have been agreed which are not contained in the document. This presumption is rebuttable, and extrinsic evidence is admissible, if the written document was not intended to set out all the terms on which the parties had agreed. The parol evidence rule prevents a party from relying on extrinsic evidence only about the contents of a contract (and only express terms), and not about its validity (such as the presence or absence of consideration or contractual intention, or where a contract is invalid for a reason such as incapacity). B. Implied terms A contract may contain terms which are not expressly stated but which are implied, either because the parties intended this, or by operation of law, or by custom or usage. Terms implied in fact Terms implied in fact are ones which are not expressly set out in the contract, but which the parties must have intended to include. The courts have adopted two tests governing whether a term may be implied. The first is the "officious bystander" test, where a term is so obvious that its inclusion goes without saying, and had an officious bystander asked the parties at the time of contracting whether the term ought to be included, the parties would have replied "Oh, of course". In other words, if it can be established that both parties regarded the term as obvious and would have accepted it, had it been put to them at the time of contracting, that should suffice to support the implication of the term in fact. The alternative test for implication is that of "business efficacy", where the contract would be unworkable without the term. For example, it has been held that in a contract for the use of a wharf, it was an implied term that it was safe for a ship to lie at the wharf. Under this test, a term will be implied if the contract simply could not work without such a term. It is important to note that the courts will not imply a term merely because it would be reasonable or desirable to do so. Further, a term cannot be implied if it conflicts with the express terms of the contract. Terms implied in law and by statute Terms implied in law are terms imported by operation of law, whether the parties intended to include them or not. For example, in a contract for the sale of goods, it is an implied term that the goods will be of a certain quality and, if sold for a particular purpose, will be fit for that

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purpose. For certain contracts the law seeks to impose a standardized set of terms as a form of regulation. Many terms which are implied in law have been put into statutory form. For example, a number of important terms are implied into contracts for the sale of goods by ss 12 to 15 of the Sale of Goods Act 1979. Further significant terms may be implied from the nature of the relationship between the parties – for example, contracts for professional services require the professional to act with reasonable standards of competence, a lawyer must act in his client's best interests and a doctor has a duty of confidentiality to his patients. Terms implied by custom or usage Evidence of custom is admissible to add to, but not to contradict, a written contract. Terms may also be implied by trade usage or locality 8. The End of a Contract There are essentially four ways in which a contract can be brought to an end A. Expiration This refers to a contract which comes to an end in accordance with its terms, either because it has a fixed expiry date or because there is a right to terminate contained in the contract (a contractual right to terminate is distinct from a common law right to terminate for breach, which is discussed below) B. Termination Breach A breach of contract is committed when a party, without lawful excuse, fails or refuses to perform what is due from him under the contract, or performs defectively, or incapacitates himself from performing.

• Failure or refusal to perform – a failure or refusal to perform a contractual promise when performance has fallen due is prima facie a breach.

• Defective performance – where a person promises to do one thing but does another, which differs, for example, in time, quantity or quality, this amounts to a breach. The effect of such a breach often differs from those of a complete failure or refusal to perform (see below). Note that where the "defect" in performance is particularly serious, the breach may amount to non-performance rather than defective performance (for example, if a seller promises beans but delivers peas).

• Incapacitating oneself – for example, a seller commits a breach of contract for the sale of a specific thing if he sells it to a third party.

Anticipatory Breach An anticipatory breach occurs when, before performance is due, a party either repudiates the contract or disables himself from performing it.

• Repudiation – clear and absolute refusal to perform, which includes conduct showing the party is unwilling, even though he may be able, to perform.

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• Disablement – for example, where a party disposes elsewhere of the specific thing which forms the subject matter of the contract.

Where one party commits an anticipatory breach, the other can elect to: • keep the contract alive by continuing to press for performance in which case the

anticipatory breach will have the same effect as an actual breach; or • "accept" the breach (in which case he has a right to damages and termination,

