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Chapter 2
The International Sale of Goods
In most cases, lawyers get involved in business transactions either at the beginning, when the
transaction is being planned and the necessary contracts and other documents are being drafted, or
at the end, after the transactions have gone wrong and the parties are going after each other for
performance and/or damages. Obviously, it is much to be preferred, if the lawyers can review the
relevant contracts and documents before they are being signed and any shortcomings in them are not
easily changed any more. In the main chapters of the book, we will review, therefore, step by step
the planning of the business transaction and the drafting of the corresponding documents,
respectively the review by the other party of the drafts proposed to it. Issues related to the enforce-
ment of rights and obligations after a breach of contract and a breakdown of friendly negotiations
will be the subject of Chapter 10.
Section 1: The Documentary Sale - an Overview
The archetypical transaction we will use to explain the majority of legal issues recurring in the
context of IBTs is the documentary sale. Rather than just the contract of sale, this analysis involves
all major steps required to execute an international sale of goods or export-import business
transaction. Four main contracts can be distinguished: i) the contract of sale between seller and
buyer; ii) the finance contract between buyer and buyer’s bank with seller as beneficiary; iii) the
shipping contract or contract of carriage between seller and carrier with buyer as beneficiary; and
iv) the insurance contract between seller and insurance company with buyer as beneficiary. The
example assumes the use of Incoterm CIF, where the seller has to arrange for shipping and
insurance. If the contract of sale stipulates FOB, the buyer herself has to take care of shipping and
insurance, which changes the picture only marginally but is important for the passing of risk and the
question of who may have to bear any loss or damage (see below, p. ???).
In addition to the four main contracts, a number of ancillary contracts may have to be concluded to
complete a documentary sale. These include a non-disclosure agreement between seller and buyer,
and an agreement with an independent inspection company for pre-shipment inspection. If the seller
does not bring the goods himself to the port for the maritime voyage and if the buyer does not collect
the goods herself at the port after the maritime voyage, contracts with local shipping companies for
truck or rail transport to and from the ports may have to be concluded. Alternatively, the parties can
use an integrated logistics company that will collect the goods at seller’s premises and deliver them
at buyer’s premises while also handling all required customs and other procedures along the way.
Obviously, the latter alternative is convenient for the parties but comes at a price.
The documentary sale can be broken down into 25 typical steps as follows. Depending on the
particulars of a given transaction, the picture may vary in some of the details, for example who has
to contract and pay for shipping and insurance and who has to take care of export and import
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formalities. Much of this will be discussed in the context of drafting the Contract of Sale and when
we analyze the different Incoterms.
#1 The first step is the communication of marketing material or other product information
from the seller to the buyer. This could be at a trade fair, via catalogs and other print media,
or simply via the website of the seller. On the basis of the material or information, the buyer
gets interested in the goods offered by the seller. However, she may still want to compare
the quality and price of the seller’s goods with those of other sellers.
#2 To understand in more detail what an offer from the seller might look like, to compare the
quality and pricing details with those of competitors, and to check whether the bank will be
willing to provide financing, the buyer requests a pro-forma invoice from the seller. As the
name suggests, this is not a real invoice but a quote of what the seller is potentially willing
to provide with regard to the kind and quantity of the goods, their weight, packaging and
transportation charges, other services such as the procurement of insurance, inspections,
export licenses, customs clearance, etc. and the price with and without tax. If the intended
use of the goods on the side of the buyer contains proprietary information, the buyer will also
ask the seller to sign a non-disclosure agreement.
#3 If the buyer has already requested a non-disclosure agreement (NDA), the seller signs and
returns it with the pro-forma invoice. If the buyer has not requested one but the seller wants
to protect proprietary information related to the goods, the seller will now ask the buyer to
sign a non-disclosure agreement.
#4 The seller prepares the pro-forma invoice, potentially with several alternatives as regards
quantity, ancillary services, and price, and transmits it to the buyer.
#5 Once the buyer is reasonably sure that she want to purchase the goods from the seller, she
contacts her bank and submits an application for a letter of credit (L/C) to be issued for the
benefit of the seller. Only after the bank has issued the L/C, can the buyer proceed to close
the contract with the seller. Otherwise she might be stuck with a binding agreement to
purchase the goods but no way of paying for them. If the buyer is confident about her ability
to get the L/C, she may want to delay this step until after the contract has been concluded
and all details regarding pricing etc. are known. The position of the seller is different,
however, and he should ask to see a draft of the L/C before the contract is finalized to ensure
that the terms of the L/C are acceptable to him. Once the L/C is issued, the terms cannot
easily be changed.
#6 Now that the buyer has the assurance that the bank will finance the transaction and she has
at least a draft of the L/C, she can submit a purchase order (PO) to the seller, ideally
together with the draft L/C, which is the offer to enter into a contract of sale (§2-206 UCC;
Article 14 CISG). The purchase order moves the negotiations from the level of non-specific
inquiries and/or negotiations with multiple potential suppliers to the contract formation
stage. It may have been preceded by the exchange of specific offers and counter-offers of
a less formal kind, in particular in a series of letters or faxes or oral conversations, that may
already have led to a binding agreement which is only being formalized now.
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#7 In response to the purchase order, the seller produces a formal Contract of Sale and submits
it to the buyer. If the contract conforms to the purchase order, it is an acceptance. If the
contract contains additional or different clauses, which is often the case because it is more
detailed than the previous negotiations, it is a counter-offer. Similarly, if the seller asks for
changes before the real L/C is issued, the response is usually not an acceptance but a
counter-offer.
#8 Acceptance by the buyer, expressed as signature on the contract, has to be communicated
to the seller to become effective. Since most contracts contain a merger clause (see below,
???), acceptance by the buyer not only seals the deal but also ensures that the final written
contract – sometimes referred to as a “fully” or “completely integrated agreement” (see, for
example, Restatement (Second) of Contracts, §210) – supersedes all prior promises made
and agreements reached in less formal communications.
#9 Depending on the payment arrangements agreed upon in the contract of sale, the buyer now
requests her bank to issue the L/C and send it to seller’s bank.
#10 Buyer’s bank identifies a bank in seller’s country with which it has a business relationship
and asks it to advise the L/C. If the advising bank is conveniently located for the seller,
buyer’s bank will nominate it to receive the payment upon a complying presentation. If not,
another bank or any bank can be nominated.
#11 Seller’s bank as the advising bank authenticates the L/C and forwards it to the seller. If
Seller’s Bank is not merely an advising bank but also a nominated bank, the seller can later
present his documents to this bank rather than having to make the presentation with the
“issuing bank” = Buyer’s Bank in buyer’s country. If Seller’s Bank is additionally a
confirming bank, seller will get paid upon a complying presentation regardless of the
approval of the issuing bank (see below, p. ???).
#12 Depending on the Incoterm agreed upon in the Contract of Sale, the seller or the buyer now
conclude a Contract of Carriage with the shipping company or carrier. In most cases, the
carrier will have a pre-formulated draft for the contract which becomes the Bill of Lading
(BoL) when the goods have been handed over (for details, see ???).
#13 Depending on the Incoterm agreed upon in the Contract of Sale, the seller or the buyer now
also conclude an Insurance Contract with the insurance company (see below, ???).
#14 Depending on the distribution of responsibilities agreed upon in the Contract of Sale and the
list of requirements in the Letter of Credit, the seller may now have to procure an export
license and have the goods independently inspected before they are packaged for shipping.
#15 Once all pre-shipment procedures are completed and all other documents required by the L/C
have been procured, the seller takes the goods to the shipping company.
#16 As a receipt for the delivery of the goods and document of title, the seller obtains the Bill of
Lading from the shipping company = carrier, in exchange for the goods.
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#17 Having completed all required tasks, the seller now goes to the Nominated Bank, which may
be a Confirming Bank, and makes a presentation of the L/C with all required documents
to get paid.
#18 If the Nominated/Confirming Bank deems the presentation complying, it will release the
funds secured by the L/C and the seller gets paid. Note that this happens after the goods
have been shipped but before and independent of their arrival and approval by the buyer.
#19 Having purchased the documents from the seller, seller’s bank now presents them to the
Issuing Bank = Buyer’s Bank for reimbursement.
#20 If the Issuing Bank deems the presentation complying, it will release the funds secured by
the L/C to Seller’s Bank.
#21 Having purchased the documents from Seller’s Bank, Buyer’s Bank forwards them to the
buyer who needs the BoL to get the goods from the carrier upon arrival.
#22 In exchange for the documents, the buyer has to pay up on the L/C, either by transferring
cash to Buyer’s Bank, having money debited from her account with Buyer’s Bank, or via
some financing agreement to defer actual payment until the goods have been received and
processed and/or re-sold. Typically, Buyer’s Bank will require some lien on the goods, a
real-estate mortgage, or a security interest in other assets, if a financing agreement is
concluded. If the buyer is a trader, the goods are for re-sale, and buyer’s country allows non-
possessory security interests, Buyer’s Bank may even use a floating charge on buyer’s
inventory as collateral for the loan.
#23 Having purchased the documents from Buyer’s Bank, the buyer now proceeds to the port to
collect the goods from the carrier.
#24 In exchange for the Bill of Lading, the carrier hands over the goods to the buyer.
#25 Buyer proceeds with customs clearance and, after payment of any duties and settlement of
any other formalities, receives the goods into free circulation.
What we can see from this arrangement is that it protects the interests of both seller and buyer. On
the one hand, the seller does not have to ship the goods merely hoping that the buyer will pay. The
seller has the L/C in hand and can work down the list of required documents. Once all conditions
of the L/C are met, the seller is confident that he will be paid. Importantly, this happens as soon as
the seller has fulfilled his part of the deal, typically as soon as the goods have been handed over to
the carrier. In particular, the seller does not have to wait for the goods to arrive safely at the buyer’s
place and to be approved by the buyer.
At the same time, the buyer is also protected to a large degree. First, the buyer does not have to pay
in advance, merely hoping that the seller will keep up his end of the bargain and ship the goods. In
order for the seller being able to make a draft on the L/C, the seller has to meet a number of
conditions. These often include an inspection of the goods by an independent company to verify that
they match with the contractual obligations. Also, no money will be withdrawn before the goods are
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on their way to the buyer. While in transit, the goods are insured against damage or loss, which also
protects the buyer against surprises.
Nevertheless, problems can still arise, for example if the different agreements are not drafted well,
or if there are gaps or mishaps when the goods are handed over from the responsibility of one party
to the next, for example if the local trucking company arrives at the port and the ship is not there yet
and the goods have to be stored temporarily and get damaged while in storage. Last but not least,
the buyer may not be happy with the quality of the goods in a way that the inspection company was
not able to detect. It is one thing for an inspector to assess the quality of say corn or wheat or crude
oil and quite another to determine whether an injection molding machine will indeed produce 1500
units an hour. Therefore, the different contracts mentioned above not only have to be drafted well
and work seamlessly together, they also need suitable choice of law and dispute settlement clauses.
All of these issues shall be discussed in the coming chapters.
Section 2: Common Pre-Contractual Documents: Pro-Forma Invoice,
Purchase Order and Non-Disclosure Agreement
Our basic assumption is that obligations between sellers and buyers arise from voluntary agreements
between them and that in the absence of a contract, such obligations do not exist. This is not entirely
true, however, as Sections 2 and 3 will show. It certainly does not mean that the actual contract of
sale is the first document we need to consider. Legal issues can arise as soon as two parties meet.
What is the legal nature of their early communication? Can a website or a marketing brochure be
interpreted as an offer, meaning that a buyer can create contractual obligations simply by sending
an acceptance, maybe in the form of a purchase order? What other documents are often drawn up
and maybe even signed before an actual contract of sale is agreed upon? To what extent may we
return to these if the interpretation of the subsequent contract is less than clear or in dispute?
The first document we will be looking at a bit more closely is a Pro Forma Invoice. The purpose
is somewhere in the middle between a non-binding price quotation and a binding offer. Typically,
it is used by the (potential) buyer to compare competing offers from different sellers on the basis of
real prices, including packaging, sales commissions, shipping, and tax. Once the (potential) buyer
has decided upon the best supplier and secured financing from her bank, she will finalize negotia-
tions with this supplier/seller based on the earlier pro forma invoice. Although the seller might still
decline to enter into a contract of sale, for example if he has already sold the goods to another buyer
in the meantime, he can normally not increase the price beyond the pro forma invoice without good
reason. Therefore, the document has also been called a good faith estimate of the total sale price. On
the other hand, the buyer can still try to negotiate a discount, for example for volume purchases or
for favorable payment terms.
Sometimes the invoice traveling with the goods and used for customs processing is also referred to
as a pro forma invoice. By contrast to the abovementioned document, this document would have to
be an accurate reflection of the goods being shipped and their customs value (see p. ???).
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Sample Document #2-1: Pro Forma Invoice
Company Name & Logo of Seller Pro Forma Invoice [1]
Contact Person[2] Expiry Date ................[3]
Street Address Customer Reference ...........................[4]
City, Zip Code & Country
Phone, Fax and e-mail
Customer/Buyer Destination for Shipping Shipping Details
Company Name Company Name[5] Mode of Transport ........................[6]
Contact Person Contact Person Incoterm ........................................[7]
Street Address Street Address Port of Departure ............................
City, Zip Code & Country City, Zip Code & Country Port of Arrival ................................
Phone, Fax and e-mail Phone, Fax and e-mail Estimated Ship Date .......................
Description of Goods
Part # Unit of Measure[8] Description[9] Unit Price x
Quantity
= Net Price
Total # of Pieces:
Estimated Net Weight and/or Volume:[17]
Packaging Specifics:[18]
Estimated Gross Weight and/or Volume:[19]
Subtotal[10]
x Tax Rate =
+ Total Tax
+ Freight[11]
+ Insurance[12]
+ Customs & Legal
Fees[13]
+ Inspection[14]
+ Other (specify!)[15]
= Total w/Currency[16]
Payment Terms[20]
9 Payment on Open Account, Bank ............, Account # ............, SWIFT # ............
by ............... Date[21]
9Letter of Credit 9 confirmed 9 unconfirmed
9Other
Signature of Seller Representative and Date
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Explanations
#1 The document should be clearly marked as “pro forma” invoice to indicate that it is neither
a binding offer nor an effective demand for payment.
#2 Whenever the seller or buyer is identified in a document or contract, there should also be the
name, phone number, and e-mail of the person authorized to send or receive any commu-
nication regarding the transaction. This avoids disputes over messages sent to the other party
but not received in time by the right person.
#3 If an expiry date is provided, it indicates that the seller is promising to have the goods
available at the quoted price until this date. If no such promise is intended, the space should
not just be left blank but the entire entry should be deleted to make it clear that there is no
promise for any time frame made beyond the general good faith estimate.
#4 The reference would be to the letter or e-mail or phone call of the (potential) buyer in which
the pro forma invoice was requested.
#5 “Buyer” and “Destination” can differ in two ways. First, the buyer may have more than one
location and it should be made clear where the goods have to be shipped. Second, the buyer
may not purchase the goods for herself but rather for a customer. Thus, it never hurts to
specify the destination name and address separately, even if it is the same as the name and
address of the company identified as the buyer.
#6 There are four main modes of transport, air, rail, road, and sea. There is also a combination
of two or more of these, usually referred to as “multimodal.” While the mode of transport
may not be of interest to the buyer, as long as a certain arrival date is guaranteed, it may be
a significant cost factor and require different paperwork and insurance coverage. In
particular, if the seller only promises a certain date for departure of the shipment, the mode
of transport will also affect the date of arrival. In general, therefore, it is better to include the
mode of transport in the quote and in the final contract.
#7 Different Incoterms lead to different distributions of responsibilities for shipping and
insurance charges and possibly other expenses, see below, p. ???. To be a meaningful quote,
therefore, it is essential that seller and buyer understand and agree on the Incoterm
suggested.
