978-0132718974 Chapter 10 Solution Manual Part 1

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Sales

I. Text Materials

United Nations Convention on Contracts for the International Sale of

Goods

The 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG)

came into force January 1, 1988, climaxing more than 50 years of negotiations. CISG is

organized in four parts:

Part I (Articles 1–13) contains the convention’s general provisions, including rules on the

scope of its applications and rules of interpretation.

Part II (Articles 14–24) governs the formation of contracts.

Part III (Articles 25–88) governs the rights and obligations of buyers and sellers.

Part IV (Articles 89–101) contains provisions for the ratification and the entry into force of

the Convention.

Transaction Covered in CISG

CISG applies to contracts for the international sale of goods—that is, the buyer and seller must

have their places of business in different states. In addition, either (1) both of the states must be

contracting parties to the convention or (2) the rules of private international law must “lead to the

application of the law of a contracting state.”

CISG may apply even if the buyer’s and seller’s places of business are not in a contracting state.

The final provisions of the convention allow a ratifying state, if it wishes, to declare that it will

apply CISG only when the buyer and seller are both from contracting states.

Opting In and Opting Out – The parties to a contract may exclude or modify its application by a

choice-of-law clause. Whether they can use that same clause to exclude a domestic law and adopt

CISG in its place depends on the rules of the state where the case is heard.

Case 10-1: Asante Technologies, Inc. v. PMC-Sierra, Inc.

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

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Issues: (1) Does federal jurisdiction attach to claims governed by CISG? (2) Were the parties

from two different CISG states? (3) Did the parties’ choice of law clause exclude the CISG? (4)

Does the well-pleaded complaint rule prevent the assumption of federal jurisdiction?

Holdings: (1) Yes. (2) Yes. (3) No. (4) No.

Law: (1) United States Code, title 28, §1331(a) gives U.S. district courts jurisdiction over claims

Explanation: (1) CISG is a U.S. treaty and therefore U.S. district courts may hear complaints that

arise under it. (2) Unique Technologies is a distributor and Asante is not bound by its actions. The

Order: Asante’s motion to remand the case to state court is denied.

Sales Defined – CISG does not directly define sales. Instead, it speaks of the seller’s and buyer’s

obligations. The seller is to “deliver the goods, hand over any documents relating to them and

transfer the property in the goods, as required by the contract and this Convention”; the buyer, in

exchange, is to “pay the price.” This is the same definition found in many domestic laws,

including the U.S. Uniform Commercial Code, which describes a sale as the “passing of title from

the seller to the buyer for a price.”

Goods Defined – CISG also does not directly define goods. Instead, it defines those kinds of

sales that are not governed by the convention. Six specific categories are excluded. Three are

based on the nature of the transaction, three on the kinds of goods. The excluded transactions are

(1) “goods bought for personal, family, or household use”; (2) auction sales; and (3) sales “on

execution or otherwise by authority of law.” The excluded goods are (1) stocks, shares,

investment securities, negotiable instruments, or money; (2) ships, vessels, hovercraft, or aircraft;

and (3) electricity.

Goods bought for personal, family, or household use are excluded for two reasons. First, a double

standard could arise if different rules governed sales by local shopkeepers to foreigners. Second,

many local laws protect consumers, and that protection would be lost if CISG applied. This

exclusion does not apply “unless” the seller “knew or ought to have known” that the goods were

bought for personal use or consumption.

Auction sales, sales on execution, and sales “otherwise by authority of law” are excluded because

of the uniqueness of the transactions involved. Auction sales present problems in determining

when the contract was formed. Executions and other kinds of forced sales do not involve the

negotiation of terms by the parties. Transactions in stocks, shares, investment securities,

negotiable instruments, and money are excluded because a wide variety of local rules govern

them, and the drafters could not agree on how to harmonize the rules in this convention. Sales of

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ships, vessels, hovercraft, aircraft, and electricity were also excluded from CISG because most

domestic legal systems have special rules that apply to them.

Mixed Sales – CISG looks upon mixed sales and services contracts as sales of goods, unless “the

preponderant part of the obligations” of the seller “consists in the supply of labor or other

services.” Preponderant has its normal meaning of “more than half,” but whether this is measured

by the cost, the sale price, or some other basis is something the convention does not make clear.