discussed below). If the injured party does not accept the breach, he remains liable to perform and retains the right to enforce the other party's primary obligations. However, it must be borne in mind that the effect of one party's breach may mean that it prevents the other party from performing his continuing obligations. Affirmation does not prevent the injured party from terminating the contract on account of a later actual breach. If the injured party does accept the breach, acceptance must be complete and unequivocal and he should make it plain that he is treating the contract as at an end. A breach can be accepted by bringing an action for damages, or by giving notice of intention to accept it to the party in breach. Acceptance of the breach entitles the injured party to claim damages at once (before the time fixed for performance). As with an actual breach, an anticipatory breach can also give rise to a right to terminate. This right arises immediately, if the prospective effects of the anticipatory breach are such as to satisfy the requirement of substantial failure in performance Termination for Breach Termination is the remedy by which one party (the injured party) is released from his obligation to perform because of the other party's defective or non- performance. A breach gives the injured party the option to terminate the contract or to affirm it and claim further performance. Termination depends on the injured party's election because the guilty party should not be allowed to rely on his own breach of duty to the other party in order to get out of the contract. The injured party must unequivocally indicate his intention to terminate such as by giving notice to this effect to the party in breach or by commencing proceedings. He must terminate the contract as a whole. And, if the injured party accepts further performance after breach, he may be held to have affirmed, so that he cannot later terminate the contract. After termination, the injured party is no longer bound to accept or pay for further performance. However, termination does not release the injured party from his duty to perform obligations which accrued before termination. If the injured party fails to exercise his option to terminate, or positively affirms the contract, the contract remains in force and each party is bound to perform his obligations when that performance falls due. At law, the right to terminate for breach arises in three situations:

• repudiation – where a party evinces a clear and absolute refusal to perform; • impossibility – where a party disables himself from performing; • substantial failure to perform. Any defect in performance must attain a certain

minimum degree of seriousness to entitle the injured party to terminate. A failure in performance is "substantial" when it deprives the party of what he bargained for or when it "goes to the root" of the contract. For less serious breaches, a right to damages may arise, but not a right to terminate.

It should be noted that bringing proceedings for breach of contract does not necessarily amount to termination of that contract. It may be that the claimant is seeking damages alone and/or the contract may contain specified formalities to be met before termination can occur.

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C. Vitiation There are situations where the parties have reached agreement but the question arises whether the existence or non-existence of some fact, or the occurrence or non-occurrence of some event, has destroyed the basis on which that agreement was reached so that the agreement is discharged or in some other way vitiated. D. Misrepresentation A misrepresentation is a false statement of fact made by one party to another, which, whilst not a term of the contract, induces the other party to enter into the contract. An actionable misrepresentation must be a false statement of fact, not of opinion or future intention or law. Silence does not normally amount to misrepresentation. However, the representor must not misleadingly tell only part of the truth. Thus, a statement that does not present the whole truth may be a misrepresentation. Where a statement was true when it was made but due to a change of circumstances becomes false, there is a duty to disclose the change. A misrepresentation may be:

• Fraudulent: made knowingly, without belief in its truth or recklessly; • Negligent: made by a person who had no reasonable grounds to believe that it was

true; or • Innocent: made in the wholly innocent belief that it was true.

The misrepresentation must have induced, at least partly, the party to enter into the contract and must have been relied on to at least some degree by the person to whom it was made. If that person in fact relies on his own judgments or investigations, or simply ignores the misrepresentation, then it cannot give rise to an action against the person who made the misrepresentation. There are multiple remedies available once misrepresentation has been proved:

• Rescission. This sets aside the contract and primarily aims to put the parties back in their original position as if the contract had never been made. Rescission can be sought for all cases of misrepresentation. However, this is a discretionary remedy – meaning that the courts will not always allow a party to rescind - and the injured party may lose the right to rescind if: a) he has already affirmed the contract; b) he does not act to rescind in a reasonable time; c) it is or becomes impossible to return the parties back to their original position; or d) a third party has acquired legal rights as a result of the original contract.

• Indemnity. The court may order payment for expenses necessarily incurred in complying with the terms of the contract.

• Damages. This remedy varies according to the type of misrepresentation. In fraudulent misrepresentation cases there is an automatic right to damages, in negligent cases the injured party may claim damages under common law or under the Misrepresentation Act 1967 s2(1). In situations of innocent misrepresentation, the court has discretion whether to award damages and may opt to award damages in lieu of rescission. Damages are discussed further below.

E. Mistake A contract may be void or voidable if mistake has occurred. If a contract is void, then it is so 'ab initio' (from the beginning), as if the contract was never made. In such cases, no

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obligations will arise under it. Alternatively, if the contract is voidable, the contract will have been valid from the start and obligations may arise under it despite the mistake. Mistake can be classified into different forms:

• Common Mistake. A common mistake is one where both parties make the same error relating to a fundamental fact. For example, a contract will be void at common law if the subject of the contract no longer exists – e.g. a contract for the sale of specific goods where those goods have already perished. Similarly, the contract will be void if the buyer makes a contract to buy something that in fact already belongs to him.

• Unilateral Mistake. This occurs when only one party is mistaken. This includes mistake as to the terms of the contract or mistake as to the identity of the parties. A mistake as to terms will make a contract void.

• Mutual Mistake. A mutual mistake is one where both parties fail to understand each other.

• A mistake as to the quality of what is being contracted for – only in extreme cases of such a mistake will the contract be void. It must be a mistake "which makes the thing without the quality essentially different from the thing as it was believed to be".