#8 The unit of measure will depend on the customary way of describing the goods in question
in a given industry. This may refer to units or pieces, gallons, bushels, barrels, and many
other units of measure. In international sales, additional care is often required because
different units or customs may prevail in other countries. For example, a reference to
“gallons” is not necessarily clear because the U.S. gallon (3.7854 liters) differs significantly
from the UK or imperial gallon (4.546 liters); similarly, a U.S. pound or lb (0.4536 kg)
differs from a metric pound (0.5 kg); even a ton is different in the UK (1'016 kg) from the
rest of the world (1'000 kg). When in doubt, the unit of measure should be supplemented
with a reference to the country. The goal is to prevent any ambiguity. The motto should be
“better safe than sorry”.
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#9 Regarding the description of the goods, there is an essential conflict of interest between
seller and buyer. The seller’s interest is to keep the description rather basic, while the buyer
would want to see additional information, for example regarding suitability and performance
of the goods. We will return to this discussion as we home in on the final sales contract. For
the purposes of the pro forma invoice, on the one hand, the description has to be detailed,
including the country of origin and the customs code in the Harmonized Schedule system
(see below, p. ???) to enable the (potential) buyer to understand exactly what she is
negotiating for. On the other hand, the description does not need to include assurances as to
performance, suitability, marketability, warranty, etc. unless they are important elements of
price.
#10 The subtotal reflects the net price of the goods and is composed of all units times quantity.
It generally includes standard packaging. However, unless there is a well-established custom
in a particular industry, it does not include any special packaging and other uncommon
services such as inspections, certificates of origin for customs clearance, and the like, as well
as the cost of carriage/freight and insurance, which will depend on the destination.
#11 The pro forma invoice should only include freight or shipping or carriage charges if the
seller is offering to organize and pay for at least some of the carriage. With an Incoterm of
EXW, this entry should be zero. We will discuss below when a seller should offer to
organize and pay for carriage, and roll it over to the buyer in the contract, versus leaving it
to the buyer to organize and pay for carriage directly (see p. ???).
#12 In the same way, the pro forma invoice should only include insurance charges if the seller
is offering to organize and pay for insurance, expressed via the Incoterm. We will discuss
below also when a seller should offer to organize and pay for insurance, and roll it over to
the buyer in the contract, versus leaving it to the buyer to organize and pay for insurance
directly (see p. ???).
#13 An entry like “Customs and Legal” would cover a number of other services required for the
implementation of the export/import transaction. The scope of services to be included here
would again depend on the Incoterm. For example, both FOB and CIF require that the goods
are cleared for export and loaded onto the ship agreed upon between seller, buyer, and
carrier. Thus, any procedures and dealings with the authorities of the exporting country
would be seller’s responsibility and the seller would want to enter his expected cost or
compensation here. If the Incoterm requires delivery in buyer’s country, additional
procedures and dealings with the authorities of the importing country will become seller’s
responsibility and the corresponding expenditure of time and money would have to be
reflected here.
#14 A reference to an “inspection” would be to separate services of a private inspection
company, not to the customs inspection by the authorities of the exporting or importing
country. An inspection by an independent third party is usually done if the buyer wants to
verify that a certain quantity and quality of goods has indeed been shipped before the seller
can go to the bank with the L/C and collect his money.
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#15 Depending on the specifics of the goods and the transaction being negotiated, other cost may
be incurred and have to be distributed, for example special packaging, quarantine charges
or the cost of warehousing, brokerage fees, etc.
#16 The total amount should reflect all elements supplied by the seller until the risk and
responsibility for the goods passes to the buyer.
#17 The net weight is for the goods themselves, in their standard packaging, if applicable.
#18 Packaging other than the standard packaging and the shipping container should be specified
here. The general understanding is that normal packaging for the selected mode of transport
and destination is included in the price for the goods and only special and/or additional
packaging should be mentioned here and can be billed separately.
#19 The gross weight is for the shipping container(s) including dunnage, if applicable.
#20 Payment terms will be discussed in detail in Chapter ???. In the pro forma invoice, the seller
needs to indicate the payment terms he would expect in order to be able to offer the quoted
price. The default time of payment pursuant to Article 58 CISG and §2-310 UCC is the time
when the seller “delivers” in accordance with the contract and the Incoterm, for example
when the seller hands over the goods to the buyer or her designated representative (EXW)
or when the seller hands over the controlling documents, including the BoL, to the bank as
buyer’s designated representative to get paid at sight (FOB or CIF). Less favorable terms,
such as 30, 60 or even 90 days after sight or even delivery (time draft), may entitle the seller
to ask for a higher price for the goods.
#21 Most prices will be quoted for payment by L/C “at sight” or for payment on open account
around the time of shipping. If the seller accepts payment by term draft, he effectively
extends a credit line to the buyer and may want a higher price for the goods. Conversely, if
the seller requires advance payment, for example full or at least partial payment at the time
the contract is signed or within a few days thereof or in installments during the production
of the goods, the buyer may be able to negotiate a discount off the regular or list price.
* * *
The next document to consider is a standard Purchase Order, typically used by a buyer after a pro
forma invoice was received and found satisfactory. By contrast to most pro forma invoices, the
average purchase order is sufficiently specific to qualify as an offer. From the point of view of the
buyer, therefore, it is very important that the purchase order is carefully drafted and contains all
elements the buyer would want to see in the final contract of sale in case the seller accepts without
further ado. If the buyer does not want the purchase order to be an offer, she has to indicate this
clearly, for example by requesting that the seller should send a draft contract for acceptance and
signature by both parties.
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Sample Document #2-2: Purchase Order
Company Name & Logo of Buyer Purchase Order [1]
Contact Person[2] Date ....................................[3]
Street Address PO Number .........................[4]
City, Zip Code & Country Vendor Reference ..............[5]
Phone, Fax and e-mail
Addressee / Vendor Destination for Shipping Shipping Details
Company Name Company Name[6] Mode of Transport ........................[7]
Contact Person Contact Person Incoterm ........................................[8]
Street Address Street Address Port of Departure ............................
City, Zip Code & Country City, Zip Code & Country Port of Arrival ..............................[9]
Phone, Fax and e-mail Phone, Fax and e-mail Shipping Date ..............................[10]
Description of Goods
Part # Unit of Measure[11] Description[12] Unit Price x
Quantity
= Net Price
Total # of Pieces:
Estimated Net Weight and/or Volume:[17]
Packaging Specifics:[18]
Estimated Gross Weight and/or Volume:[19]
= Subtotal[13]
- Discount[14]
+ Tax, Carriage,
Insurance and any
other costs[15]
= Total w/Currency[16]
Payment Terms[20]
....................................................................................................................................................................
Other Terms and Conditions[21]
....................................................................................................................................................................
Please contact us immediately, if you should be unable to ship the goods as requested.
We enclose our general terms, which form an integral part of this PO.
Signature of Buyer Representative and Date
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Explanations
#1 By marking the document as “purchase order” the buyer signals that she is now ready to
commit and that the agreement would be acceptable to her as reflected in the PO. A binding
contract would be concluded if the seller simply accepts the PO without further details or
conditions. At least under the CISG (Article 18(1)) and in common law of contracts (§50
Restatement (Second) of Contracts) the acceptance of the PO and formation of the contract
is possible via declaration or promise and also via performance, in particular if the seller
ships the goods.
#2 Whenever the seller or buyer is identified in a document or contract, there should also be the
name, phone number, and e-mail of the person authorized to send or receive any com-
munication regarding the transaction. This avoids disputes over messages sent to the other
party but not received in time by the right person.
#3 In business communications, where several offers and counter-offers may be exchanged
within a short time, it is essential that all documents are clearly dated. Sometimes, they may
need to be identified further to avoid any confusion which document is the last one in a
series and supersedes all earlier ones.
#4 A unique identifier number should be provided and used as a reference in all further
communications referring to this PO.
#5 In particular, if the PO is sent in response to a particular pro form invoice or an offer by the
seller, a clear reference to the respective document should be included.
#6 Every contract or draft contract should always specify who is bound by it (the seller and the
buyer = the principals), where the goods are to be sent and, if necessary, who should be
invoiced. Even if several of these names and addresses are the same, it does not hurt to list
them separately.
#7 There are four main modes of transport, air, rail, road, and sea. There is also a combination
of two or more of these, usually referred to as “multimodal.” While the mode of transport
may not be of interest to the buyer, as long as a certain arrival date is guaranteed, it may be
a significant cost factor and require different paperwork and insurance coverage. In
particular, if the seller only promises a certain date for departure of the shipment, the mode
of transport will also affect the date of arrival. In general, therefore, it is better to include the
mode of transport in the PO and in the final contract.
#8 Different Incoterms lead to different distributions of responsibilities for shipping and
insurance charges and possibly other expenses, see below, p. ???. Any contract should
absolutely ensure that seller and buyer agree on the Incoterm. As an offer, therefore, the PO
needs to be unambiguous in this regard.
#9 The port of arrival matters primarily if the seller, per Incoterm, is expected to organize and
pay for carriage and insurance (C-terms), let alone carry the risk until delivery at the port of
arrival (D-terms). It is irrelevant if the buyer has to pick up the goods at the seller’s premises
(EXW), and it is less important if the seller merely has to bring the goods to the port of
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departure and a specific vessel (F-terms). In the latter case, the buyer will still want to
include the port of arrival because the seller has to clear the goods through customs as the
port of origin or departure. This may require an export license for some destination countries
and ports (see below, Chapter ???).
#10 The important date is usually the date when the risk will pass from the seller to the buyer.
With F and C terms, this will be at the port of origin or departure when the goods are handed
over to the carrier for the marine voyage. If the parties should include a D-term, the date to
be entered here should be the arrival date. If the parties should agree on EXW, the date
should be the date when the goods have to be handed over to the buyer or buyer’s
representative at the seller’s premises. Instead of “shipping date”, the parties may specify
“delivery date” in these cases and the place or port of delivery, i.e. where the goods are
handed over and the risk passes to the buyer. In many industries it is still customary not to
specify a particular day but a calendar week for the agreed upon delivery. This gives a
measure of flexibility to the seller but requires notification of the final date to ensure a
seamless handover.
#11 The unit of measure will depend on the customary way of describing the goods in question
in a given industry. This may refer to units or pieces, gallons, bushels, barrels, and many
other units of measure. In international sales, additional care is often required because
different units or customs may prevail in other countries. For example, a reference to
“gallons” is not necessarily clear because the U.S. gallon (3.7854 liters) differs significantly
from the UK or imperial gallon (4.546 liters); similarly, a U.S. pound or lb (0.4536 kg)
differs from a metric pound (0.5 kg); even a ton is different in the UK (1'016 kg) from the
rest of the world (1'000 kg). When in doubt, the unit of measure should be supplemented
with a reference to the country. The goal is to prevent any ambiguity. The motto should be
“better safe than sorry”.
#12 Regarding the description of the goods, there is an essential conflict of interest between
seller and buyer. The seller’s interest is to keep the description rather basic, while the buyer
would want to see additional information, for example regarding suitability and performance
of the goods. We will return to this discussion as we home in on the final sales contract. For
the purposes of the PO, the description has to be detailed, including the country of origin and
the customs code in the Harmonized Schedule system (see below, p. ???) to make clear what
buyer and seller are talking about. Since the PO is drafted by the buyer, she may additionally
want to include requirements as to performance, suitability, marketability, warranty, etc., in
particular if they are important elements of price.
#13 The subtotal reflects the net price of the goods and is composed of all units times quantity.
It generally includes standard packaging. However, unless there is a well-established custom
in a particular industry, it does not include any special packaging and other uncommon
services such as inspections, certificates of origin for customs clearance, and the like, as well
as the cost of carriage/freight and insurance, which will depend on the destination. All of
those should be included in #15.
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#14 In particular, if the seller at some point in the negotiations mentioned any possibility of
discounts for new customers, volume purchases, up-front payment, or the like, the buyer
should try to get them into the contract here.
#15 The buyer should list agreed upon services of the seller at this point, in particular if the
contract is for a C-term and the seller has to organize and pay for carriage and insurance.
However, the buyer should also include a clause such as “and any other costs and expenses”
to prevent the seller from claiming, at a later stage, expenses for export licenses, origin
receiving charges, and the like. The buyer wants to ensure that the total price will remain as
stated in #16 and any surprises will not be at her expense.
#16 The total amount should reflect all elements supplied by the seller until the risk and respon-
sibility for the goods passes to the buyer.
#17 The net weight is for the goods themselves, in their standard packaging, if applicable. Since
the buyer may not know the weight of the goods, this would have to refer to information
supplied by the seller in the pro forma invoice or other documentation.
#18 Packaging other than the standard packaging and the shipping container should be specified
here. The general understanding is that normal packaging for the selected mode of transport
and destination is included in the price for the goods and only special and/or additional
packaging, if required by the buyer, should be mentioned here.
#19 The gross weight is for the shipping container(s) including dunnage, if applicable. Again,
since the buyer may not know the weight of the goods, this would have to refer to
information supplied by the seller in the pro forma invoice or other documentation. Even if
the buyer does not know the weight, it is not irrelevant for her and should be part of the
contract. If the actual weight should deviate significantly from the contractual weight, the
buyer may hold the seller accountable for additional expenses.
#20 Payment terms will be discussed in detail in Chapter ???. In the PO, the buyer needs to
indicate the payment terms she is expecting at the quoted price. Less favorable terms, such
as payment in advance on an open account, would either be unacceptable to the buyer or at
least entitle her to ask for a lower price for the goods.
#21 If they were not included earlier in the description of the goods, any assurances sought by
the buyer on issues such as suitability of the goods for a specific purpose, marketability,
performance targets, warranties, etc. should be clearly spelled out here. Also, the buyer may
want to specify the choice of law and forum.
Many buyers don’t invest a lot of time when generating a PO and send more or less just a list of the
goods they are seeking to buy and the price agreed upon in earlier communications. This is a grave
mistake, since the seller can simply accept the PO and there would be no clear record of many of
the terms that should be included in the contract of sale, which we will discuss below.
* * *
2 – SALES CONTRACTS
Version as of 18 September 2017 p. 15 of 245
Finally, we turn to a document that is becoming increasingly widely used, often without real need.
This is the Confidentiality Agreement or Non-Disclosure Agreement (NDA) for the protection
of proprietary information of the seller and/or the buyer. The seller will ask for an NDA to be signed
before revealing proprietary information related to the goods to be sold, for example secret methods
or processes used in the production of the goods or certain of their features or performance charac-
teristics. The buyer may ask for an NDA to be signed before revealing proprietary information
related to the intended use of the goods, for example pricing strategies, production or sales targets,
marketing strategies, client lists and other information about clients, but also how parts might be
integrated into a larger unit, etc.
In some companies, it is now a general requirement that anybody who enters into negotiations with
the company and, in the course of such negotiations, may receive any kind of proprietary infor-
mation, first has to sign an NDA. This may include any and all vendors and customers (sellers and
buyers). However, with the exception of NDAs used by employers with their employees, it is not
so obvious that these agreements are worth the trouble and ultimately serve more than psychological
effects. Here are some of the concerns:
– NDAs have to be sufficiently broad to cover all intended aspects of a business relationship
but also sufficiently specific to identify the proprietary information they are eligible to
protect. Aggressive use of overly broad NDAs can expose a company to antitrust liability
based on attempted restraint of competition!
– Identifying the proprietary information and who owns it is important so that the other side
cannot later say that they already knew the information or obtained it from elsewhere.
– Only confidential information can be protected via an NDA. If a party has already disclosed
the information in marketing materials or otherwise publicly available technical product
specifications, or in a patent filing, or during public hearings in an antitrust case or lawsuit,
the information is no longer confidential and cannot be protected via an NDA.
– Many trade secrets are already protected in common law (misappropriation, breach of
confidentiality, and unfair competition can trigger liability), and in statutory law. The US
Federal Trade Commission Act, and various state level legislation implementing the Uniform
Trade Secrets Act, provide protection and a range of remedies including injunctions and
damages. The 28 Member States of the EU have to adopt national legislation for the
implementation of EU Directive 2016/943 of the European Parliament and the Council of
8 June 2016 on the Protection of Undisclosed Know-How and Business Information (Trade
Secrets) Against their Unlawful Acquisition, Use and Disclosure (OJ 2016 L 157, pp. 1-18)
by 9 June 2018. The national implementation acts will supersede any prior national laws. An
NDA is not needed in areas covered by these rules but may still facilitate proof of
misappropriation or misuse of confidential information.