Contracts for goods to be manufactured are treated by CISG as sales of goods unless the buyer

“undertakes to supply a substantial part of the materials.” Although substantial probably means

less than half, how much less is unclear.

Contractual Issues Excluded from the Coverage of CISG

CISG only deals with (1) the formation of the contract and (2) the remedies available to the buyer

and seller. It specifically excludes questions about (1) the legality of the contract, (2) the

competency of the parties, (3) the rights of third parties, and (4) liability for death or personal

injury.

Illegality and Incompetency – Domestic laws vary greatly in determining when a contract is

illegal and when it is void or voidable because one or both of the parties are incompetent. The

extent to which a contract can be avoided because it was fraudulently obtained varies greatly.

Domestic rules on insanity, infancy, and other contractual disabilities are equally diverse.

The drafters of the convention recognized that legality and competency are sensitive issues that

reflect the mores and social values of particular cultures. To avoid a disagreement that might have

jeopardized the adoption of CISG, these questions were left for settlement by domestic law.

Third-Party Claims and Personal Injuries – Diverse domestic laws apply to the matters of

third-party claims and the liability of a seller for death or personal injury. Again, to avoid the

possibility of a deadlock in the drafting of the convention, the drafters left them out.

Preemption – To determine if CISG applies to a particular contractual issue, one must look to the

convention itself, not to domestic law. If the convention does apply, domestic law is preempted.

That is, the remedies provided in CISG are the only remedies available. This result is the

consequence of the convention’s basic function: to establish uniform rules for international sales

contracts.

Preemption applies both in cases where domestic law calls the matter contractual and where it

gives it some other name. Under CISG, a remedy is available if the goods failed to conform to the

contract (Article 35) and damage resulted from the defect (Article 74). Despite the fact that local

law may require a third proof element to establish product liability, this does not mean that a tort

remedy is available. The only permissible remedy is the one provided by CISG.

Interpreting CISG

The underlying goal of CISG is the creation of a uniform body of international commercial sales

law. In deciding legal questions governed by the convention, Article 7(2) directs a court to look to

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the following sources, in the following order: (1) the convention itself, (2) the general principles

on which the convention is based, and (3) the rules of private international law.

The Convention – When the words of CISG itself require interpretation, Article 7(1) directs a

court to consider (1) the international character of the convention, (2) the need to promote

uniformity in the convention’s application, and (3) the observance of good faith.

On its face, CISG implies that a court may use only the plain meaning rule of the language in the

convention. In many countries, the courts also look to a statute’s legislative history—the travaux

préparatoires—to determine its intent. In addition to travaux préparatoires, courts in most

countries use case law to interpret statutes and treaties.

General Principles – CISG calls for courts to look to the general principles on which the

convention is based when interpreting its provisions, but it gives no list of general principles. The

following two have been suggested: (1) A party to a contract has the duty to communicate

information needed by the other party, and (2) parties have the obligation to mitigate damages

resulting from a breach. The CISG requires that the principles must be derived from particular

sections of the convention and then extended, by analogy, to the case at hand.

Rules of Private International Law – The rules of private international law are the third and

final source for interpreting the convention. They may be used, however, only when CISG itself

does not directly settle a matter or when the matter cannot be resolved by the application of a

general principle derived from the convention itself.

Private international law rules vary from country to country. Some states have enacted private

international law codes, whereas others rely on case law. By 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.

Interpreting Sales Contracts

Article 8 of CISG establishes rules for interpreting the statements and conduct of the parties;

Article 9 deals with usages and practices.

Statements and Conduct of the Parties – Varying approaches in domestic law:

The subjective intent approach: A contract is sometimes said to be formed only when the

parties have a “meeting of the minds” or a “common intent.”

The objective intent approach: A 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.”

The subjective intent of the parties is the best evidence for interpreting a contract—if it can be

fairly ascertained—and CISG allows courts to turn to it first. Thus, courts are to use the

subjective intent of a speaker, but only if “the other party knew or could not have been unaware”

of the speaker’s intent. When a speaker’s intent is not clear, CISG directs the court to look at

objective intent.

Negotiations – When a court is to determine intent, Article 8(3) of CISG directs that “due

consideration” be given “to all relevant circumstances,” including (1) the negotiations leading up

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to the contract, (2) the practices that the parties have established between themselves, and (3) the

parties’ conduct after they agree to the contract.