F. Frustration Under the doctrine of frustration, a contract may be discharged if, after its formation, an unforeseen event occurs which makes performance of the contract impossible, illegal or essentially different from what was contemplated. A good example is Avery v Bowden, in which a ship was supposed to pick up some cargo at Odessa. With the outbreak of the Crimean War, the government made it illegal to load cargo at an enemy port, so the ship could not perform its contract without breaking the law. The contract was therefore frustrated. Frustration will not occur where the frustrating event was caused by the fault of one party. Equally, frustration will not occur where the parties made express provision for the event in their contract (such as in a force majeure clause). The doctrine cannot be invoked lightly, and cannot allow a party to escape from a bad bargain. The position at common law is that frustration discharges the parties only from duties of future performance. Rights accrued before the frustrating event therefore remains enforceable but those which have not yet accrued do not arise. This may cause hardship, as exemplified in Chandler v Webster. Here money for hire of a room for the King's coronation was due in advance. Not all the monies had been paid when the coronation was postponed, but the hirer was still liable to pay the full amount. The payment had fallen due before the frustrating event. The Law Reform (Frustrated Contracts) Act 1943 was enacted to remedy this defect. Under the Act, sums paid before that date are recoverable; sums due after that date cease to be payable. Where there has been partial performance, the performing party may be able to recover its expenses incurred in carrying out, or preparing to carry out, that performance. 9. Damages/Remedies Damages are intended to compensate the injured party for the loss that he has suffered as a result of the breach of contract. In order to establish an entitlement to substantial damages for breach of contract, the injured party must show that:

• actual loss has been caused by the breach; • the type of loss is recognized as giving an entitlement to compensation; and • the loss is not too remote.

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A breach of contract can be established even if there is no actual loss but in that case, there will be an entitlement to only nominal damages. The underlying principle is to put the injured party financially, as near as possible, into the position he would have been in had the promise been fulfilled. As a general rule, damages are based in loss to the claimant not gain to the defendant. In other words, damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party. Damages may sometimes be an inadequate remedy. There are a number of equitable remedies, which are discretionary, directed at ensuring that the injured party is not unjustly treated by being confined to the common law remedy of damages. For example: A. Specific Performance Where damages are deemed inadequate, the court may make an order for specific performance which will compel the party in breach to fulfill the terms of a contract. The court "will only grant specific performance if, under all the circumstances, it is just and equitable to do so." Specific performance may be refused if the claimant has acted unjustly or unfairly on the basis that the claimant must come to equity with "clean hands". B. Injunction A court may restrain a party from committing a breach of contract by injunction. Such injunctions may be "interlocutory" ones that are designed to regulate the position of the parties pending a full hearing of a dispute or permanent. Further, an injunction (whether interlocutory or permanent) may be "prohibitory" ordering a defendant not to do something in breach of contract or "mandatory" requiring a defendant to reverse the effects of an existing breach. An injunction will not normally be granted if the effect is to directly or indirectly compel the defendant to do acts for which the plaintiff could not have obtained an order for specific performance.

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VIII. NATURE OF FRENCH CONTRACT LAW The French Code Civil is the oldest and still valid Civil Code of Europe dates back in 1804, the Napoleonic days of the country. French law supports the supremacy of legislation and therefore written law as France is one of the civil law countries in Europe. The contract law chapter of the Code Civil is universally valid in all contractual situations and court decisions are merely applications of the written rules of contract law. Courts cannot create new legal institutions when it comes to contract law. 1. Theory and effect of contracts French law heavily relies on the freedom of contract principle that includes the freedom of formation, form, choosing the partner and content of the contract. Autonomy of the will is an essential element of the French civil law system and, therefore, contract law as well. Parties are free to enter into a contract and to determine its contents, subject to the requirements of good faith and air dealing, and the mandatory rules. Mandatory rules are scarce in France as only a very limited number of nominated contracts are building from partially cogent norms in the Code. Article 1134 of Code Civil regulates the effect towards parties. Agreements lawfully entered into take the place of the law for those who have made them. This is the French translation and implementation of the ancient Roman law principle of pacta sunt servanda. Contracts, however, may be revoked only by mutual consent, or for causes authorized by law (e.g. amendment by the court is circumstances significantly changes). Contracts must be performed in good faith. According to article 1165, contracts may have positive effect toward third parties. Agreements produce effect only between the contracting parties and they do not harm a third party. Contract may only benefit third parties in the case one stipulate for the benefit of a third party. 2. Interpretation of contracts A contract should be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words. Under French contract law, intent of the parties definitely prevails grammatical and textual interpretation. No common and commonly accepted meaning of words shall govern the method of interpretation but the circumstances and intention of the contracting parties. However, there may be a decline of the free common intention in special cases. Article 1244-1 states that a judge may, defer or spread out the payment of sums due, taking into account the debtor’s position and in consideration of the creditor’s needs. Article 1152 says that the judge may ‘even of his own motion’ moderate or increase the agreed penalty clause of the contract. Another good example for the decline of the free common intention of the parties is contract between professionals and consumers. However, these examples show only exceptional cases and circumstances and either community interest or the protection of the weaker party justify the intervention in the freedom of contract principle.