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The following is a classic example of an overly broad NDA clause that will be hard to enforce and
could easily be interpreted as an illegal restraint of competition:1
By contrast, if an NDA is well crafted, it can be a life-saver for a company if proprietary information
is misappropriated. An illustration is provided by the case RRK Holding Co. v. Sears, Roebuck, &
Co. (563 F. Supp. 2d 832 (N.D. Illinois 2008): In the 1990s, RRK manufactured and sold a spiral
saw under the brand name “Roto Zip” with some success. Sears contacted RRK in 1997 about
manufacturing an updated model to be distributed under the “Craftsman” brand owned by Sears. The
two companies entered into an NDA and RRK disclosed information about its next-generation
model to Sears. The two companies eventually could not agree over the pricing of the device and
terminated their cooperation before a single saw was produced by RRK for Sears. Shortly thereafter,
Sears introduced its own new spiral saw under the Craftsman label, which incorporated the
technology RRK had disclosed to it. RRK sued and was able to show that all key documents handed
over to Sears had been marked as confidential. Although Sears claimed that the respective
technology was by then public knowledge in the power-tool industry, a jury agreed with RRK that
the technology was innovative and returned a verdict finding Sears liable for breach of the NDA and
for misappropriating RRK’s trade secret. A judgment granted RRK US$11,665,105 for actual losses,
US$1,688,136 for unjust enrichment, and US$8,011,344 for punitive damages. Defendant then
moved for a judgment as a matter of law, claiming that there was no legally sufficient evidentiary
basis for a reasonable jury to find for the other side. RRK moved for prejudgment and post-judgment
interest. In the end, the court denied defendant’s motion and granted plaintiff’s motion ordering
Sears to pay US$21,363,585 in total damages, US$3,715,479 in pre-judgment interest, and
US$1,931.50 per day in post-judgment interest until paid as awarded.
Against this background, we can now draft a model that can be adapted to most IBT relationships
of the kind discussed in the present volume. We have to distinguish unilateral NDAs where one
company is the “disclosing party” and the other is the “receiving party”, and mutual NDAs, where
both parties are disclosing information and both are sworn to secrecy.
“The Confidential Information to be disclosed can be described as and includes: Invention descrip-
tion(s), technical and business information relating to proprietary ideas and inventions, ideas,
patentable ideas, trade secrets, drawings and/or illustrations, patent searches, existing and/or
contemplated products and services, research and development, production, costs, profit and margin
information, finances and financial projections, customers, clients, marketing, and current or future
business plans and models, regardless of whether such information is designated as “Confidential
Information” at the time of its disclosure.”
1 Cf. Sage Languages Pte Ltd - Standard Confidentiality Agreement, available at http://www.sage-
languages.com/wp-content/uploads/2013/09/Confidentiality-Agreement.pdf (last visited 8 September
2016).
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Version as of 18 September 2017 p. 17 of 245
Sample Document #2-3: Unilateral Non-Disclosure or Confidentiality Agreement
Confidentiality Agreement
entered into between
Company Name & Logo of Disclosing Party and Company Name of Receiving Party
Contact Person Contact Person
Street Address Street Address
City, Zip Code & Country City, Zip Code & Country
Phone, Fax and e-mail Phone, Fax and e-mail
1. Purpose
In the course of their business dealings, the disclosing party has transmitted or will transmit valuable
information to the receiving party. This information currently is and needs to be kept confidential. It is and
remains the property of the disclosing party. Neither its disclosure nor the present agreement imply that a
license is granted or rights are transferred to the receiving party, unless otherwise agreed between the
parties in writing.
2. Existing Trade Secrets Being Disclosed
The parties agree that the following specific information is proprietary information of the disclosing party
and falls under the non-disclosure obligations of the receiving party.
(1) ............................................................................................................................................................
(2) ............................................................................................................................................................
3. Future Confidential Information
Any communication in any medium transmitted in future from the disclosing party to the receiving party
will be marked as “Confidential - Subject to NDA of ............. [date]” if it contains trade secrets and other
information falling under the scope of this agreement.
4. Obligations of the Receiving Party
The receiving party agrees to protect the proprietary information of the disclosing party identified pursuant
to this agreement with all lawful means, in particular
(a) not do disclose the information to any third party unless required by law;
(b) to maintain the confidentiality of the information in its internal procedures, to limit access to the
information among its staff to those who need to know, to maintain binding legal agreements with
all employees and independent contractors who have been given or may gain access to the infor-
mation, and to safeguard against unauthorized third party access to facilities and computers;
(c) to notify immediately if it disagrees with the designation of information pursuant to #3 because it
has already received the information from a third party, considers the information to be part of the
public domain and can name the sources to back up this claim, or is able to prove that it has
already independently developed the same information itself;
(d) not to use the information in any way in competition with the disclosing party, for example but not
limited to the acquisition of patents or trademarks, the registration of domain names, the
solicitation of employees, customers or suppliers, or the development of products or services;
(e) to delete the information from all electronic media and destroy any documents containing such
information, when the business relationship ends or the information is otherwise no longer needed,
whichever comes first;
(f) to take any other measures reasonably required to protect the confidentiality of the information.
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p. 18 of 245 Version as of 18 September 2017
Non-Disclosure or Confidentiality Agreement, Page 2
5. Exclusions
The obligations of the receiving party do not extend to information that has become part of the public
domain by action of the disclosing party or a third party. If the receiving party has disclosed or wishes to
disclose information covered by this agreement based on this exclusion, the receiving party bears the
burden of proof that the information has become part of the public domain before its disclosure. If a lawsuit
or other procedure is started against the receiving party that might require disclosure of protected informa-
tion, the receiving party shall notify the disclosing party in a timely manner to enable it to intervene and
protect its rights if necessary.
6. No Implied Warranties
The fact that the information is classified as valuable in this agreement does not imply any warranties on
behalf of the disclosing party, for example that the information is accurate, that it will be of use for the
receiving party, or that it will never be disclosed to third parties or otherwise become known or available to
them.
7. Assignability
The rights and obligations under this agreement are binding on the parties and not assignable to third
persons without mutual consent of the parties to this agreement in writing.
8. Term
The agreement is valid for the duration of the negotiations and business dealings of the parties and for a
period of five years beyond. It can be extended by mutual consent in writing.
9. Consideration
The parties agree that the disclosure of the confidential information is of sufficient value for the receiving
party to constitute consideration.
10. Remedies
Any breach of this agreement that entails access of third parties to the protected information can cause
irreparable harm to the disclosing party. Therefore, the receiving party agrees to compensate the disclosing
party for proven loss or a minimum amount of liquidated damages of ..............$, whichever is higher. The
receiving party will also compensate the disclosing party for the cost of any legal remedies against itself
and against any third party that gained access to the information as a result of the breach by the receiving
party.
11. Governing Law and Forum
This agreement shall be subject to the laws of ................ Any disputes about the agreement or a breach of
the agreement shall be settled in arbitration administered by the International Centre for Dispute Resolution
of the AAA in accordance with its international arbitration rules. The place of arbitration shall be .............
and the proceedings shall be conducted in English. The number of arbitrators shall be one/three.
12. Final Clauses
This is the entire agreement between the parties and supersedes any earlier communications, negotiations,
and agreements with respect to its subject matter. Any modifications or subsequent agreements on the
subject matter must be in writing and duly signed by both parties. Should any part of this agreement be
found to be invalid, the remaining parts shall remain binding and enforceable between the parties.
Date and Signatures
On behalf of the disclosing party On behalf of the receiving party
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Version as of 18 September 2017 p. 19 of 245
Explanations
In some industries or settings the name “confidentiality agreement” is more commonly used (for
example in employment contexts), in others the name “non-disclosure agreement”; there is no
material difference between the two, as long as the other terms are clear.
#1 The entry on “purpose” clarifies several things: first, that there will be a transfer of infor-
mation that is currently not publicly available, i.e. it is confidential; second, the information
is considered valuable by both parties and is, therefore, “consideration” (see also #9); third,
the information has to remain confidential; fourth, the present agreement does not affect the
ownership of the disclosing party and does not constitute a license or permission for the
receiving party to do anything with the information other than the purpose for which it is
being disclosed.
#2 There are generally three ways of determining the scope of the NDA or CDA: i) The infor-
mation can be broadly described with reference to the IBT in question (see the example on
p. 16???); ii) the information can be specifically described; and iii) the information can be
marked. The present NDA or CDA uses a combination of ii) and iii) (see also #3). To the
extent that existing information is disclosed, it needs to be described quite clearly. In
practice, very general NDAs and CDAs have often proven unenforceable. To this end
compare below, Magellan International Corporation v Salzgitter Handel GmbH, pp. ???-
???, in particular paras. 36-46.
#3 The proposal specifies that future information will be marked if it is to fall under the NDA.
This ensures a high level of enforceability but also puts a significant burden on the
disclosing party. They may want to have a stamp made and place it on every piece of paper
and other information that is being transmitted by mail, fax, or e-mail attachment and
contains confidential information. They may also want to include a rider in all e-mails and
delete it when it is not needed versus adding it when it is needed.
#4 The obligations of the receiving party are spelled out clearly in this model. They cover both
voluntary and involuntary disclosure by the receiving party. The obligation to maintain a
high level of computer security is increasingly important in practice.
Clause #4(c) is of particular importance. By way of the NDA, the receiving party acknow-
ledges that existing information described under #2 falls under the NDA; by way of clause
(c), the receiving party also acknowledges that future information falls under the NDA if it
is so marked by the disclosing party and not contradicted by the receiving party. This
prevents the receiving party from claiming that some information was already in the public
domain when received or that they had already independently arrived at the same research
results (see also #6).
#5 The exclusions are important because it is always possible that confidential information
becomes publicly known without an act or fault of the receiving party. For example, the
disclosing party may have transferred it to third parties with or without an obligation to keep
it confidential. Third parties may have violated their NDAs. Third parties may have indepen-
dently arrived at the same research results. Clause #5 accounts for these possibilities.
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p. 20 of 245 Version as of 18 September 2017
However, it also puts the burden of proof on the receiving party that it has not and will not
disclose information in breach of the NDA.
The last sentence refers back to Clause #4(a) and the possibility that the receiving party may
be required by law to disclose information protected under the NDA. In such a case, the
disclosing party needs to be informed and may seek to protect the confidentiality of the
information.
#6 This clause protects the disclosing party from any claims by the receiving party about the
quality and/or the continued confidentiality of the information. The disclosing party owns
the information and can basically do with it as it pleases.
#7 Assignment implies disclosure. Even if a third party accepts to step into the position of the
receiving party and be equally bound by the NDA, assignment requires permission by the
disclosing party.
#8 In many cases, the disclosing party would like the receiving party to honor the NDA
indefinitely. However, very long protection terms have caused problems with enforcement
in practice. Five years beyond the business dealings of the parties would seem a reasonably
compromise. Still, the ideal term would depend on the information and the nature of the
business. Parties should opt for a shorter term if the value of the information is very time
sensitive and tends to decline rapidly. On the other hand, disclosing parties can justify a
longer term if the information is likely to remain confidential and valuable for a long time.
Disclosing parties should remember that the effects of the NDA do not only end at the end
of the protection term but also if the information becomes known to third parties and/or the
general public at an earlier time (see #6).
#9 Common law jurisdictions generally require that a contract is for consideration to be binding
(see §17(1) of the Restatement (Second) on Contracts). This can be a problem if the re-
ceiving party has to protect the confidentiality of information of the disclosing party without
getting paid or some other compensation in return. With this clause, the receiving party
acknowledges that the information is of value to it and, therefore, constitutes consideration.
The language in Clause #6 is not quite unproblematic in this regard, since the disclosing
party refuses to guarantee via that clause that the information is in fact objectively valuable
and of subjective value to the receiving party. Theoretically, the disclosing party could pay
the receiving party a nominal sum, say 25$, for keeping the information confidential. This
would certainly qualify as consideration but the cost of making an international bank transfer
would exceed the amount in question. Thus, the present clause should be a good com-
promise.
#10 The problem with remedies is that the loss to the disclosing party is usually hard to quantify.
At the same time, a very large sum in “liquidated damages” will often be considered
unreasonable by a court asked to enforce it. Again, we need to find a compromise that
provides a deterrent against disclosure in breach of the NDA, a sum that would seem
adequate compensation for the disclosing party, and a reasonable amount for a court or
arbitration tribunal. In the end, the amount to be entered here will depend on the transaction
2 – SALES CONTRACTS
Version as of 18 September 2017 p. 21 of 245
in question and the objective or subjective value of the information in question. If the parties
are negotiating a multi-billion dollar investment, liquidated damages of several million
dollars would probably not seem unreasonable to an arbitration tribunal. However, a court
or arbitration tribunal will probably not enforce an amount similar to or higher than the
envisaged transaction as such.
The situation is quite different if the value of the information can be proven, for example if
the receiving party, armed with the confidential information of the disclosing party, decides
to go into business with a third party instead and generates considerable profits based on this
breach of the NDA. An arbitration tribunal and probably even a court would in such a case
at least consider a full disgorgement of the respective profits.
#11 Like every contract between parties in different countries, it is highly recommended that a
choice of law clause and a choice of forum should be included. The benefits have been
discussed elsewhere. Parties should never assume that the choice of law and forum clauses
agreed upon in the main contract would also apply to ancillary agreements such as an NDA.
Furthermore, the NDA is often concluded before the main contract and the latter may never
come together. However, if both an NDA and a main contract and maybe other ancillary
agreements are concluded between the same parties, it makes sense to include the same
choice of law and forum clauses in all agreements that refer to the same business trans-
action(s). In this way, the parties could avoid having to litigate or arbitrate related questions
in different fora, with different lawyers, under different and potentially incompatible laws,
and with potentially conflicting outcomes.
#12 The severability clause is standard and should always be included in international and
domestic contracts.
The question whether or not an NDA or CDA is enforceable depends more than anything on the
reasonableness of its terms. Many models otherwise available may provide broader protection for
the disclosing party on paper. However, if they should be considered unreasonably broad when push
comes to shove, they won’t be worth the paper they are written on. The present model should be
reasonable overall and thus enforceable in most cases.
________
NOTES AND QUESTIONS
1. On the basis of Articles 14 and 18 CISG and §2-206 UCC, explain when a pro forma invoice
might be construed as an offer and when a purchase order might be construed as an acceptance
(compare also Chapter 3 on Formation of Contracts in the Restatement (Second) on Contracts). How
should these documents be formulated by the seller and the buyer to indicate clearly that the
negotiations are ongoing and that neither an offer nor an acceptance has yet been declared? What
is a pro forma invoice if it is not an offer? Are the CISG, the UCC, and the Restatement coming to
the same results in this regard?
2. At the bottom, the purchase order contains a request that the seller should get in touch if he does
not accept or is not able to fulfill the order as requested. Does this mean that the seller has an
2 – SALES CONTRACTS
p. 22 of 245 Version as of 18 September 2017
obligation to act if he does not want to be bound by the contract? Could silence be interpreted as
consent and trigger obligations for the seller and, potentially, damages for the buyer? If so, on what
conditions? In this respect, is there a difference between the CISG and the UCC?
3. If a purchase order is sent and either qualifies as an offer or as an invitation to make an offer, does
the PO alone trigger obligations, even if there is no acceptance or final contract? How about obliga-
tions on the buyer? Let’s assume the seller receives the PO and proceeds to manufacture the goods.
Simultaneously, he sends a contract draft but the buyer never returns it or informs the seller after a
while that she is no longer interested in the goods. Rights of the seller? (Check below, Section 3, for
further discussion)
4. When is an NDA too narrow for its purpose? When is it too broad? Discuss the sample clause on
p. 16??? and explain why this is too broad.
5. How would a mutual NDA or CDA have to be formulated differently from the sample document
#3?