The purpose of Article 8(3) is to do away with the technical rules that domestic courts sometimes

use to interpret contracts. One notable example is the common law’s parol evidence rule. Article 6

allows the parties to “derogate from or vary the effect of” any of the provisions of the convention.

Thus, if the parties include a contract term (often called an integration clause) that directs a court

to ignore all prior or contemporaneous agreements, the court will have to give effect to that term.

CISG lets a court consider the parties’ subsequent conduct. CISG, however, does reflect the most

widely followed practice and, as is the case for parol evidence, the parties are free to insert a

provision in their contract excluding its consideration.

Practices and Usages – Both Article 8(3) and Article 9(1) of CISG state that parties are bound by

“any practices which they have established between themselves.” Article 9(1) also allows a court

to consider any usages that the parties agreed to, and Article 9(2) lets it consider “a usage of

which the parties knew or ought to have known and which in international trade is widely known

to, and regularly observed by parties to contracts of the type involved in the particular trade

concerned.”

Case 10-2: Treibacher Industrie, A.G. v. Allegheny Technologies, Inc.

Facts: Treibacher, an Austrian seller of hard metal powders, agreed to sell specific quantities of

tantalum carbide (TaC) to TDY Industries, Inc. for delivery to “consignment.” After taking

Issue: Does CISG provide that the parties’ interpretation of a term trumps the term’s customary

industry usage?

Holding: Yes.

Law: Plaintiff relies on CISG Article 9(1), while defendant relies on art. 9(2). Article 8(1)

Explanation: Plaintiff’s construction of CISG is correct. TDY segregated Treibacher’s materials

Order: The judgment of the district court is affirmed.

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Form – Most of the delegates involved in the drafting of CISG were of the opinion that a writing

requirement is inconsistent with modern commercial practice, especially in market economies

where speed and informality characterize so many transactions. The Soviet delegates, however,

insisted that a writing requirement is important for protecting their country’s longtime pattern of

making foreign trade contracts. The result of this disagreement was a compromise:

Article 11 of the convention states that 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.

Article 96 authorizes a contracting state “whose legislation requires contracts of sale to be

concluded in or evidenced by writing” to make a declaration at the time of ratification that

Article 11 “does not apply where any party has his place of business in that state.”

Formation of the Contract

A contract is formed, and the parties are bound by its provisions, when an offer to buy or sell a

good is accepted.

The Offer – An offer is 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. Should there be some

doubt whether a communication is an offer or not, CISG directs a court to ascertain if the offeror

communicated an intention to be bound. This can be determined from the general rules of

interpretation in Article 8 of the convention—that is, by looking at the offeror’s proposal within

its full context, including any negotiations, any practices between the parties, any usages, and any

subsequent conduct. It can also be determined from the subsidiary rules contained in Article 14.

Definiteness

According to Article 14, a “proposal is sufficiently definite if it indicates the goods and expressly

or implicitly fixes or makes provision for determining the quantity and price.” In other words, an

offer must describe the goods with sufficient clarity that the parties know what is being offered

for sale, and it must also state the quantity and price.

Article 55 provides: Where a contract has been validly concluded but does not expressly or

implicitly fix or make provision for determining the price, the parties are considered in the

absence of any indication to the contrary, to have impliedly made reference to the price generally

charged at the time of the conclusion of the contract for such goods sold under comparable

circumstances in the trade concerned.

Specific Offerees

For a proposal to be an offer, it must be addressed to “one or more specific persons.” Proposals

made to the public are ordinarily intended to be nothing more than invitations to negotiate. CISG,

accordingly, adopts the rule that public offers are only invitations to negotiate “unless the contrary

is clearly indicated.”

Effectiveness of an Offer – An offer becomes effective only after it reaches the offeree. Thus,

offers—including offers that promise that they are irrevocable—can be withdrawn before they

reach the offeree.

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Revocation

Offers that do not state that they are irrevocable can be revoked any time before the offeree

dispatches an acceptance. This revocation rule is based on the famous English common law

mailbox rule, which limits the ability of the offeror to cancel an offer where the offeree has

reasonably relied on it.

Firm Offers

Most common law countries are allowing offerees to enforce firm offers made by merchants if

they are made in writing, are signed by the offeror, and are effective for only a limited time

period. The promise of irrevocability does not have to be signed, does not have to be in writing,

and there is no time limitation. A firm offer is enforceable if the offeror makes the offer

irrevocable or if the offeree can reasonably rely on conduct that implies that the offer is firm.