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3. Classification of Contracts Contracts are classified in the Code Civil as being either synallagmatic or unilateral. Contract synallagmatic is defined in article 1102 of the Civil Code. A contract is synallagmatic or bilateral where the contracting parties bind themselves mutually towards each other. These contracts require a bargain, some form of consideration as both parties undertake some obligations toward the other party. While contract unilateral, according to article 1103 of the Civil Code, is where one person is bound towards one, without any obligation on the part of the latter. These contracts, in some jurisdictions, are considered non-binding, like we saw it in England or the laws of the United States. However, in most civil law countries, such as the mother of all, France, these unilateral undertakings, promises may be binding even without the presence of any consideration on the side of the other contracting party. Merely the acceptance of such individual and unilateral promise creates a contract attaching a binding effect to it. Great examples to unilateral contracts are donations, gift contracts. There may be other ways of classification of contracts. A contract of benevolence (article 1105) or a contract for value (article 1106). A contract of benevolence is one by which one of the parties procures a purely gratuitous advantage to the other. A contract for value is one that obliges each party to transfer or do something. Contracts with a special denomination or without such thing are regulated in article 1107. Contracts, whether they have a specific denomination or not, are subject to general rules, which are the subject matter of this title. Particular rules for certain contracts are laid down under the Titles relating to each of them; and the particular rules for commercial transactions are laid down by the legislation that relates to commerce. Contract with or without intuitus personae may be another base for classification. Contracts with intuitus personae are personal services contracts, where the person of one of the contracting parties is an essential term of the contract. In these contracts, a particular individual cannot be replaces. Examples include contracts with musicians, singers, actors, specific lawyers, professional athletes who cannot be replaces, otherwise the contractual interest of the other party may be diminished. Contracts may also be formed for an indefinite period constituting long-term relationship between parties, or with a fixed term. There may also be instantaneous contracts that are performed immediately. 4. The formation process The formation process in France is very similar to the old offer and acceptance method. The consent of the parties is an essential element of the contract and without it, contract cannot be concluded. Four requisites are essential for the validity of a contract:

• The consent of the party who binds himself. • His capacity to contract. • A definite object with forms the subject matter of the undertaking. • A lawful cause in the obligation.

A. Offer Offer must be precise containing all essential elements of the contract. For example, if it is a sales contract, there must be agreement on the price and the good. These are minimum conditions of a sales contract. Offer should also be firm, so there is no place for any reservations by parties. Where a writing is required for the validity of a legal transaction, it may be established and stored in electronic form. Where a mention written in the own hand of the person who binds himself is required, the latter may appose it in electronic form where the

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conditions in which it is apposed are likely to vouch that it can only be apposed by the person himself. Documentary evidence, or evidence in writing, results from a sequence of letters, characters, figures or of any other signs or symbols having an intelligible meaning, whatever their medium and the ways and means of their transmission may be. A writing in electronic form is admissible as evidence in the same manner as a paper-based writing, provided that the person from whom it proceeds can be duly identified and that it be established and stored in conditions calculated to secure its integrity. Where a statute has not fixed other principles, and failing a valid agreement to the contrary between the parties, the judge shall regulate the conflicts in matters of documentary evidence by determining by every means the most credible instrument, whatever its medium may be. An electronic-based writing has the same probative value as a paper-based writing. Start talks and negotiations do not have a binding effect to sign and conclude a contract at the end of them. However, there may be liability for breaking off negotiations. Article 1382 provides a general rule for that. Any act whatever of man, which causes damage to another, obliges the one by whose fault it occurred, to compensate it. In order to be liable for such behavior in the negotiation phase, there are four prerequisites:

• Advanced stage of negotiations. • The legitimate belief of the other party. • Brutal and unilateral way of the break off. • Legitimate reason.