Section 3. Pre-Contractual Obligations and Pre-Contractual Liability
In commercial law, claims from one party against another can generally be based in one or more out
of five different areas of law:
– contract law, if a contract was concluded between the parties and not all mutual
obligations were correctly met;
– pre-contractual liability, sometimes referred to as culpa in contrahendo and/or
negotiorum gestio (see p. ???, note ???), if the parties entered into contract negotia-
tions and one or both sides suffered losses although a contract was never concluded;
– tort liability, if one party suffers a loss as a consequence of unlawful conduct of the
other;
– unjust enrichment, if a party somehow acquires assets at the expense of another
party without having a contract or another legal basis for the acquisition of the assets;
– property, if a party is in possession of or otherwise benefitting from material or
immaterial goods (including intellectual property rights) owned by another party.
All five areas of claim bases will appear and re-appear in different sections of this book. In the
present section, we will focus on pre-contractual liability.1 The concept is not well established in the
U.S., the UK, and other common law countries. However, depending on the applicable law, parties
1 For detailed discussion see Ingeborg Schwenzer, Pascal Hachem & Christopher Kee, Global Sales and
Contract Law, Oxford University Press, Oxford (UK) 2012, pp. 275-287.
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Version as of 18 September 2017 p. 23 of 245
to IBTs and their legal counsel may find themselves exposed to this kind of liability whether they
are aware of it or not.1
In the European legal tradition, the concept of pre-contractual obligations and pre-contractual
liability, in cases of breach of such obligations, is well-established. However, the legal basis varies
from one country to another. In some countries, pre-contractual liability is part of tort liability. This
can be problematic because tort liability typically requires a level of culpability, an unlawful act, on
the side of the tortfeasor. If a party merely breaks off negotiations with another party or otherwise
changes its mind before a contract is finalized, an unlawful act will rarely be committed. This is a
corollary of the freedom of contract, which includes the freedom not to contract. Therefore, other
European jurisdictions, like Germany, have developed the concept of pre-contractual liability as
distinct from tort liability.
The dichotomy and some of the ramifications are illustrated in the case that led to the judgment of
the European Court of Justice of 17 September 2002 in Case C-334/00, Tacconi.2 In 1996, the Italian
company Tacconi had entered into negotiations with a German supplier, HWS, for the sale of a
moulding plant. With knowledge of HWS, Tacconi concluded a leasing contract for the plant with
a third party before the contract of sale with HWS was finalized. After HWS broke off the contract
negotiations, Tacconi claimed damages of some US$ 2 million, alleging a breach of the duty to act
honestly and in good faith. Tacconi brought the case not in defendant court in Germany but in its
own court in Italy based on its conviction that HWS had committed a tort. HWS, by contrast,
claimed that any case by Tacconi should either be brought via arbitration, as envisaged in the draft
contract, or in defendant court in Germany. Since matters of jurisdiction between EU Member States
are subject to the mandatory rules of EU Regulation 1215/2012 on Jurisdiction and the Recognition
and Enforcement of Judgments in Civil and Commercial Matters,3 and the Italian court was unsure
1 See Larry A. DiMatteo, An International Contract Law Formula: The Informality of International Business
Transactions Plus the Internationalization of Contract Law Equals Unexpected Contractual Liability,
L=(ii)2, Syracuse J.Int’l L. & Com. 1997, Vol. 23, pp. 67-???.
See also Gregory S. Crespi, Recovering Pre-Contractual Expenditures as an Element of Reliance
Damages, SMU L.Rev 1995/96, Vol. 49, pp. 43-???, with comparative analysis of U.S. and Commonwealth
case law. Essentially, in the common law systems, the issue is dealt with either under the notion of
misrepresentation, unconscionability, or under promissory estoppel. For further analysis of U.S. case law
see also Violeta Solonova Foreman, Non-Binding Preliminary Agreements: The Duty to Negotiate in Good
Faith and the Award of Expectation Damages, 72 U.T. Fac. L. Rev. 12 (2014). An attempt at a unified
solution for the U.S. legal system – the concept of “no-retraction” pursuant to which a party can at some
point no longer walk away from contract negotiations without incurring some form of liability – was
advanced in Omri Ben-Shahar, Contracts Without Consent: Exploring a New Basis for Contractual
Liability, UPenn Law Review 2004, Vol. 152, No. 6, pp. 1829-1872.
2Case C-334/00, Fonderie Officine Meccaniche Tacconi SpA v Heinrich Wagner Sinto Maschinenfabrik
GmbH, 2002 ECR I-7383.
3 OJ 2012 L 351, pp. 1-32. Regulation 1215/2012 is the successor to Regulation 44/2001 on Jurisdiction and
the Recognition and Enforcement of Judgments in Civil and Commercial Matters, which, in turn, is the
successor to the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and
Commercial Matters. Although the applicable law at the pertinent time was the 1968 Convention, referen-
ces here are to the current 2012 Regulation, since the relevant provisions – at least in substance – have
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p. 24 of 245 Version as of 18 September 2017
how this Regulation should be interpreted in a case involving pre-contractual liability. If pre-
contractual liability was akin to tort, it would be covered by Article 7(2) of the Regulation and the
injured party could bring the case “where the harmful event occurred”, i.e. her own court (see Mines
de Potasse d’Alsace, below p. ???). By contrast, if pre-contractual liability was covered by contract
law, it would be subject to Article 7(1) of the Regulation and the case would have to be brought “in
the courts for the place of performance”, here the defendant court. To find out about the legal nature
of pre-contractual liability and the applicable provision of the Regulation, the Italian court referred
the following questions to the European Court of Justice pursuant to Article 267 TFEU:
“1 . Does an action against a defendant seeking to establish pre-contractual liability
fall within the scope of matters relating to tort, delict or quasi-delict (Article [7(2)
of the Regulation 1215/2012])?
2. If not, does it fall within the scope of matters relating to a contract (Article [7(1)
of the Regulation]), and if it does, what is "the obligation in question"?
3. If not, is the general criterion of the domicile of the defendant the only criterion
applicable?”
Fonderie Officine Meccaniche Tacconi SpA v. Heinrich Wagner Sinto Maschinenfabrik
GmbH (HWS)
European Court of Justice, Case C-334/00, 2002 ECR I-7383 (footnotes omitted)
Opinion of Advocate General Geelhoed of 31 January 2002
[...] V – Observations submitted
46 Tacconi contends that pre-contractual liability must be regarded as non-contractual and therefore
constitutes a delict or quasi-delict. [...]
47 Tacconi construes the case-law of the Court as meaning that the concept ‘matters relating to a
contract’ [in Article 7(1)(a) of the Regulation] cannot cover a situation in which there is no obliga-
tion freely assumed by one party towards another. Tacconi contends that at the pre-contractual stage
there is no contractual link between the parties and if no agreement results from the negotiations no
contractual obligation can arise therefrom in respect of the parties. [...]
VI – Pre-contractual liability
55 It follows from the principle of freedom of contract that each person is free to choose with whom
and on what matter he wishes to enter into negotiations and the point to which he wishes to continue
negotiations. Therefore, in principle persons are free to break off negotiations whenever they wish
to so without incurring liability in that regard. However, the freedom to break off negotiations is not
absolute. Article 2.15 of the UNIDROIT principles provide that ‘a party who ... breaks off negotia-
remained unchanged since 1968 and the interpretations given by the ECJ to the older versions are
applicable to the current version.
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tions in bad faith is liable for losses caused to the other party’. According to the explanatory note
to this article, negotiations can reach a point after which they may no longer be broken off abruptly
and without justification. When such a point is reached depends firstly on the extent to which the
other party, as a result of the conduct of the first party, had reason to rely on the positive outcome.
Secondly, it depends on the number of issues on which the parties had already reached agreement.
However, where a party breaks off negotiations abruptly and without justification, it must compen-
sate for the loss incurred by the other party.
56 Thus, pre-contractual liability arises where negotiations on a contract are broken off without
justification.
57 This is the first time that the Court has had to deal, in connection with the [1968 Convention
and/or its subsequent reiterations as Regulations 44/2001 and 1215/2012], with the legal nature of
the liability which can arise between two potential contracting parties during negotiations over a
contract. [Neither the original Convention nor the Regulation now in force] lays down [any] rules
on liability arising from pre-contractual relations per se. The clearest indication is still to be found
in the Evrigenis Report which provided clarification on the Convention on the occasion of the
accession of Greece. This report states that pre-contractual relations can fall within the scope of
Article [7(1)]. However, the report does not state the foundation on which this view is based.
Furthermore, there are extensive academic writings on pre-contractual liability in the Member States
and also in connection with international private law. The academic writings do not follow the same
lines in all the Member States.
58 In most legal systems a party which breaks off negotiations without just cause, having created an
expectation on the part of the other party that a contract will be entered into, is liable for the negative
contractual interest. In general, such interest includes not only the expenses but also the lost
opportunities to conclude another contract with a third party. Negotiations which are broken off dash
an expectation that they will lead to a result. In this respect I will briefly examine some of these legal
systems below. This brief account of the law relating to pre-contractual liability is certainly not
intended to provide an exhaustive picture of the law in the Member States as it now stands, but
merely serves as an illustration. The Court may use national law as a source of inspiration when
answering the questions referred to it.
59 In Italian law Article 1337 of the Codice Civile contains a specific provision governing
pre-contractual liability. Parties must act in good faith during negotiations over and the formation
of a contract. A party who breaks off negotiations without just cause, having created an expectation
that a contract will be entered into, is liable for the negative contractual interest. Such negative
interest specifically includes lost opportunities in addition to expenses. The positive interest is not
compensated for, that is to say the other party need not be placed in the situation in which it would
have been had the contract actually been concluded. The legal requirement which is not observed
when negotiations are broken off abruptly is intended to prevent the other party suffering harm as
a result of the fact that it is involved in negotiations and not because the negotiations did not
ultimately result in a contract. Fault is not required.
60 In German law a party who culpably breaks off negotiations without just cause or on irrelevant
grounds, having created an expectation on the part of another party that a contract will certainly be
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entered into, is liable for the negative contractual interest. Usually the liability is based on the
doctrine of culpa in contrahendo: a party who suddenly breaks of negotiations is liable for the
culpable non-fulfilment of the obligation to take account of the other party’s interests. Therefore,
in German law almost the same criterion applies as in Italy, except that the requirement relating to
fault has a role to play.
61 French law does not lay down provisions on pre-contractual negotiations and entering into
contracts. Pre-contractual liability is based on the doctrine of abuse of rights in conjunction with
reasonableness and equity. It arises wherever a party suddenly breaks off negotiations without just
cause at a time when the other party could legitimately expect that a contract would be entered into.
As long as no contract has been entered into, the harm which results from the pre-contractual stage
is regarded as covered by the law governing tort, delict or quasi-delict. The loss suffered by the other
party must be compensated for. It is uncertain whether this also covers lost opportunities (‘perte
d’une chance’) because it is not established that a contract with a third party has actually been
entered into. Furthermore, the French courts appear reluctant to declare that pre-contractual liability
exists as they do not wish to curb the principle of freedom of contract.
62 Netherlands law is different. Liability is possible before the other party can legitimately expect
that the contract will be entered into. Under Netherlands law, a stage can be reached in negotiations
at which they may no longer be broken off. However, where this occurs, liability for positive
contractual interest is possible. Three stages in the negotiations are identified. In the first stage
negotiations may be broken off without liability being incurred. This is followed by a stage during
which negotiations may be broken off, but the costs incurred by the other party must be compensated
for. Finally, there is the concluding stage at which negotiations may no longer be broken off. This
is reached when the other party can legitimately expect that a contract will be entered into or there
are no other circumstances which justify the negotiations being broken off. If a party breaks off
negotiations at this stage, it can even be liable for lost profit. In Netherlands academic writings it
is argued that at this stage actions may be subsumed under Article [7(1)] on account of the
‘closeness of the links’ which [have] developed between the parties.
63 Liability arising from negotiations which have been broken off has not been recognised in United
Kingdom law since time immemorial. The risk that a party will break off negotiations before a
contract has been entered into is regarded as a ‘business loss’. The continental notion of
pre-contractual good faith per se is unknown in the United Kingdom. There is no obligation to
negotiate in conformity with the requirements of reasonableness and equity. However, neither of
these facts mean that there are no rules governing conduct during the pre-contractual stage. For
example, liability can be based of the doctrine of ‘misrepresentation’. However, I consider that the
legal concept of ‘estoppel by representation’ is more important. In accordance with this legal
concept, a party may not withdraw a previous statement if the other party has suffered harm as a
result of that statement. Thus, this legal concept is – albeit not identical – comparable with notions
in continental law such as the protection of good faith and legitimate expectations. Finally, it should
be noted that in so far as liability arises as a result of negotiations which have been broken off, this
is based on actions which constitute a ‘tort’. A clear distinction must be drawn between such liability
and liability in connection with failure to fulfil contractual obligations.
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64 I now turn to the relevance of the abovementioned legal principles to the answer to the question
which has been referred in the light of the [Regulation].
65 To that end, I will divide the negotiation process into two stages. During the first stage freedom
of contract is paramount. The parties may break off negotiations. However, during the second stage
the parties may no longer break off negotiations. The expectation which been created on the part of
the other party and the harm which it suffers because negotiations are broken off can give rise to
liability. In any event, that liability includes the negative contractual interest, that is to say the
expenses incurred and the opportunities lost. In general this liability does not go so far as to enable
the other party to demand that the contract nevertheless be concluded.
66 It is possible that a further, third stage should be identified – which I deduce from the legal
principles in the Netherlands. It is possible that the links between the parties are so close that a
positive contractual interest can also be claimed. This involves either an action for the contract
nevertheless to be concluded or compensation which is the equivalent thereto. [...]
The relationship between Article [7(1) Jurisdiction in Matters Relating to a Contract] and Article
[7(2) Matters Relating to Tort, Delict or Quasi-Delict]
71 As I have said, in matters of liability under civil law the [Regulation] provides for a closed
scheme: whatever the case, either Article [7(1)] or Article [7(2)] applies. The provisions can never
apply simultaneously.
72 As regards this closed scheme, I concur with the Commission’s assessment of the relationship
between Article [7(1)] and Article [7(2)]. The Commission contends that, unlike the concept of
‘matters relating to tort, delict or quasi-delict’, the concept of ‘matters of contract’ is open to a literal
interpretation.
73 In brief, according to the case-law of the Court, the scope of Article [7(1)] is precisely defined.
Where a matter does not fall within the scope of Article [7(1)], Article [7(2)] applies. In this sense
Article [7(2)] is a residual category. Thus, it is necessary to establish in which cases a matter falls
within the scope of Article [7(1)]. In that respect the aspect of freedom is central. According to [Case
C-26/91] Handte, the phrase ‘matters relating to a contract’ is not ‘to be understood as covering a
situation in which there is no obligation freely assumed by one party towards another’. Whether an
obligation is freely assumed is determined primarily by the principle of legal certainty as applied
inter alia in Handte. Must a normally well-informed individual foresee that he has assumed an
obligation?
74 The precise definition of the scope of Article [7(1)] is important for another reason. Article [7(1)]
includes the possibility of choice of forum. Under Article [25 of the Regulation], the parties to a
contract may confer jurisdiction on another court or even a forum which has exclusive jurisdiction
to settle a possible dispute. The parties thereby freely renounce the jurisdiction of the court which
would be competent in their case. The decision to waive such a fundamental right can be made only
on the basis of a well-considered choice.
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The importance of pre-contractual relations
75 As the national court emphasises, the pre-contractual liability derives from the failure to observe
a legal requirement and not from the failure to fulfil a contractual obligation. That is because there.
is no contract. In the present case the legal requirement derives from Article 1337 of the Italian
Codice Civile under which parties must act in good faith during negotiations over a contract.
76 I consider that this requirement is a generally applicable rule of conduct enshrined in law which
does not differ from other rules of conduct derived from law. Under certain circumstances failure
to comply with such rules of conduct can constitute a delict or quasi-delict. Consequently, Article
[7(2)] of the [Regulation] should apply.
77 That would make it possible to give a simple answer to the question referred by the national court.
However, I consider that the issue of pre-contractual liability is more complex in nature. In my view,
the decisive factor as regards the application of the [Regulation] is whether an agreement has been
entered into between the parties. Have the parties assumed obligations towards one another? Where
an obligation has been freely assumed, Article [7(1)] applies. I would draw a distinction between
obligations and expectations – legitimate or otherwise – which the parties have in relation to one
another. Such expectation can consist in the negotiations not being broken off suddenly or, for
example, negotiations being held at the same time – but not openly – with a competitor. I consider
that the dashing of such expectations constitutes a delict or quasi-delict.