Acceptance – A contract comes into existence at the point in time 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 expresses assent is unlimited; however, the offeree

must communicate his assent to the offeror.

Silence

Silence or inactivity does not, in and of itself, constitute acceptance. 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, the

acceptance must be made immediately, unless the circumstances indicate otherwise.

In devising the acceptance rule for CISG, the drafters opted for the receipt theory used in civil

law countries. In common law countries, the dispatch or mailbox theory is used. The difference

between the two relates to the allocation of risk when an acceptance is lost or delayed.

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. However, the offer, a trade usage, or

the practice of the parties must make it clear that the offeree is not required to notify the offeror.

Withdrawal

Because an acceptance is normally not effective until the offeror receives it, an offeree may

withdraw his acceptance any time before or simultaneous with its receipt.

Rejection

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A rejection becomes effective when it reaches the offeror. If an offeree were to dispatch both a

rejection and an acceptance at the same time, the one that reached the offeror first would be the

one given effect.

Acceptance with Modifications – Battle of the Forms occurs when merchants use preprinted

forms both to make offers and to send back acceptances. The typed-in descriptions commonly

match up; it is the “fine print” on the back of the forms, however, that contains differences. Under

CISG, if the inconsistencies are “material” the would-be acceptance is a counteroffer.

Article 19(3) states: Additional or different terms relating, among other things, to the price,

payment, quality of the goods, place and time of delivery, extent of one party’s liability to the

other, or the settlement of disputes are considered to alter the terms of the offer materially.

Terms that are not material are considered to be proposals for addition that will become part of

the contract unless the offeror promptly objects.

Case 10-3: Filanto, SpA v. Chilewich International Corp.

Facts: Chilewich (a U.S. export-import firm) had a contract to deliver footwear to Russia. This

Issue: (1) Was the August 7 reply a counteroffer? (2) If it was, was there a contract anyway based

on unobjected-to performance?

Holding: (1) Yes. (2) Yes.

Law: A reply that purports to be an acceptance but contains material (such as the rejection of an

Explanation: (1) The objections to the arbitration provision in the August 7 cover letter were a

Order: Case dismissed; the matter must be arbitrated in Moscow.

General Standards of Performance

CISG imposes general standards of performance on both the buyer and seller. In general, both

parties are entitled to get from their contract what they expect. A party that fails to perform

accordingly is in breach of contract. When one party breaches, the other party may avoid the

contract or make a demand for specific performance.

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Fundamental Breach – Article 25 defines a fundamental breach thus: A breach of contract

committed by one of the parties is fundamental if it results in such detriment to the other party as

substantially to deprive him of what he is entitled to expect under the contract, unless the party in

breach did not foresee and a reasonable person of the same kind in the same circumstances would

not have foreseen such a result.

Avoidance – If there has been a fundamental breach, one remedy available to the injured party is

avoidance. To be entitled to avoid a contract, the injured party must notify the other party and be

able to return any goods he has already received.

When a party avoids, only the obligation to perform is affected. Avoidance does not cancel (1)

any provision in the contract concerning the settlement of disputes or (2) any other provisions

governing the rights and duties of the parties “consequent upon the avoidance of the contract.”

Requests for Specific Performance – CISG authorizes an injured party to ask a court “to require

performance” if the other party fails to carry out his obligations. A court is not obliged to grant

this request, however, unless the court can do so under its own domestic rules. What constitutes

specific performance varies from country to country, and the rule in CISG reflects the difficulties

the drafters had in defining the concept.

Seller’s Obligations

A seller is required to (1) deliver the goods, (2) hand over any documents relating to them, and (3)

ensure that the goods conform with the contract.

Place for Delivery – The place for delivery is the place agreed to in the contract; otherwise, it is

(1) the first carrier’s place of business if the contract involves the carriage of goods or (2) the

place where the parties knew the goods were located or were to be manufactured or produced.

The seller must, at the time he delivers the goods to a carrier, either (1) identify to the carrier both

the goods and the buyer “by markings on the goods, by shipping documents or otherwise” or (2)

“give the buyer notice of the consignment of the specifying goods.”