There may be a breach of confidentiality if information is given in the course of negotiation. Damages may be collected for such infringement. An offer may be revoked, however a revocation of an offer is ineffective if:

• the offer indicates that it is irrevocable; • it states a fixed time for its acceptance; • it was reasonable for the offeree to rely on the offer as being irrevocable and the

offeree has acted in reliance on the offer. B. Acceptance Acceptance must be without reservations otherwise it is a new offer. Silence is not acceptance unless there are special circumstances, like in continuous business relationships there was a similar contract before that stated silence as acceptance. In case of consumer contracts, there are specific periods for cooling-off. Consumer may withdraw his order to buy under a specific timeframe. A contract is concluded if the parties intend to be legally bound and they reach a sufficient agreement without any further requirement. There is a special case of remote contracts (like distance selling). Contract is formed when the acceptance has been dispatched by the offerre not and when it reaches the offeror (‘Suppletive’ rule). C. Special Rules of Electronic Commerce Code Civil provides specific provisions for offer in electronic commercial relations. Information must be provided along or before the offer has been communicated on:

• contract terms and general conditions in a way that allows storage and reproduction; • an offer is not revoked until it is no more accessible; • the various technical steps to follow to conclude the contract; • language of the contract, etc.

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In case of e-commerce, a contract is concluded when: • the acceptor can check his order and can correct errors; • the offeror has acknowledge the receipt of the recipient; • the order and the acknowledgement of receipt are received when the parties to whom

they are addressed are able to access them. Special rules exist for emails. An ordinary letter relating to the conclusion or performance of a contract may be sent by electronic mail. The appending of the date of sending shall result from an electronic process whose reliability is presumed, until evidence contrary to it. A charged letter relating to the conclusion or performance of a contract may be sent by electronic mail provided that this mail is dispatched by a third person according to a process which allows to identify that third person, to designate the sender, to ensure the identity of the addressee and to establish whether the letter has been delivered or not to the addressee. At the option of the sender, the contents of that letter may be printed by the third person on paper in order to be delivered to the addressee or may be addressed to the latter by electronic means. In the latter case, where the addressee is not a professional, he must have requested the sending by that way or have accepted the use of it during previous exchanges. Where the appending of the date of sending or of receipt results from an electronic process, the reliability of the latter is presumed, until evidence contrary to it. An advice of delivery may be addressed to the sender by electronic means or by any other device which allows him to store it. D. Nullity A contract can be void in three cases: error in substantial (material) quality or on the person; deception and duress. Error on the substantial (material) quality or on the person is regulated by article 1110. Requirements are the following:

• 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.

• Mistake must be excusable • Mistake as to facts or law. The action for annulment may be carried out in five years from the day when mistake was discovered.

Deception is a ground for annulment of a contract where the schemes used by one of the parties are such that it is obvious that, without them, the other party would not have entered into the contract. It may not be presumed, and must be proved. Duress exerted against the person who has contracted the obligation is a ground for annulment even though it was exerted by a third party different from the one for whose benefit the agreement was made. 5. Non-performance of Obligations and Remedies In case of non-performance of any obligations undertaken in the contract by the parties, there are several remedies available for the non-breaching party:

• Liability for damages • Forced performance (specific performance) • Right to withhold performance (ius retentionis)

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• Right to terminate the contract. A. Conditions of liability Damages are due only where a debtor is given notice to fulfill his obligation, except nevertheless where the thing which the debtor has bound himself to transfer or to do could be transferred or done only within a certain time which he has allowed to elapse. Notice of default may follow from a letter missive where a sufficient requisition results from it. A debtor shall be ordered to pay damages, if there is occasion, either by reason of the non-performance of the obligation, or by reason of delay in performing, whenever he does not prove that the non-performance comes from an external cause which may not be ascribed to him, although there is no bad faith on his part. A party’s non-performance may be excused if he proves that it is due to an impediment beyond his control and that due to an external cause (force majeure). Another condition to successfully use the force majeure clause is that the breaching party could not reasonably have been expected to take the impediment into account at the time of the conclusion of the contract, or to have avoided or overcome the impediment or its consequences. A debtor is liable only for damages which were foreseeable or which could have been foreseen at the time of the contract. Unforeseeable damages are excluded from liability. This limitation does not apply if the breach was intentional. The fault of the aggrieved party may excuse the other party’s non-performance completely or partially. Any obligation to do or not to do resolves itself into damages, in case of non-performance on the part of the debtor. The judge cannot force a party to perform the obligation, only to pay ‘astreinte’. Parties may limit the liability for breach in the contract itself. It is considered valid under French law, however, if the obligation unperformed is an essential one, a clause limiting liability may be held ineffective although the breach itself is not deliberate or gross. B. Penalty Clauses A penalty is a clause by which a person, in order to ensure performance of an agreement, binds himself to something in case of non-performance. Nevertheless, the judge may ‘even of his own motion’ moderate or increase the agreed penalty, where it is obviously excessive or ridicously low. Any stipulation to the contrary shall be deemed unwritten. C. Right to Withhold Performance A party who is to perform simultaneously with or after the other party may withhold performance until the other has tendered performance or has performed. The first party may withhold the whole of its performance or a part of it as may be reasonable in the circumstances. A party may similarly withhold performance for as long as it is clear that there will be a non-performance by the other party when the other party’s performance becomes due. D. Forced Performance Forced performance may be direct of indirect. In case of a direct forced performance there is an obligation to pay the price or there may be grounds for a seizure. Indirect forced performance is an imposition of a periodic penalty (astreinte).