78 The obligation referred to in the above paragraph need not relate to the actual contract on which
negotiations are being held. It can also relate to a preformation contract under which one of the
parties makes a start on performance. By way of illustration, I refer to the case in the main
proceedings. Even before there is a complete contract for delivery of the moulding plant by HWS,
which also lays down all the financing terms and conditions, for example, an agreement may
possibly exist between the parties under which HWS is to make a start on performance by, for
example, reserving production capacity or ordering materials. Disputes which subsequently arise
could, possibly, fall within the scope of Article [7(1) of the Regulation].
79 The criteria laid down in Article [25 of the Regulation] could also be relevant in answering the
question concerning the time at which an obligation arises. This relates in particular to the criteria
referred to at Article [25(b) and (c)]. Where there is no agreement in writing (or evidenced in
writing), the existence of an obligation can be inferred from:
“– the practices which the parties have established between themselves, or,
– in international trade or commerce, the usage of which the parties are or
ought to have been aware and which in such trade or commerce is widely
known to, and regularly observed by, parties to contracts of the type involved
in the particular trade or commerce concerned.”
80 I will clarify my view by reference to the various stages in the negotiating process which I
identified in Section VI of this Opinion.
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Version as of 18 September 2017 p. 29 of 245
81 During the first stage of the negotiating process the parties may break off negotiations without
incurring liability. At this stage Article [7] of the Convention is irrelevant. There is no delict or
quasi-delict, or an agreement.
82 During the second stage an expectation has been created which can result in harm. At this point
a party may no longer break off negotiations suddenly. If it nevertheless does so, it commits, under
certain circumstances, a delict or quasi-delict. It can then be ordered to compensate for the expenses
incurred by the other party or to compensate for the opportunities lost by the other party.
83 The third stage is the stage at which there is still no (signed) contract, but at which it can be
inferred from the circumstances that an obligation has been assumed between the parties. At this
stage Article [7(1) of the Regulation] can apply. Such circumstances might lie in the fact that
agreement has been reached on the main aspects of a contract – the draft of the contract and the price
– but negotiations are still under way on the other terms and conditions. It is also possible that one
of the party has already made a start on performing the contract since it was able to deduce from the
conduct of the other party that it intended to conclude a contract. Finally, I refer to the circumstances
set out in Article [25 of the Regulation].
84 I am aware that at the third staged described here there is almost a complete contract. The extent
to which this stage is regarded as pre-contractual depends on the content of national private law.
85 I conclude that an action for pre-contractual liability can be regarded as falling within the scope
of matters relating to delict or quasi-delict within the meaning of Article [7(2) of the Regulation].
Where such action relates to an obligation which the other party has assumed towards the claimant,
it must also be regarded as falling within the scope of matters relating to a contract within the
meaning of Article [7(1) of the Regulation].
Judgment of the European Court of Justice of 17 September 2002
[...] Question 1 [...]
19 It should be observed at the outset that the Court has consistently held (see Case 34/82 Martin
Peters Bauunternehmung [1983] ECR 987, paragraphs 9 and 10, [Case C-261/90] Reichert and
Kockler [[1992] ECR I-2149], paragraph 15, and [Case C-26/91] Handte [[1992] ECR I-3967],
paragraph 10) that the expressions ‘matters relating to a contract’ and ‘matters relating to tort, delict
or quasi-delict’ in Article [7(1) and (2) of Regulation 1215/2012] are to be interpreted indepen-
dently, having regard primarily to the objectives and general scheme of the [Regulation]. Those
expressions cannot therefore be taken as simple references to the national law of one or the other
of the [Member] States concerned.
20 Only such an interpretation is capable of ensuring the uniform application of the [Regulation],
which is intended in particular to lay down common rules on jurisdiction for the courts of the
[Member] States and to strengthen the legal protection of persons established in the Community by
enabling the claimant to identify easily the court in which he may sue and the defendant reasonably
to foresee in which court he may be sued (see Case C-295/95 Farrell [1997] ECR I-1683, paragraph
13, and Case C-256/00 Besix [2002] ECR I-1737, paragraphs 25 and 26).
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21 As the Court has held, the concept of ‘matters relating to tort, delict or quasi-delict’ within the
meaning of Article [7(2) of the Regulation] covers all actions which seek to establish the liability
of a defendant and which are not related to a ‘contract’ within the meaning of Article [7(1) of the
Regulation] ([Case 189/87] Kalfelis [[1988] ECR 5565], paragraph 18, Reichert and Kockler, para-
graph 16, and Case C-51/97 Réunion Européenne and Others [1998] ECR I-6511, paragraph 22).
22 Moreover, while Article [7(1) of the Regulation] does not require a contract to have been
concluded, it is nevertheless essential, for that provision to apply, to identify an obligation, since the
jurisdiction of the national court is determined, in matters relating to a contract, by the place of
performance of the obligation in question.
23 Furthermore, it should be noted that, according to the Court’s case-law, the expression ‘matters
relating to contract’ within the meaning of Article [7(1) of the Regulation] is not to be understood
as covering a situation in which there is no obligation freely assumed by one party towards another
(Handte, paragraph 15, and Réunion Européenne and Others, paragraph 17).
24 It does not appear from the documents in the case that there was any obligation freely assumed
by HWS towards Tacconi.
25 In view of the circumstances of the main proceedings, the obligation to make good the damage
allegedly caused by the unjustified breaking off of negotiations could derive only from breach of
rules of law, in particular the rule which requires the parties to act in good faith in negotiations with
a view to the formation of a contract.
26 In those circumstances, it is clear that any liability which may follow from the failure to conclude
the contract referred to in the main proceedings cannot be contractual.
27 In the light of all the foregoing, the answer to the first question must be that, in circumstances such
as those of the main proceedings, characterised by the absence of obligations freely assumed by one
party towards another on the occasion of negotiations with a view to the formation of a contract and
by a possible breach of rules of law, in particular the rule which requires the parties to act in good
faith in such negotiations, an action founded on the pre-contractual liability of the defendant is a
matter relating to tort, delict or quasi-delict within the meaning of Article [7(2) of Regulation
1215/2012].
Questions 2 and 3
28 As the first question has been answered in the affirmative, there is no need to answer the other
questions put by the national court.
________
NOTES AND QUESTIONS
1. While Tacconi suggests a straightforward solution, the Advocate General compares different
Member State solutions and opts for a differentiated solution to be adopted by the EU. What does
Court do and why? In your opinion, what would be the best solution? And why?
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2. What is the legal basis for the pre-contractual liability in the present case? Surely not the
Regulation 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil
and Commercial Matters? More generally, what is the applicable contract law when the parties did
not conclude a contract? The CISG, for example, does not contain any provisions about pre-
contractual liability...
3. As a result of the judgment, where should Tacconi go to sue for damages? How likely are they
to succeed? If anything, will Tacconi get compensated only for the “negative interest” (to put them
in the same position as if they had never met with HWS) or also the “positive interest” (to put them
in the position as if HWS had not walked away but concluded the contract with Tacconi)?
4. If two parties conclude an NDA at an early stage of contract negotiations and one side later breaks
off the negotiations, just before the main contract of sale is finalized, would the existence of the
NDA influence the analysis of the European Court of Justice and potentially change the outcome?
5. Tacconi was decided in 2002. By 2007, the European Parliament and Council explicitly included
“culpa in contrahendo” in Regulation 864/2007 of the European Parliament and of the Council of
11 July 2007 on the Law Applicable to Non-Contractual Obligations, the so-called “Rome II
Regulation” (Documents, pp. ???). According to the Preamble of the Regulation, “Culpa in contra-
hendo for the purposes of this Regulation is an autonomous concept and should not necessarily be
interpreted within the meaning of national law. It should include the violation of the duty of dis-
closure and the breakdown of contractual negotiations” (recital 30). Article 2(1) provides that
“damage shall cover any consequences arising out of tort/delict, unjust enrichment, negotiorum
gestio or culpa in contrahendo.” On the basis of this language, does the Regulation provide an
autonomous legal basis in EU law for a damage claim based on pre-contractual liability? Compare
Articles 12 and 15 of the Regulation when pondering your answer to this question. If the Regulation
does not provide a legal basis, where might such a legal basis be found? Would it provide for com-
pensation of the negative interest only? The positive interest as well? Always? What does “any con-
sequences” mean in Article 2(1) in this regard? Go back to question 1 and reconsider your answer
in light of these new statutory provisions!
6. What is the legal situation in the United States with regard to pre-contractual liability? Is there
a legal basis in the UCC for such a liability? In common law? In the CISG, Unidroit Principles or
CFR? If so, what is the extent of any compensation that can be claimed as damages in a case similar
to Tacconi? Consider the following explanations before giving your answer! (How) would these
explanations influence your answer to question 5?
* * *
The CISG does not contain any specific rules about pre-contractual obligations and liabilities.
Indeed, a proposal to include such rules was rejected by the drafters.1 In principle, this means that
pre-contractual liability or culpa in contrahendo joins issues such as mistake or fraud in the forma-
tion of a contract, namely issues not covered by the CISG to which the rules of the national legal
1 See Schroeter in Ingeborg Schwenzer (ed): Schlechtriem & Schwenzer Commentary on the UN Convention
on the International Sale of Goods (CISG), Oxford University Press, Oxford 4th ed. 2016, at p. 255.
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system have to be applied that was chosen as back-up by the parties, respectively that is applicable
pursuant to private international law. This outcome is less than ideal because it diminishes the
harmonizing and simplifying effects of the CISG. Therefore, some commentators argue that a
universal and uniform requirement of good faith and fair dealing in contract negotiations could be
introduced into the CISG via Article 7(2).1 If such proposals gain traction, they could lead to similar
results as we can find in the U.S. (see below).
The Unidroit Principles (PICC) contain a provision about “negotiations in bad faith” in Article
2.1.15:
“(1) A party is free to negotiate and is not liable for failure to reach an agreement.
(2) However, a party who negotiates or breaks off negotiations in bad faith is liable
for the losses caused to the other party.
(3) It is bad faith, in particular, for a party to enter into or continue negotiations when
intending not to reach an agreement with the other party.”
Given the nature of the PICC as a reflection of the global law merchant (see below, p. ???), one
could argue that this is a universal principle applicable to contract negotiations unless specifically
excluded or regulated differently by an applicable contract law or by agreement of the parties.
However, several questions remain unanswered: is this liability contractual? tort based? or sui
generis? The consequences extend not only to possible questions of jurisdiction, as in Tacconi, but
also to statute of limitations, etc. And what would be the extent of the liability? Does it provide only
for the reliance or negative interest, to put the injured party in the position it would be in if she had
never met the other party? Or could the injured party claim also the positive interest, i.e. any gains
it would have made from the conclusion and proper implementation of the contract?
The CFR has similar and, if anything, even more detailed rules compared to the PICC. First, Article
II-3:301(1) establishes the principle that “[a] person is free to negotiate and is not liable for failure
to reach and agreement.” Then the provision continues
“(2) A person who is engaged in negotiations has a duty to negotiate in accordance
with good faith and fair dealing and not to break off negotiations contrary to good
faith and fair dealing. This duty may not be excluded or limited by contract.
(3) A person who is in breach of the duty is liable for any loss caused to the other
party by the breach.
(4) It is contrary to good faith and fair dealing, in particular, for a person to enter into
or continue negotiations with no real intention of reaching an agreement with the
other party.”
1 Ibid.
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Compared to the PICC, it is remarkable that the CFR specifies liability for any loss. Presumably,
this would include not only the negative interest but any positive interest as well? Does it mean,
however, that the PICC would only reimburse the negative interest?1
The CFR further establishes quite detailed rules about the duty to disclose information pertinent to
the parties and the goods or services subject to negotiation, as well as the corresponding duty to
maintain the confidentiality of information versus third parties, and provides remedies for breach
of these pre-contractual duties (Articles II-3:101 to II-3:109, as well as Article II-3:302). Again, the
PICC are shorter but they do contain the provision of Article 2.1.16 regarding the duty of confi-
dentiality.
The UCC, like the CISG, does not contain an express provision regarding pre-contractual liability.
There is some case law, however,2 and the Restatement (Second) on Contracts provides in §90 under
the title “Promise Reasonably Inducing Action or Forbearance” that
“(1) A promise with the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of
the promise. The remedy granted for breach may be limited as justice requires. [...]”
Which of the options outlined by AG Geelhoed in Tacconi would the Restatement seem to support?
Contractual liability? Tort? Or sui generis? And what is the remedy prescribed or awarded by the
Restatement? Negative interest only? Or even the positive interest, if justice so requires? Last but
not least, do you see a sufficient trend toward global harmonization of pre-contractual liability that
would allow us to formulate a universal rule in the making?
Section 4: The Contract for the Sale of Goods
I. The Principle of Party Autonomy and the Freedom of Contract
If seller and buyer are located in different countries, a number of potential problems are added to
those we potentially encounter in contracts of sale on the domestic level. First, the legal system in
seller’s country will be different from the legal system in buyer’s country and this may affect any-
thing from the formation of the contract to the different rights and obligations and how they should
be interpreted and applied in a given case. The seller will be familiar with his own legal system but
rarely with buyer’s legal system and vice verse. Thus, the natural inclination of the seller will be to
insist that his own legal system or law should be applied to the contract while the buyer will insist
on her legal system or law. Without compromise, there will be no contract. Second, each party will
have a better familiarity with her own court system and will be more or less distrustful of the court
1 The latter is the view of Kleinheisterkamp in Stefan Vogenauer & Jan Kleinheisterkamp (eds): Commentary
on the Unidroit Principles of International Commercial Contracts (PICC), Oxford University Press, Oxford
2009, at p. 306, and consistent with the official commentary to the PICC.
2 On misrepresentation see, for example, ???; on unconsionability see, for example, ???; finally, regarding
promissory estoppel see, for example, ???.
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system and the chances of enforcing a claim against a local party in the other country. Against this
background, we now have to examine to what extent and by what means parties can choose the law
that should govern their transaction and where any disputes should be settled. As we will see, the
parties have many options in this regard and many opportunities to make mistakes or at least less-
than-optimal choices.1
In Business-to-Business (B2B) transactions, the principle of party autonomy and freedom of contract
are universally respected to a very wide degree. This is confirmed, first of all, by all international
conventions and agreements dealing with the law applicable to international sales and similar
contracts. For example, the 1955 Hague Convention on the Law Applicable to International Sale
of Goods (Documents, p. 1) stipulates in Article 2 that “[a] sale shall be governed by the domestic
law of the country designated by the contracting parties” (emphasis added). Only then it proceeds
to provide for the case where the parties have not made a choice of law or where the party choice
turns out to be invalid. Similarly, the 1986 Hague Convention on the Law Applicable to Con-
tracts for the International Sale of Goods (Documents, p. 2) provides in Article 7, as the default
rule, that “[a] contract of sale is governed by the law chosen by the parties.” The same is true for the
1994 Inter-American Convention on the Law Applicable to International Contracts (Article
7, Documents, p. 10), and even the broader EU Regulation 593/2008 on the Law Applicable to
Contractual Obligations (Rome I) (Article 3(1), Documents p. 14 et seq, at p. 20). While the
United States are not party to any of these conventions and agreements, the principle is inherent to
U.S. law and can be found, for example, in UCC §1-301, which reads in para. (c) “(1) an agreement
by parties to a domestic transaction that any or all of their rights and obligations are to be determined
by the law of this State or of another State is effective, whether or not the transaction bears a relation
to the State designated; and (2) an agreement by the parties to an international transaction that any
or all of their rights and obligations are to be determined by the law of this State or another State or
country is effective, whether or not the transaction bears a relation to the State or country designa-
ted” (Documents, pp. 63 et seq, at p. 69). A good summary of the internationally recognized
standards can also be found in the 2015 Hague Principles on Choice of Law in International
Commercial Contracts (Documents, p. ???). Although the Principles are non-binding, they have
been widely endorsed and approved.2
1 For useful analysis see, for example, Ingeborg Schwenzer, Who Needs a Uniform Contract Law, and Why?,
58 Vill. L. Rev. 723 (2013)
2 The Principles are available online on the website of the Hague Conference on Private International Law,
see https://www.hcch.net/en/instruments/conventions/full-text/?cid=135. For further reading see, inter alia,
Jonathan Levin, The Hague Principles on Choice of Law in International Commercial Contracts:
Enhancing Party Autonomy in a Globalized Market, 13 N.Y.U. J.L. & Bus. 271 (2016); Marta Pertegás &
Brooke Adele Marshall, Party Autonomy and its Limits: Convergence Through the New Hague Principles
on Choice of Law in International Commercial Contracts, 39 Brook. J. Int’l L. 975 (2014); Geneviève
Saumier, The Hague Principles and the Choice of Non-State “Rules of Law” to Govern an International
Commercial Contract, 40 Brook. J. Int’l L. 1 (2014); Andreas Schwartze, New Trends in Parties’ Options
to Select the Applicable Law? The Hague Principles on Choice of Law in International Contracts in a
Comparative Perspective, 12 U. St. Thomas L.J. 87 (2015); S.I. Strong, Limits of Procedural Choice of
Law, 39 Brook. J. Int’l L. 1027 (2014);
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In a similar way, the international conventions and national laws dealing with the question of
jurisdiction respect the choice of the parties as the primary criterion for determining which courts
are competent to hear any disputes between the parties to an international business transaction. For
example, the 2005 Hague Convention on Choice of Court Agreements, which applies to “inter-
national cases [...] in civil or commercial matters” (Article 1) provides that “[t]he court or courts of
a Contracting State designated in an exclusive choice of court agreement [between two or more
parties to a contract] shall have jurisdiction to decide a dispute to which the agreement applies,
unless the agreement is null and void under the law of that State” (Article 5(1)).