Time for Delivery – The seller is to deliver the goods on the date fixed in the contract or, if no

date is fixed, within a reasonable time after the conclusion 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.

The Turning Over of Documents – At the time and place for delivery, the seller must turn over

any documents relating to the goods that the contract requires. If he does so early, he has the right

to “cure any lack of conformity in the documents,” so long as this does not cause the buyer

“unreasonable inconvenience or unreasonable expense.”

Conformity of Goods – Article 35(1) of CISG states that the seller “must deliver goods which

are of the quantity, quality, and description required by the contract and which are contained or

packaged in the manner required by the contract.” This provision is similar to many warranty

provisions found in common law countries, with the notable exception that it does not use the

terms warranty or guarantee. This is important, because the seller’s obligation (and the buyer’s

right) arises—and can be waived—without the use of these terms.

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Determining Conformity: The rules for determining whether the goods conform are set out in

Article 35(2). Except where the parties have agreed otherwise, the goods do not conform with the

contract unless they are:

fit for the ordinary purposes of such goods.

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.

of the same quality as a sample or model provided by the seller.

contained or packaged in the same manner that is:

usual for such goods, or

adequate to preserve and protect the goods.

Third-Party Claims: Goods also do not conform if they are subject to third-party claims.

Third-party claims include assertions of ownership and rights in intellectual property such as

patents, copyrights, and trademarks.

Waiver: Although the seller is obliged to produce goods that conform to the contract, the parties

may (1) expressly excuse him/her from complying or (2) impliedly excuse him/her if the buyer

knew or “could not have been unaware” that the goods were nonconforming. These rules are

similar to the waiver provisions found in most common law countries, except there is no

requirement to use any particular terms to make the waiver. Moreover, unlike the practice in

many civil law countries, a waiver can be implied from the buyer’s conduct.

Time for Examining Goods: The buyer has an obligation to 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” and, if the buyer has to redirect

or redispatch the goods while they are in transit, the examination “may be deferred until after the

goods have arrived at the new destination,” so long as the seller “knew or ought to have known of

the possibility of such redirection or redispatch.”

Notice of Defect: In order for the buyer to avoid waiving his rights to require performance, he is

obligated to inform the seller of any defects he discovers within a reasonable time after delivery.

If the buyer discovers a defect at some later time, he must also promptly notify the seller in order

to preserve his rights.

In any event, the seller will not be responsible for a defect that arises more than two years after

delivery unless (1) the seller knew or ought to have known of a nonconformity and did not

disclose it to the buyer or (2) the contract establishes a longer “period of guarantee.” CISG does

not describe specifically what the buyer has to do in notifying the seller of a defect, but the notice

undoubtedly must be sufficient to inform the seller of the problem.

Curing Defects: If the seller delivers his goods early, he may correct or cure any defect up to the

agreed-upon date for delivery, so long as this does not cause the buyer any unreasonable

inconvenience or expense. Nevertheless, even if the seller does make a cure, the buyer retains the

right to claim any damages that are provided for in CISG.

Buyer’s Obligations

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A buyer is required to (1) pay the price and (2) take delivery of the goods. CISG’s rules apply

only when a contract fails to describe how this is done.

Payment of the Price – The buyer is obliged to take whatever preliminary steps are necessary

“under the contract or any laws or regulations to enable payment to be made.” He is then 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 has to pay “without the need for any request or compliance with any formality on the

part of the seller.” However, unless the parties agree otherwise, the buyer does not have to pay

until after he has had a chance to examine the goods.

If the parties have not agreed to a place for payment but have agreed to a place for the delivery of

either the goods or their controlling documents, then payment will be made at that place. If they

did not specify a place for delivery, then the buyer must pay at the seller’s place of business.

Case 10-4: The Natural Gas Case

Facts: Buyer agreed to buy natural gas for itself and a third party. Seller agreed to ship gas from

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?

Law: (1) A defendant cannot complain that a plaintiff failed to fulfill its obligations when the

Explanation: (1) The buyer did not breach, because the failure to provide a letter of credit was

Order: Decision of the Court of Appeals was affirmed.

Taking Delivery – In connection with the taking of delivery, a buyer is obligated to cooperate

with the seller to facilitate the transfer and to actually “take over the goods.” A buyer who fails to

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cooperate will be responsible for any resulting costs, and one who fails to take delivery assumes

the risk for any damage to the goods after that time.