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E. Right to Terminate the Contract In principle, termination must be applied for in court. However, there is an opportunity for non-judicial termination as well in case of fixed-term contracts, intuitus personae contracts, resolutionary clause contracts (with or without notice of termination) or if the other party’s non-performance is fundamental.

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IX. NOVELTIES IN GERMAN CONTRACT LAW The German Civil Code (BGB) was modernized on January 1st 2002 in terms of law of obligations including the law of contracts. This chapter focuses on some of the most important and relevant novelties of this modernization to demonstrate how traditionally old civil codes are being adapted to the needs of modern society. As fundamentals of German contract law are very similar to what we had already examined in other civil law legal systems (most notably in France or Italy), we only concentrate on the special new rules for contracts. 1. Scope of the Reform In the 21st century modernizing contract law usually faces with two important challenges. First of all, contract law must serve business needs in order to ensure smooth operation of business transactions. Even if some rules are set in international treaties – such as the Vienna Convention on the International Sale of Goods – national contract still has a lot to cover in terms of international business contracts. Rules enacted to regulate domestic commerce have a significant impact on international contracts and their evaluation as well. Since no international or even European code for contracts exist, domestic contract law plays an important role even in international business debates when the national forum applies domestic law as governing law. Partly, domestic commerce also requires modern norms in terms of contract law. Most importantly electronic commerce rewrote contract law significantly. On the other hand consumer protection perspective is another vital element for modern national contract law regulations. Consumer protection became a big hit in Europe after the second world war and especially the legislation of the European Union urged domestic laws to create a specific core of law to provide safety and protection to consumers. Consumer protection goals cross traditional and classic contract law institutions in many aspects, so a generalized approach is usually not the best way for member states. As consumer protection is mainly about providing more detailed information and effective weapons to the otherwise weaker party involved in the transactions, these rule cannot be extended to business-to-business relations. Modernization of the German BGB therefore implemented various rules to protect consumers only applicable for consumer contracts. The modernization had three distinguished sources in Germany. The first was the necessity to implement several directives of the European Communities/European Union. Among these directives, the most important was the Consumer Sales Directive. This was the one that forced the German legislator to create more specific rules for consumer contracts. Another solution would have been to regulate this area of law in a separate legislative product other than the Civil Code, however mainly due to the many otherwise applicable general norms of contracts, implementation of consumer protection institutions in the Civil Code seemed to be a better and easier alternative. These days in Europe it is a debated problem whether consumer protection belongs to the Civil Code or not. Germans still think a Civil Code must regulate and codify most relationships between individuals, including businesses and consumers at the same time. The other two factors that played an important role in modernization were namely the directives on E-Commerce and Late Payment, related to the law of obligations only in some and probably less central aspects. These directives deal with specific questions, so implementation mainly resulted in individual chapters regulating such problems. These implementations did very little impact on the characteristics of the new law and also did not rewrite classic and old concepts of contract law in Germany. The second source of the new Law of Obligations chapter in BGB was a draft that had been prepared by a reform commission in a process that goes back to the 1970s. It had initially

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been entrusted with the task of preparing a reform of the entire German law of obligations that covers not only contracts but damages, unjust enrichment and other related topics as well. In 1992 the commission delivered a comprehensive draft for the reform of the law of obligations in the German BGB. In 1994 a biannual assembly of German lawyers entitled Deutscher Juristentag, voted with an overwhelming majority for the enactment of the reform. But that pretty much marked the end of this otherwise ambitious project. The draft was forgotten by the Federal Ministry of Justice and did not become a base for future modernization debates. It has been said that the main reason for this inactivity was the opposition of the mighty associations of the German industry as the proposed reform could have placed a more significant burden on certain sectors. These associations claimed that the new law proposed by the draft would have had severe disadvantages to their members. However, after the European Consumer Sales Directive was adopted, that situation changed completely and made it a top priority for the German legislator to deal with consumer protection elements in the law of obligations chapter of the BGB. The third source of the reform was already an important core of the old German law, but was never incorporated by the Civil Code itself. Around the BGB, a massive number of smaller statutes on more specific matters, which were all closely connected to private law, had been developed. The German legislator took the opportunity of modernization and integrated most of these separate statutes into the Civil Code. 2. Remedies in Case of Breach A. System of Remedies As for all domestic contract laws, the most debated cases arose from breach. This is why available remedies to the innocent party remain a massively important core of contract law. One of the most relevant issues in the modernization of the German law of obligations was its new system of remedies available in case a party commits a breach. First, we should clarify what remedies in German law actually mean. In German law, we distinguish the obligee's claim for specific performance (primary claim) from other rights of the obligee that may arise in case of non-performance or insufficient performance of a contractual obligation by the other party. This is why the latter group is called secondary claims. When Germans speak of remedies, this only relates to the secondary rights, which could be a claim for compensation, the right to terminate the contract, or to reduce the price in the majority of cases. In order to demonstrate and analyze the fundamental shift from the old system of remedies to the new one in the valid code, first we should take a closer look at the situation existed before the amendments came into force. Formerly, remedies of the obligee (e.g. the buyer) under the BGB depended on the type of the breach of contract what the obligor (e.g. the seller) had committed. There were four distinguishable types of breaches of a contract that were categorized as follows:

• Unmöglichkeit (impossibility); • Verzug (delay); • Positive Vertragsverletzung (positive breach of contract); • Gewährleistung (obligee's rights in the event of defects).

One of the most significant problems with the old system was how to distinguish between these four categories of breaches. The distinction and separation was vital as remedies available to the obligee for each of these types of breach solely depended on completely different prerequisites. The most important case may serve as an example. In many cases the obligee (e.g. the buyer) was in a relatively weak position in the event of defective performance (e.g., delivery of defective goods). The buyer’s rights were subject to a very

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short period of limitation (in the example given, 6 months counted from the date of delivery) and he could claim compensation only in exceptional cases listed specifically by the old law. However, the situation of the buyer was completely different if the seller had not delivered at all (this is what we may call non-performance). In this case, the buyer could generally claim compensation including consequential losses, and the limitation period was significantly longer, in most frequent cases 2 years. This resulted some rather strange distinctions and anomalies. For example, in one famous case the parties concluded a contract for the sale of summer wheat seed. After more than 6 months, it turned out that the seed obviously was winter wheat that could only be sown in the autumn. Unsurprisingly, the buyer claimed compensation because he had sown the wheat in the spring and it had not grown. The crucial question was now whether the wheat that the seller had delivered was defective initially (making this delivery of defective goods and thus a case of Gewährleistung) or something completely different (making this a case of non-performance). If this had been delivery of defective goods, the buyer could have claimed compensation only within a limitation period of six months after delivery, and this period had already been expired. Consequently, the buyer would have had no rights at all against the seller if the wheat delivered was considered as defective goods. On the other hand, if the wheat delivered had been considered to be completely different goods ("aliud performance"), this was considered to have the same consequences as if nothing had been delivered at all. In this case, the buyer would be entitled to claim full compensation for all the damage the delivery of the wrong wheat had caused to him. Incidentally, the Bundesgerichtshof (German Federal Court of Justice, hereinafter: BGH) decided in favor of the buyer, but this was not undisputed in jurisprudence and judicial practice at the same time. (Judgment of 20 November 1967, reported in Neue Juristische Wochenschrift 1968, p. 640). There are, naturally, no suitable general criteria for making this crucial distinction between the delivery of defective goods and the delivery of an aliud performance. The new BGB has changed completely the system of old remedies in order to make such distinctions unnecessary, or at least a lot less relevant in most cases. The new central prerequisite for remedies of the obligee (w.g. the buyer) in case of non-performance or bad performance is "breach of duty", which is a very general concept and does not care about which obligation was actually breached by the violator. It is no longer of significant importance whether defective goods were delivered, or whether the obligor committed a different breach of duty. In particular, it is recognized that the seller may commit a breach of duty purely by delivery of defective goods. The core provision that clarifies the issue is § 433 (1), sent. 2 in the German BGB. The prerequisites for the obligor's remedies now depend on the type of remedy that sought after. These include:

• compensation; • in lieu of performance (if you do, get or give one thing in lieu of another, you do, get

or give it instead of the other thing, because the two things are considered to have the same value or importance);

• for delay; • other damages; • termination of the contract; • other possible remedies, e.g. removal of a defect, price reduction, delivery of new

goods free from defects. B. Urging the Debtor to Perform In the 21st century it is not a rare case when the debtor cannot perform at all due to insolvency problems. Especially in the economic crisis it became clear that contract law must find