Similarly, the EU Regulation 1215/2012 on Jurisdiction and the Recognition and Enforcement
of Judgments in Civil and Commercial Matters (Brussels Ia or Ibis), which is the relevant law
in the 28 Member States of the EU, provides in Article 25(1) “[i]f the parties, regardless of their
domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle
any disputes which have arisen or which may arise in connection with a particular legal relationship,
that court or those courts shall have jurisdiction [...]. Such jurisdiction shall be exclusive unless the
parties have agreed otherwise.” (Documents, p. ???).
In the United States, jurisdiction and recognition of foreign judgments are matters of state law. To
the extent that these rules are part of state common law, they are usually applied equally for the
recognition and enforcement of a judgment from a sister state in the US and for judgments from
foreign countries. To facilitate access for lawyers who are unfamiliar with the (common) law of a
particular state of the Union and to achieve a level of harmonization, the Uniform Law Commission
first adopted the 1948 Uniform Enforcement of Foreign Judgments Act and then the 1962 Uniform
Foreign Money-Judgments Recognition Act. The former covers the enforcement of sister state
judgment in implementation of the Full Faith and Credit Clause of the U.S. Constitution. The latter
deals specifically with the recognition and enforcement of judgments from foreign countries. It was
recast recently in the form of the 2005 Uniform Foreign-Country Money Judgments Recognition
Act (UFCMJRA) (Documents, p. ???). The 1962 version of the Act was implemented by 31 States
plus the District of Columbia and the U.S. Virgin Islands. The 2005 version of the Act was so far
implemented by 13 States and the District of Columbia.1 The 2005 UFCMJRA provides in Sec. 5(a)
that “[a] foreign-country judgment may not be refused recognition for personal jurisdiction if: [...]
(3) the defendant, before the commencement of the proceeding, had agreed to submit to the
jurisdiction of the foreign court with respect to the subject matter involved” (Documents, pp. ???).
Finally, some 154 countries, by ratifying the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (Documents, p. ???), have accepted that parties to a
B2B transaction can choose not to take their disputes to a public court at all.
Choice of forum options and clauses will be examined in detail in Chapter 10 Section 2 on
International Commercial Litigation and Section 3 on International Commercial Arbitration.
1 For up-to-date information on the enactment status visit the website of the Uniform Law Commission at
http://www.uniformlaws.org/Act.aspx. Since some States have enacted first the 1962 and then the 2005
version, some 15 States, including Utah, Kansas, Arkansas, Louisiana, Kentucky, Tennessee, Mississippi,
New Hampshire, and Vermont, have not enacted either version.
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However, party autonomy and freedom of contract goes even beyond the mere choice of law and
forum in international B2B transactions. In general, the parties cannot merely choose the contract
or sales law they wish to abide by from a range of different national laws, they can also select
contract or sales rules that are not part of any national legal system or make up their own rules
entirely. One example is Article 6 of the United Nations Convention for the International Sale
of Goods (CISG), which reads: “The parties may exclude the application of this Convention or [...]
derogate from or vary the effects of any of its provisions” (emphasis added). Pursuant to this
provision and within the scope of application of the CISG, parties are literally able to write up their
own contract law. The same deference can be found in the Uniform Commercial Code (UCC),
beginning with §2-301, pursuant to which the obligations of the seller and buyer are determined “in
accordance with the contract.” The same notion is reflected in §2-303 on the Allocation or Division
of Risk (“unless otherwise agreed”) and numerous other provisions of the UCC.
Of course, the freedom of the parties to a contract is not unlimited. First, there are structural limits
in most national legal systems, such as the prohibitions provided by criminal law (fraudulent
contracts or contracts dealing in illegal goods), administrative law (contracts violating antitrust laws
or provisions of environmental or food and drug laws), human rights and labor law, etc. Secondly,
there are limitations for Business-to-Consumer (B2C) contracts. Finally, there are limitations for
contracts where one party takes advantage of its superior bargaining power and/or the inexperience
or lack of information of the other party to achieve a contract that is so grossly unfair that it violates
fundamental principles of justice and equity. The latter set of rules can be found in public
interest/public order/ordre public provisions in many countries, although they generally kick in only
in extreme cases when B2B contracts are concerned.1 Compare the provisions of the UCC, which
talks in §2-302 about “unconscionable” contract or terms, but also assumes in §2-104 that
“merchants” have the “knowledge or skill peculiar to the practices or goods involved in the trans-
action”, i.e. they know what they are doing.
As a result of these various provisions relating to the freedom of contract and providing a very large
measure of party autonomy for B2B transactions, we can conclude that within the outer guard rails
of the law, in 95% of all international business transactions, the parties have broad discretion to
determine the scope of their mutual rights and obligations, as well as the applicable law and forum
for any disputes over these rights and obligations. Naturally, a wide freedom to design virtually all
provisions of a contract includes also many opportunities for making mistakes. In other words, the
freedom of contract includes the freedom to draft or to accept unfavorable contracts and to be bound
by them, for better or for worse.
A particular problem arises because many attorneys, in particular in the United States, use the
freedom of contract in B2B transactions to produce very lengthy and highly detailed contracts for
each individual transaction, including many substantive rules of contract law. In a way, these
attorneys (re-)write the rules of contract law each time they prepare a contract, instead of simply
1 For further discussion see Alexander Bìlohlávek, Public Policy and Public Interest in International Law
and EU Law, Czech Yearbook of International Law, 2012, pp. 117-147.
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subjecting their contract to a pre-existing contract law like the UCC or the CISG. The question is,
of course, whether this effort makes sense, in particular since it costs the clients a lot of money.
Theoretically, it can indeed be in the client’s interest to rely on a set of pre-existing rules, such as
the UCC or CISG, and then to make extensive modifications to those rules for any aspects of them
that are less than favorable for the client in her role as buyer or seller. However, this would require
that the attorneys not only do a careful study of the particular transaction to determine how and why
the general rules of contract law should be modified, it would also require the ability to impose such
modifications, which presumably tilt the balance of the contract in favor of the respective party and
– consequently – against the other party. The reality is usually quite different. First, very few
attorneys will go to the trouble of examining carefully what may go wrong in a particular type of
transaction. For example, the present author frequently meets with the engineers rather than just the
in-house counsel and the sales executives who negotiate the contracts. By asking the engineers “if
something would go wrong with this sale, most likely, what would it be?” we can get a better
understanding whether any problems may have to be anticipated with the performance of the goods
– for example because they are highly innovative and potentially unproven – or whether the main
issues may be with timely delivery, safe transport, export or import licenses, intellectual property
rights, or payment modalities. Unfortunately, the majority of our colleagues, while billing for time
as if they had done such a detailed background investigation, mainly cobble a lengthy contract
together from contracts used in other cases and circulating on the law firm computers. More than
a few times, when we asked a colleague why he or she used a particular phrase or formula in a
contract, the answer we would get is that they did not know but that this is what was usually done
at the firm.
More importantly, contract laws like the CISG or the UCC were drafted by teams of the most highly
respected experts from the respective countries and legal systems and often took years to create and
multiple updates to refine. One could be forgiven for saying that it is somewhat preposterous for an
attorney to think that he or she can do better for each and every transaction or at least for each type
of transactions. Among the distinguishing features of the CISG and UCC is that they are well-
balanced and fair for both sides, which we consider essential, not only because it is often hard to
predict whether one’s client will be sued or may have to sue or even where such a suit may have to
be brought. What matters most in the end is to provide a good contract that ideally avoids any
disputes from arising in the first place, enables the parties to settle most of their disagreements
amicably, and even if litigation or arbitration becomes inevitable, leaves the parties with the feeling
that the outcome of any such dispute settlement was fair and that the business relationship can be
continued. This will rarely happen, however, if a contract is deliberately tilted to favor one side over
the other and to carve exceptions out of contract law systems that have not foreseen them precisely
because they would render the rights and obligations of the parties unbalanced and potentially
unfair. Last but not least, we have seen more than a few contracts that say one thing on page 17 and
quite the opposite on page 53 because it is very hard and – given the legalese favored by many
attorneys to create the impression of highly specialized know-how – probably quite impossible to
avoid such contradictions in a document of 80 or 100 pages that is largely a cut-and-paste product
from multiple earlier contracts with input from multiple different individuals.
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For these reasons, and because we constantly encounter poorly drafted contracts in our international
consulting practice and as international arbitrators, we will put significant emphasis on the develop-
ment of fair and efficient contracts and intelligent choices for law and forum in the coming chapters.
II. Planning for Disputes – Choice of Law and Choice of Forum
As outlined above, parties of B2B transactions are generally free to choose the applicable law and
the forum where any disputes must be settled. This raises the following questions:
• What are sensible choices for law and forum in a given case? What kind of guidance can we
provide for businesses and their legal counsel when planning for disputes?
• How should a choice of law and a choice of forum be implemented in order to be valid and
– if necessary – enforceable?
• What happens if the parties to a B2B transaction fail to make a choice of law and/or a choice
of forum? What happens if the parties make a choice of law and forum but the choice turns
out to be invalid or ineffective?
These issues shall be addressed in turn.
1. What Are Sensible Choices for Law and Forum?
The first rule with regard to making wise choices for law and forum is that the two are always
related. There is no such thing as “the right” law for a particular commercial relationship without
knowing where any disputes would have to be settled. Similarly, there is no “right court” as long
as we don’t know which legal system or set of rules the forum would have to apply. Simply
speaking, a wonderful legal system or set of rules won’t work in the wrong forum; and an otherwise
good and trustworthy forum won’t be a good choice if it has to apply the wrong legal system.
Since there is no “one size fits all” solution and different combinations of law and forum will work
best for different types of transactions and different sellers and buyers, rather than recommending
“a solution”, we have to think about the criteria that determine whether a particular choice is good
or not so good in a particular context.
We have already learned that parties to B2B transactions can literally choose between about 200
national legal systems1 – assuming about 200 sovereign countries around the world – plus at least
1 See UCC §1-301(c)(2): “an agreement by parties to an international transaction that any or all of their rights
and obligations are to be determined by the law of this State or of another State or country is effective,
whether or not the transaction bears a relation to the State or country designated.” By contrast, §187(2)(a)
of the Restatement (Second) of Conflict of Laws requires that the law chosen by the parties has a
“substantial relationship to the parties or the transactions” or that there is “[an]other reasonable basis” for
the parties’ choice.
Courts in the European Union will apply Regulation 593/2008 on the Law Applicable to Contractual
Obligations (“the Rome I Regulation”) to disputes between parties from different countries. Pursuant to
Article 3(1) of the Rome I Regulation, “a contract shall be governed by the law chosen by the parties.” As
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three international legal systems (CISG, Unidroit Principles, and European Common Frame of
Reference) as the contract law to govern the transaction. Fortunately, even the best and most diligent
lawyer will not have to compare all of them before recommending the contract law that should
govern a particular transaction. First, we can sort the 203 or so contract laws around the world
into a far smaller number of families of legal systems. Within each family, the difference between
national legal systems will be quite small and other considerations, such as language, will become
more important.
The families of legal systems around the world are the following:1
• the common law, including the legal systems of the United States of America (with the
exception of Louisiana), the United Kingdom of Great Britain and Northern Ireland (with
the exception of Scotland), Canada (with the exception of Quebec), Australia and New
Zealand;
In modern times, none of these countries relies exclusively on case law and in many areas
they have adopted as many statutory provisions as one might expect in civil law countries.
Importantly, however, Australian, New Zealand, Canadian, and English contract law remain
largely case law based.2 In Australia, a level of harmonization is accomplished by the fact
that the High Court of Australia has the final say over all other courts and thus provides the
one authoritative source of common law;3 a similar situation exists in New Zealand and in
England. By contrast, Canada, with the Sale of Goods Act, and the U.S., with the Uniform
Commercial Code and the respective state-level statutory implementations for commercial
contracts, have achieved a degree of harmonization and simplification in spite of the dualism
between federal and state law. Furthermore, in the U.S., we have the Restatement (Second)
of Contracts, a kind of codification, albeit non-binding, of the common law of contracts that
does not fall under the UCC and its state level implementation.
• the civil law, originating from Roman law and nowadays including the French legal tradition
(largely followed also by Italy, Greece, Spain, Portugal, the Central- and Latin American
van Calster elaborates, “[t]he choice [...] is absolutely free: the law chosen need not have any connection
with the parties or the contract.” See Geert van Calster, European Private International Law, 2nd ed., Oxford
2016, at p. 203.
1 For further analysis see René David & Camille Jauffret-Spinosi, Les Grandes Systèmes de Droit Contem-
porains, 11th ed, Editions Dalloz-Sirey, Paris 2002; and Konrad Zweigert & Hein Kötz, An Introduction to
Comparative Law, Oxford University Press, Oxford, 3rd ed. 1998; for a critique see Mariana Pargendler,
The Rise and Decline of Legal Families, Am.J.Comp.L 2012, Vol. 60, No. 4, pp. 1043-1074. A mediating
approach can be found in Uwe Kischel, Rechtsvergleichung, Beck Verlag, Munich 2015, in particular pp.
217-228. Kischel also provides a discussion of the important idea of legal cultures, see id. p. 229.
2 For further analysis see Michael Whincup, Contract Law and Practice - The English System, with Scottish,
Commonwealth, and Continental Comparisons, Kluwer Law International, Alphen aan den Rijn, 5th ed.
2006.
3 This system has been so successful that at least some commentators reject a need for codification; see, for
example, Warren Swain, Contract Codification in Australia: Is It Necessary, Desirable and Possible?, 36
Sydney L. Rev. 131 (2014).
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countries, including Mexico,1 the US State of Louisiana, the Canadian province of Quebec,
as well as Egypt and – via the reception of the Egyptian civil code – in much of the rest of
the Middle East and North Africa), as well as the German legal tradition (largely followed
also by Austria, Switzerland, Turkey, Central- and Eastern Europe, as well as Japan and
China). Some commentators see the legal systems of the Scandinavian or Nordic countries
as distinct (e.g. Zweigert & Kötz), others put them into the German group. The Russian civil
code – to the extent that it is applied at all – is based on Dutch law, which in turn was close
to the French family or sub-group until the reforms of 1992 and nowadays is closer to the
German legal tradition;
• the socialist legal systems, which have become largely obsolete after the decline and fall of
the Soviet Union and the replacement of most of the socialist laws2 with civil law codes;
• the religious legal systems, which have to be broken down into Jewish law, Muslim law,
Hindu law,3 as well as the Confucian legal tradition;4
• finally the countries where mixed legal systems are applied;5
First, in many of the Arab countries, family and inheritance matters are governed by Muslim
law (Sharia), while commercial and contract law is largely governed by civil law. There may
be some inroads, however, of Islamic principles into commercial and contract law that make
certain types of contracts or certain contract clauses invalid. An example would be the
unenforceability of contracts for the sale of alcohol in Saudi Arabia or the problems that can
arise if a contract specifically provides for interest, which is prohibited by many Islamic
countries. Pakistan is a different example, with a mix of the English Common law tradition
and Islamic law. In India, we have a mix of common law and Hindu law. In China, some
Confucian principles and traditions continue to co-exist with an otherwise modern civil law
following the German legal tradition. In Japan, traditionally the German and French civil law
systems were used as models. However, in more recent times, Anglo-American law has had
a stronger influence.6 Israel has a mix of Common law and Jewish law, but there are also
1 For more information see Stephen Zamora et al., Mexican Law, Oxford University Press, Oxford, 2005.
2 Socialist law was characterized by the priority of public law over private law, since private ownership of
factors of production was frowned upon; importantly, Socialist law was also the domain of “mechanical
jurisprudence” (Kühn) via a strictly positivist interpretation and application of black letter law by the public
administration and the courts.
3 See, for example, Menski, Hindu Law Beyond Tradition and Modernity, Oxford University Press, Oxford,
2009.
4 Tibet had a distinctly Buddhist legal system from 1940 to 1959. Nowadays, some remnants can still be
found there, as well as in Laos, Myanmar, Thailand, and Sri Lanka.
5 In general, see Reinhard Zimmermann, Daniel Visser & Kenneth Reid, Mixed Legal Systems in
Comparative Perspective, Oxford University Press, Oxford, 2005.
6 See Hiroshi Oda, Japanese Law, Oxford University Press, Oxford, 3rd 2011.
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remnants of Ottoman or Muslim law, as well as some German legal traditions.1 Finally, the
legal systems of the African countries are usually a mix of pre-colonial customs, rules
inherited from the former colonial powers, and more recent reforms and developments. Thus,
an influence of English Common law can be detected in most countries that were once
British colonies, while the countries that were at some point French colonies often still show
a noticeable influence by the French Code Civil. Finally, South African law is a mix of
Roman-Dutch and English Common law.
For international business transactions, we may safely assume that none of the legal systems
mentioned above are inherently unfair or unbalanced. Thus, the most important qualities of the
underlying law are clarity, predictability, and ease of application. On these criteria, there are clear
winners and clear losers and a few that are kind of in the middle. In a nutshell, case law systems will
always be more cumbersome to research and come up with more ambiguous results simply on
account of the many voices that have a say in the development and interpretation of the law. By
contrast, statutory law systems, often referred to also as civil law systems or Continental European
legal systems, rely on one relatively compact source of rules. That being said, older legislation will
have experienced more evolutionary changes in practice which means that a lot of case law may
have to be taken into account to understand and interpret how the antiquated statutory language
should be applied today. As a result, the most recent codifications generally provide the easiest and
quickest results and require few if any updates via case law.2
In the author’s opinion, and this is certainly somewhat subjective, the mixed legal systems are the
least suitable for international business transactions. Typically, even the lawyers in the respective
countries will not easily agree on the solution to cases that are just a bit more complicated than the
average. This makes it hard, if not impossible, for lawyers in other countries to understand and
predict how an issue should be resolved and how a lawsuit might end in such a legal system.
Whenever lawyers from mixed legal systems draft contracts, they have a tendency to select English
law, if their country was once an English colony and/or their legal system still carries some of the
marks of English common law. However, many English lawyers who are also trained in other legal
systems confirm that English law is bulky and unwieldy and time-consuming to work with. The
same would be true, by the way, for the U.S. common law of contract, i.e. outside of the scope of
application of the UCC, unless the parties make an express choice of law in favor of the Restatement
(Second) of Contracts.
1 For further analysis see, for example, Menachem Mautner, Law and Culture of Israel, Oxford University
Press, Oxford 2011; Eyal Zamir, Private Law Codification in a Mixed Legal System – the Israeli Successful
Experience, 32 IUS Gentium 233 (2013).
2 This is why “[c]odification [...] has increasingly become the preferred method of shaping the development
of commercial law”. See David Frisch, Commercial Common Law, the United Nations Convention on the
International Sale of Goods, and the Inertia of Habit, Tulane Law Review 1999, Vol. 74, No. ???, pp. 495-
559.
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If the mixed legal systems had originally experienced an influence from French law, as it is the case,
for example, in the Middle East,1 the lawyers like to select French law as the governing law for their
international contracts. Unfortunately, the French Civil Code dates back to the year 1804 and,
although a stroke of genius at the time, has become rather outdated and somewhat of a quilt of
frequent amendments and judicial interpretations.2 Much the same has to be said about the German
BGB from the year 19003 and the Swiss Civil Code of 1907.4
This leaves us with just a handful of truly modern codifications, three on the national level and
three on the international level. The Dutch Civil Code (Wetboek) is the most modern compre-
hensive codification in force anywhere. It was substantially reformed and recast in 1992. Although
the official language is Dutch, a semi-official translation into English is available online.5 However,
for lawyers and researchers unfamiliar with the Dutch language, the practice of the courts in the
interpretation of the Wetboek is not accessible.
The second national codification of good quality and relatively recent vintage is the Restatement
(Second) of Contracts in the U.S. (Documents, p. ???). Interestingly, this is a private effort by the
American Law Institute with the help of distinguished experts from around the country and the
world. Starting in 1962 and finalized in 1981, the experts developed not a treatise on the common
law of contracts, nor a commentary on its principles and rules, but an actual code with sections and
paragraphs that could be enacted as statutory law without further ado. Although nobody has actually
enacted it as law, the Restatement could be chosen as the law governing a contract by the parties in
a B2B transaction. However, while the Restatement has many strengths, for example its relatively
clear and modern language and its extensive coverage of topics such as fraud and mistake, which
are poorly covered in several other codifications, most notably the CISG, the Restatement is not
really all that modern as a codification. Rather than a forward looking contract law for the 21st
century, the Restatement is looking backward and “restates” what the courts have said about the
common law of contracts over the decades and centuries preceding it.
1 The French Code Civil was translated and adapted for Egyptian needs by Abd El-Razzak El Sanhuri (1895-
1971). Also referred to as the Sanhuri Code of 1948, the contract law is virtually the same as in the French
Code Civil. Differences pertain, for example, to property law, where the more socialist system of Egypt at
the time shines through. The Sanhuri Code, in turn, stood model for the civil codes of Syria, Libya, Saudi
Arabia, and many of the remaining countries of the Middle East. For more information see, inter alia, Chibli
Mallat: Introduction to Middle Eastern Law, Oxford University Press, Oxford, 2007.
2 For further analysis see Eva Steiner: French Law – A Comparative Approach, Oxford University Press,
Oxford, 2010.
3 More information can be found in Nigel Foster & Satish Sule: German Legal System and Laws, Oxford
University Press, Oxford, 4th ed. 2010.
4 It may be of interest for some that the Turkish Civil Code is by and large a translation of the Swiss Civil
Code.
5 Several parts of the Russian Civil Code of 1996, including the second part on the law of obligations, are
essentially translations of the Dutch Wetboek. The Russian Civil Code, in turn, is the model for the codes
applicable in many of the CIS States. For more information see William E. Butler: Civil Code of the
Russian Federation, Oxford University Press, Oxford, 2003; and more generally William Butler: Russian
Law, Oxford University Press, Oxford, 3rd ed. 2009.
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The third codification on the national level and the other rulebook in the common law tradition is
the Uniform Commercial Code (UCC) in the U.S. From 1942 to 1952, experts engaged by the
National Conference of Commissioners on Uniform State Laws and the American Law Institute
produced the first edition of this model law. Since then, there have been a number of supplementa-
tions and revisions. The UCC has several strengths but also a number of weaknesses when it comes
to its use in IBTs. First, it should be remembered that there is really not one UCC in the sense of one
and the same codification that would apply all across the United States of America. Commercial law
in the U.S. is state law. Therefore, the UCC is merely a model for voluntary adoption by the 50
States of the Union. Although the large majority of the States did enact legislation based on the
UCC, many of them made non-uniform amendments at the time of first enactment or at later stages.
Also, since the UCC does not provide definitions for important terms like “offer” or “acceptance”,
these have to be supplemented by common law (see §1-103(b)), which is again different in different
States. Furthermore, after relatively uniform commercial laws were adopted on the State level, they
are now evolving via case law and they are doing so in different directions since there is no one
court that plays the role of final arbiter when it comes to the interpretation of the commercial laws
based on the UCC.1 Another major weakness of the UCC is its rather convoluted language, certainly
when compared with the Restatement (Second) on Contracts or a codification like the CISG or the
CFR. All of this makes it relatively difficult, even more so for foreign lawyers, to determine with
some degree of certainty the precise content of the UCC rules, as applicable say in New York,
dealing with a particular issue.2
The three international codifications are the 1980 United Nations Convention on Contracts for the
International Sale of Goods (CISG), the Unidroit Principles of International Commercial Contracts
(PICC), as last updated in 2010, and the Common Frame of Reference (CFR) of the European
Union, as finalized in 2012. All three of these follow the civil or Continental European legal
tradition.
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is the
most important of the three because it is actually law in force in some 85 countries, including major
trading nations such as the United States, Canada and Mexico, China, Russia, and the majority of
the EU Member States.3 Unfortunately, law schools have done a poor job at making this fact widely
known. Therefore, in many of the countries that have ratified the CISG, even today, only a small
percentage of law graduates is able and willing to work with this set of rules and many briefs and
judgments are written that ignore its applicability.4
1 See Gerald T. McLaughlin, The Evolving Uniform Commercial Code: From Infancy to Maturity to Old
Age, 26 Loy.L.A. L.Rev. 691 (1993).
2 For anyone having to work with and seeking to understand the UCC, the most recommended work is James
J. White & Robert S. Summers, Uniform Commercial Code, West Publishing, Hornbook Series, St. Paul, 6th
ed. 2010.
3 The current list of signatories can be found on the website of UNCITRAL at
https://mckinneylaw.iu.edu/net/faculty/voting.cfm. See also Documents, p. ???.
4 See David Frisch, Commercial Common Law, the United Nations Convention on the International Sale of
Goods, and the Inertia of Habit, Tulane Law Review 1999, Vol. 74, No. ???, pp. 495-559.
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Professor Dodge of the UC Davis School of Law made a passionate appeal in favor of teaching the
CISG already in first-year Contracts. Referring to it as “[the other] body of U.S. contract law”, he
argues that “[t]he failure to teach the CISG in first-year Contracts is problematic. As a treaty the
CISG is federal law, which preempts state common law and the UCC. Whenever a party whose
place of business is in the United States contracts for the sale of goods with a party whose place of
business is in another country that has joined the CISG, it is the CISG and not the UCC or the
common law that governs the formation of their contract and their respective rights and obligations
under it. This means that the CISG is potentially applicable to an enormous number of contracts. As
of [January 2017, 84 countries???] are parties to the CISG, including Canada, Mexico, Germany,
France, China [...]. The lawyers who draft these contracts and litigate disputes arising under them
will not necessarily have taken International Business Transactions in law school, which means that
if they are not exposed to the CISG in Contracts, they will probably not be exposed to the CISG at
all. Thus, by failing to teach the CISG in Contracts, American law schools are producing lawyers
who are ill equipped to represent their clients competently.”1 One way of fixing the problem, as
suggested by Kina Grbic, would be to insert explicit language into the UCC “that Article 2 does not
apply to a sale of goods contract when a buyer and seller have their principal place of business in
two different contracting states under the CISG.”2 At least for the time being, however, neither the
suggested change of the UCC nor the more widespread teaching of the CISG in American law
schools is likely to happen. The situation is not always better in other Contracting States.
1 William S. Dodge, Teaching the CISG in Contracts, 50 J. Legal Educ. 72, March 2000, at pp. 72-73.
2 Kina Grbic, Putting the CISG Where It Belongs: In the Uniform Commercial Code, 29 Touro L. Rev. 173
(2012), at p. 175. The underlying idea is supported, inter alia, by John F. Coyle, The Case for Writing
International Law into the U.S. Code, 56 B.C. L. Rev. 433 (2015).
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The willful ignorance of many lawyers, including in the United States, is unfortunate.1 The CISG
actually has many strengths and few weaknesses. The most important strength is that it is a universal
code with universal application. Businesses around the world and their legal counsel can all look
at the same set of rules and nobody has to submit to someone else’s laws. Second, it is available in
all official languages of the UN: Arabic, Chinese, English, French, Russian, and Spanish, and in
many more official translations. It is also rather well crafted, easy to read and understand, and quite
short. Furthermore, there is a rapidly growing body of case law and academic literature that we can
call on to clarify how the CISG should be applied to a particular situation.2 The only noticeable
1 Professor Fitzgerald conducted an empirical study on the usefulness – or lack thereof – of the CISG and the
Unidroit Principles for American practitioners. In the introduction, he writes that “[i]n an era of globaliza-
tion it is perplexing that so many U.S. practitioners, jurists, and legal academics continue to view contract
issues as governed exclusively by state common law and the Uniform Commercial Code. In essence, a
significant number of lawyers may be defaulting to the wrong law, in the absence of an effective choice of
law clause, when trying to determine the rights and responsibilities arising out of international commercial
transactions.” The results of his study are summarized as follows: “In sum, while the CISG and UNIDROIT
Principles provide numerous concepts and rules that could be of use in serving client interests, they are
being underutilized. Moreover, they are being underutilized not because of a conscious selection of a
‘better’ rule or approach found in the common law or the UCC. Rather, they are being ignored either
because of outright ignorance or because these instruments are simply unfamiliar and perceived – correctly
(in the case of the UNIDROIT Principles) or quite incorrectly (in the case of the CISG) – as ‘foreign’ law.
The CISG is, and should be recognized as, the default law for a vast number international commercial
transactions involving U.S. parties. The persistent failure to do so is neither professional nor good
lawyering, and may well constitute malpractice. In the era of globalization, an era that international trade
helped foster and create, legal ethnocentricity has no legitimate role. American lawyers, be they practitio-
ners, jurists, or academics, need to be more aware of the CISG and the UNIDROIT Principles.” See Peter L.
Fitzgerald, The International Contracting Practices Survey Project: an Empirical Study of the Value and
Utility of the United Nations Convention on the International Sale of Goods (CISG) and the Unidroit
Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the
United States, 27 J.L & Com. 1 (2008).
2 The United Nations Commission on International Trade Law (UNCITRAL) publishes a Digest of Case Law
on the CISG. The 2012 edition is freely available online: http://www.uncitral.org/pdf/eng-
lish/clout/CISG-digest-2012-e.pdf. Even more useful is the electronic library of case law maintained by
Pace Law School. It can be searched in various ways, including by relevant article of the CISG, by country,
case name, goods involved, or keyword. There are more than 3,000 decisions reported in the database, with
summaries in English of those decisions that are not originally in English language. Pace maintains this
collection with the explicit purpose of “debunking the myth” that “there are hardly any cases on the CISG”.
As far as literature in English is concerned, there are numerous treatises and two very good
commentaries. The work that stands head and shoulders above the rest and should be in the library of every
good international law firm is Peter Schlechtriem & Ingeborg Schwenzer (eds), Commentary on the UN
Convention on the International Sale of Goods (CISG), Oxford University Press, 4th ed. 2016. Not as
comprehensive and up to date but also not bad: Stefan Kröll, Loukas Mistelis & Pilar Perales Viscasillas
(eds), UN Convention on Contracts for the International Sale of Goods (CISG) - Commentary, Munich
2011. Other works worth mentioning include Peter Huber & Alastair Mullis, The CISG - A New Textbook
for Students and Practitioners, Sellier, Munich, 2nd ed. 2014; as well as Joseph Lookofsky, Understanding
the CISG in the USA, Kluwer, 4th ed. 2012.