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necessary instruments to urge the debtor to perform his obligations. German contract law reform was way ahead of the economic crisis and still put a significant emphasis on these instruments. The changes implemented for the system of remedies have in many ways changed the wording of the BGB without affecting the outcome of most cases in courts. The purpose was primarily to make the law easier to understand for those who are not holding a law degree. However, there are some aspects where the substantive law has really been affected and changed, so that for some situations, the new German law of obligations leads to other results than its predecessor. This change is inevitable in most places. Several of these changes can be summarized under the headline "greater pressure on the obligor to perform and higher risk of being liable for damages caused by non-performance". The easiest way to exemplify this problem is to analyze the provisions on the so-called compensation in lieu of performance. We should imagine the following standard situation. The obligor does not perform his obligations. We do not know precisely the reason why he did so. An obligor who does not perform may or may not indicate reasons for this failure to the other party in most cases. But as an obligor is under some pressure to present excuses, the obligee cannot really be sure whether the obligor is telling the truth or doing whatever he can (e.g. false statements) in order to get exonerated from liability. Under the old rules of the German BGB, § 326 BGB applied in such a case. This provision granted compensation in lieu of performance if the following, rather long list of prerequisites was fulfilled at the same time:

• non-performance exists; • responsibility of the obligor for the failure could be detected; • notice to perform was given; • the other party fixed a reasonable period of time; • threat to refuse performance after expiry of the period was obvious; • expiry of the fixed period happened;

Two of these prerequisites: • notice to perform • threat to deny performance after expiry of the period

were started to fade in judicial practice and in business relations more and more. This is why these two prerequisites have faded so significantly that the modernization of the BGB completely left them out from the preconditions. The successor of the former § 326 BGB is the new § 281 BGB in the Code. The list of its prerequisites for a claim for compensation is now much shorter:

• non-performance (which is, of course, qualified as a breach of duty); • liability of the obligor for the failure; • fixing a reasonable period by the oblige, and • the expiration of the fixed period.

A notice requesting performance and the threat to refuse performance after the original period has expired are no longer necessary under the new § 281 BGB. The new German law of compensation has abolished these two preconditions that were introduced by the original text of the BGB in 1900 in order to protect the obligor more. After the recent reform became effective, it is much easier for the obligee to terminate the contract and to claim compensation in lieu of performance. In other words: it imposes a much bigger risk for the obligor not to perform. And this - of course - increases the pressure on him to perform and urge him to fulfill his obligations undertaken in the contract. This was an explicit and obvious purpose of the modernization. This tendency of the new BGB to increase the pressure on the obligor to perform may also be illustrated with two more examples. First, the limitation period for the buyer's remedies for defective goods is now much longer than it used to be under the validity of the old text. For

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moveable property, i.e. tangible goods, the limitation period has been extended - as a general rule - from 6 months to 2 years (§ 438 (1) no. 3 BGB). This was, of course, a requirement established by the European Consumer Sales Directive. However, German law has lengthened the limitation period for any sale of goods, i.e. including business-to-business transactions that is normally uncommon when implementing purely consumer protection directives in a member state. The risk of contractual liability in the event of delivery defective goods under a sales contract has increased substantially. Second, the risk for the seller to become liable for compensation in the event of defects is much bigger than before. As mentioned above, under the old law, the buyer was allowed to claim compensation only in exceptional cases, e.g. if the seller fraudulently concealed a defect or if he gave a warranty for certain qualities of the good sold. Under the new system of remedies, the number of situations in which the seller is liable for compensation of the buyer’s loss in the event of defective goods has increased dramatically. As a general rule, any delivery of defective goods amounts to a breach of duty (§ 433 (1) BGB) and can thus trigger the buyer's claim for compensation. According to § 280 (1) sentence 2 BGB, the seller can only escape from this liability if he proves that he was not responsible for this breach of duty. Taken together, this shows that one of the most important features of the reform is that it increases the pressure on the seller to perform properly in order to avoid being exposed to remedies of the buyer which are much more effective and costly compared to the system of remedies which prevailed during the first century of the BGB’s existence, i.e. the 20th century.

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CLOSING REMARKS Contract law is considered to be a vital element for business relations and civil relations as well. In the 21st century there is a growing need for a flexible and still effective regulation of contracts both in terms of a general part and the special one. The general part of contracts deals with question of formation, rules for performance, breach and the available remedies in case of non-performance or defective performance, including the problem of damages. The special part of contract law lists several of the most typical contract types often used by individuals and businesses in order to provide model rules for such transactions. In case the parties decide not to specify their relationship or shorten the text of the agreement, these subsidiary model rules may serve as governing laws in a future debate. The internationalization of contract law is an evident and important challenge for domestic private law systems. More and more transactions are concluded in the international commercial sphere involving some kind of foreign element in the form of a foreign party or a foreign place for performance. The textbook proves that even if the European Union and the United Nations work hard on enacting international regulations for the most frequently debated contractual questions or contract forms, this process is far from offering a truly unified and internationalized core of contract law. This is why understanding the similarities and the most important differences in contract law of various legal systems, even inside the European Union is vital for every lawyer and even judges. Private international law may point to the relevant factor linking the problem (in our case the actual contract) to a legal system and a national contract law and it can easily be different than the forum’s very own rules for contracts.