Finally, worth mentioning is also the work of the CISG Advisory Council, a private group of
experts with observer status at UNCITRAL and Unidroit. The Advisory Council publishes opinions about
the interpretation of specific articles of the CISG and, more broadly, the way the Convention should be
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downside, besides the fact that too many lawyers are still poorly trained to apply it, is the limited
coverage of the CISG.1 Pursuant to Article 4 CISG,
“This Convention governs only the formation of the contract of sale and the rights
and obligations of the seller and the buyer arising from such contract. In particular,
except as otherwise expressly provided in this Convention, it is not concerned with:
(a) the validity of the contract or of any of its provisions or of any usage;
(b) the effect which the contract may have on the property in the goods sold.”
Thus, the CISG does not deal with questions such as invalidity on account of mistake or fraud, issues
of party capacity, or the rights of third parties, for example if the seller has to make delivery to a
third party. As Article 4(b) clarifies, the CISG also does not deal with the transfer of title and related
issues, in particular the retention of title and its consequences.2 Logically, tort actions are not
covered either.3 In this regard, the CISG is an incomplete regulatory framework4 and the parties
should specify which (national) legal system they wish to apply if a question should arise that is not
covered by the CISG. In the absence of party agreement on the issue, the applicable backup system
has to be determined pursuant to the rules of private international law, respectively the rules on
international conflict of laws, applicable where the forum is located. By contrast, questions that are
covered by the CISG but not expressly resolved should be answered by recourse to general
principles of international contract law before any recourse to national law(s). In practice, however,
the incompleteness of the CISG has not prevented it from successfully harmonizing the most
important issues related to international sales transactions.
The Unidroit Principles have been called “an international restatement of contract law” by Michael
Bonell, one of its authors and most ardent supporters.5 While the CISG could still be called a pre-
dominantly continental European codification because of its closeness in style and method to the
applied to certain problems, such as electronic communications (Opinion No. 1), or the calculation of
damages under Articles 74 (Opinion No. 6) as well as 75 and 76 (Opinion No. 8). The opinions, references
to case-law citing them, as well as bibliographic references, can be accessed at http://www.cisgac.com.
1 For a more sceptical view of unification and harmonization in general see Paul B. Stephan, The Futility of
Unification and Harmonization in International Commercial Law, 39 Va. J. Int’l L. 743 (1999).
2 See below, p. ??? and ???.
3 For further discussion see Allison E. Butler, A Practical Guide to the CISG: Negotiations Through
Litigation, Aspen Publishers 2007, at pp. 14-16; as well as ???
4 At the same time, Schlechtriem writes that “[t]he phrase ‘governs only’ (formation, rights, and obligations)
is too narrow and should be read as ‘governs without doubt’, for the Convention also governs interpretation
of statements, conduct, and contracts (Article 8), the applicability of usage and custom (Article 9), (freedom
of) form (Article 11 [...]), termination or modification of contracts by agreement (Article 29(1)), interpreta-
tion of the Convention and gap filling [...].” Peter Schlechtriem, Article 4, in Peter Schlechtriem & Ingeborg
Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG), Oxford, 4th ed.
2016, para. 3 at p. ???.
5 See Michael J. Bonell, An International Restatement of Contract Law - The Unidroit Principles of
International Commercial Contracts, 3rd ed., Transnational Publishers Inc., Ardsley, New York, 2005.
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French Code Civil and the German BGB,1 the Unidroit Principles have strong roots also in the
English common law of contracts and represent the most universal of contract law codifications.2
The Principles themselves are available in English, French, German, Italian and Spanish as official
languages, as well as semi-official translations into Arabic, Chinese, Greek, Hungarian, Japanese,
Persian, Portuguese, Romanian, Russian, Turkish, and Ukrainian from the website of the Institute.
There is also Unilex, a database with case-law organized by date, by court, by arbitral tribunal, and
by issue, freely available for everyone. Furthermore, there is a rapidly growing body of literature
discussing the PICC and their interpretation from a variety of national and international perspectives
and enabling both academics and practitioners to understand how the Principles should be and are
being applied in practice.3
The Common Frame of Reference is the most recent, the most comprehensive and the most
ambitious codification of transnational contract law. Although essentially an academic exercise, it
was funded by the EU Commission and many, including the present author, would like to see it
evolve into a pan-European civil code. The following article elaborates on its history and scope.
Frank Emmert
The Draft Common Frame of Reference (DCFR) – the Most Interesting Development in
Contract Law since the Code Civil and the BGB
Cuadernos de la Maestría en Derecho, Universidad Sergio Arboleda, Edición anual No. 2,
Bogotá 2012
I. What Is the “Draft Common Frame of Reference”?
After the horrors of World War II, European integration was conceived by Jean Monnet, and the
great statesmen who understood and picked up his ideas, as a radically new way of securing long
term peace and prosperity in Europe. Integration instead of exclusion, cooperation instead of
discrimination, community instead of nationalism. In 1953, an initial six European states, including
the “arch enemies” France and Germany, tied their fates together in the European Coal and Steel
Community, designed to remove control over key industries for military buildup from nationalist
1 Check this??? and provide sources???
2 See, for example, Henry Deeb Gabriel, Unidroit Principles as a Source of Global Sales Law, 58 Vill. L.
Rev. 661 (2013)
3 While not a “commentary” in the strict sense, extensive “comments” on the PICC in an article-by-article
format can be downloaded free of charge from the website of the Institute at http://www.unidroit.org/eng-
lish/principles/contracts/principles2010/integralversionprinciples2010-e.pdf.
A commercial commentary is available from Oxford University Press, Stefan Vogenauer (ed),
Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC), 2nd ed. 2015.
While nowhere near the level of sophistication of the Schlechtriem/Schwenzer Commentary on the CISG
(see above, note ???), this is a very useful work for anyone seeking to understand the PICC and work with
them in practice.
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politicians and giving it to dispassionate European bureaucrats.1 The European Economic Com-
munity and the European Atomic Energy Community followed in 1957. Since then, membership in
the greatest experiment in voluntary integration of sovereign states has grown to 27, with several
more countries currently negotiating entry to the club. Among the many accomplishments of
European integration is a period of peace between its Member States that is unprecedented in
European history, as well as a general level of prosperity that has never been seen before in this part
of the world. Although these accomplishments have recently been cast in a less favorable light due
to the economic crisis in Europe, the appeal of membership may well be greater than ever, which
is evidenced, for example, by the application of Iceland in the wake of its economic meltdown. As
more and more countries are coming to realize, being part of the European Union and having
partners that are not only fair-weather friends but that are contractually obligated to stand together,
is even more precious in times of hardship and crisis. For this reason, the doomsday sayers, who
have been predicting the end of European integration as we know it, will be proven wrong once
again and it is more likely than not that the EU will accelerate its integration program because of the
crisis, rather than slow it down, let alone abandon it altogether.
One of the key components of European integration is the development of the “internal market” of
the EU, which is defined as “an area without internal frontiers in which the free movement of goods,
persons, services and capital is ensured”.2 Merging the relatively small national markets of the
Member States into one large European market yields numerous economic benefits. The ability to
buy and sell to and from all Member States greatly increases trade and competitive pressures in the
EU, resulting in vastly increased choices for consumers in combination with lower prices for higher
quality goods and services.3
The free movement of goods, services, people, companies, and capital, however, has presented and
continues to present various challenges to European regulators and law makers. To give but one
example, if goods can move freely from one Member State to another under the Cassis de Dijon
principle that what is good enough in one Member State has to be good enough for the other
Member States,4 a formidable race to the bottom could ensue. To ensure that Member States are not
tempted to attract investment and jobs by waiving standards for product safety, environmental and
workplace protection, etc., the EU has embarked on a massive program of harmonization of these
1 For more information see, for example, Dinan, D. (2004). Europe Recast - a History of European Union.
Basingstoke: Palgrave Macmillan.
2 See Article 26(2), formerly Article 14(2), of the Treaty on the Functioning of the European Union TFEU.
3 Good books on the subject include: Artis, M. & Nixson, F. (Eds., 2007). The Economics of the European
Union - Policy Analysis (4.th ed.). Oxford: Oxford University Press; Jørgen Drud Hansen, J. D. (2001).
European Integration - an Economic Perspective. Oxford: Oxford University Press; McDonald, F. &
Dearden, S. (2005). European Economic Integration (4.th ed.). Harlow: Financial Times/Prentice Hall;
Molle, W. (2006). The Economics of European Integration - Theory, Practice, Policy (5th ed.). Aldershot:
Ashgate ; Neal, L. & Barbezat, D. (1998). The Economics of the European Union and the Economics of
Europe. Oxford: Oxford University Press; and in particular Pelkmans, J. (2006). European Integration -
Methods and Economic Analysis (3.rd ed.). Harlow: Prentice Hall/Financial Times.
4 See the Judgment of the European Court of Justice of 20 February 1979 in Rewe-Zentral AG v
Bundesmonopolverwaltung für Branntwein, 1979 ECR 649, in particular Rec. 14.
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rules across the Member States, essentially replacing diverging national legislation with common
European rules.
Intensive trade between Member States with different legal rules and systems also creates challenges
in the area of private international law. Every time a contract is made between parties in different
Member States, the law governing the contract has to be determined. At least if the parties are both
merchants, they have numerous choices regarding the applicable law. These choices include seller’s
law, buyer’s law, the law of pretty much any other country, as well as certain international contract
law regimes, such as the United Nations Convention on Contracts for the International Sale of
Goods (CISG),5 or the infamous “lex mercatoria”.6 And if the parties did not make a choice of law
at all, or if their choice was ineffective, the applicable law has to be determined on the basis of
private international law, which may in turn differ from one forum to another, potentially causing
significant uncertainty and even an incentive for a race to the courthouse.
Against this background, harmonization of contract law across all Member States of the EU has long
been an attractive idea. However, while the EU was explicitly given powers to pursue legal
harmonization in areas such as environmental protection (Article 192 TFEU), free movement of
services (Article 59 TFEU), the right to establishment for self-employed natural and legal persons
(Article 50 TFEU), and the free movement of employed persons (Article 46 TFEU), a power to
5 The literature on the CISG is vast. An easy introduction is supplied by: Ferrari, F. (2011). Contracts for the
International Sale of Goods - Applicability and Applications of the 1980 United Nations Sales Convention.
The Hague: Martinus Nijhoff; see also Huber, P. & Mullis, A. (2007). The CISG - a New Textbook for
Students and Practitioners. München: Sellier; and Lookofsky, J. (2008). Understanding the CISG in the
USA (3.rd ed.). The Hague: Wolters Kluwer Law International. For comprehensive analysis, see Kröll, S.,
Mistelis, L. & Perales, P. (Eds., 2011). UN Convention on Contracts for the International Sale of Goods
(CISG) – Commentary. München: Verlag C. H. Beck; and, in particular, Schlechtriem, P. & Schwenzer, I.
(Eds., [2016]). Commentary on the UN Convention on the International Sale of Goods-CISG ([4th] ed.).
Oxford: Oxford University Press.
6 Literally translated, “lex mercatoria” means “law of merchants”. Commonly, the reference is to the customs
and unwritten rules applied within a certain circle of traders. Essentially, these were self-enforced: if you
didn’t play by the rules, your former business partners would shun you and/or you could not get deals or
credit on the same good terms (any more). On the one hand, the lex mercatoria could differ from one trade
or industry to another, on the other hand, it was never written down, let alone adopted as law, in any
coherent and systematic fashion. Entirely wrong is, therefore, the definition provided by “The Free
Dictionary by Farlex”, which says that LEX MERCATORIA is “[t]hat system of laws which is adopted by
all commercial nations, and which, therefore, constitutes a part of the law of the land.” (see http://legal-dic-
tionary.thefreedictionary.com/Lex+mercatoria). Fortunately, the core of the lex mercatoria was eventually
codified and is now available to us in multiple languages in the form of the Unidroit Principles of Inter-
national Commercial Contracts adopted by the International Institute for the Unifcation of Private Law
UNIDROIT in Rome in 1994 and revised in 2004, 2010 and 2016, available online at http://www.uni-
droit.org/unidroit-principles-2016/official-languages/english-integral. Even these, however, are not part of
the law of the land anywhere in the world and only become applicable if merchants agree to use them as
(part of) the law to govern their contract by explicit reference to the Unidroit Prinples or the lex mercatoria.
For comprehensive analysis of the UNIDROIT Principles see: Vogenauer, S. & Kleinheisterkamp, J. (Eds.,
2009). Commentary on the Unidroit Principles of International Commercial Contracts (PICC). Oxford:
Oxford University Press.
For further discussion of the Unidroit Principles and the lex mercatoria, see below, pp. ???.
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replace Member State contract laws with a common European system is not explicitly provided in
the Treaties.1 Nevertheless, the European Commission, with encouragement and support from the
European Parliament, started as early as 1974, to play with the idea of a “European Code of
Obligations”.8 By 1980, a group of experts from all Member States, most of them academics, had
been composed and by 1995, this group, on the basis of extensive comparative analysis of the legal
systems of all Member States of the EU and the CISG and even the American Uniform Commercial
Code (UCC), had completed the first phase of its work: “The Principles of European Contract Law
(PECL), Part I, Performance, Non Performance and Remedies.”(Lando & Beale, 2000, p. xi)
As the name suggests, these “Principles” were no code at all, certainly not in the form of binding
legislation. They were, however, formulated in such a way that they could be adopted as legislation,
much like the well known model codes in the American system, with the UCC just the best known
example. And although not a single country has as yet adopted the Principles as domestic law, and
they remain, therefore, really just a good idea, these European Principles quickly became immensely
popular among comparativists and private international lawyers. This popularity is based on two
grounds. First, the team around Professor Ole Lando had accomplished a genuine synthesis of all
European contract laws, to the extent that they found broad support in every single Member State.
Second, and even more importantly, the Principles are crafted in elegant, simple, and efficient
language, much easier to understand than any other contract law around the world.
This explains why the Lando Group continued, and in 1999 presented the second phase of its work,
this time covering rules on formation of contracts, authority of agents to bind their principal, validity
of contracts, interpretation, content, and effects.9 A third part followed in 2003.10 It also explains
why other groups have become busy11 and have been working, with the same or similar methods,12
1 To retain their sovereignty, the Member States have clearly established the principle of enumerated powers
codified in Article 5 TEU: “(1) The limits of Union competences are governed by the principle of conferral.
... (2) Under the principle of conferral, the Union shall act only within the limits of the competences
conferred upon it by the Member States in the Treaties ... . Competences not conferred upon the Union in
the Treaties remain with the Member States.”
8 Ole Lando tells the story “How It Started” in the Preface Lando, O. & Beale, H. (Eds., 2000), Principles of
European Contract Law (p. xi). The Hague: Wolters Kluwer Law International.
9 Lando, O. & Beale, H. (Eds., 1999). Principles of European Contract Law, Parts I and II. The Hague:
Wolters Kluwer Law International.
10 Lando, O., Clive, E., Prüm, A. & Zimmermann, R. (Eds., 2003). Principles of European Contract Law Part
III. The Hague: Wolters Kluwer Law International. This third part covers plurality of parties, assignment of
claims, substitution of new debtor: transfer of contract, set-off, prescription, illegality, conditions, and
capitalization of interest.
11 To name just a few, the Lando Commission was succeeded by the Study Group on a European Civil Code
in 1998 and from 1992 to 2005, the European Group on Tort Law produced the Principles of European Tort
Law (PETL). For much more detail on these initiatives and a comprehensive bibliography see: Antoniolli,
L. & Fiorentini, F. (2011). A Factual Assessment of the Draft Common Frame of Reference. (pp. 3-7 and
419 et seq). Munich: Sellier.
12 An interesting approach was also pioneered by former Advocate General Walter van Gerven with the Ius
Commune Casebook series. The editors collect national court judgments from across the Member States of
the EU and show that comparable fact scenarios result in comparable judicial decisions, which in turn
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in other areas of civil law. After broad consultations with Member State governments, enterprises,
legal professionals, consumer organizations, and other stakeholders, the EU Commission, in its 2003
Action Plan for European Contract Law,13 announced the concept of a Common Frame of Reference
(CFR), envisioned as a collection of the “best solutions” for definitions, terminology, and
substantive rules in European private law. To this end, the various academic groups were brought
together, the pre-existing Principles were united, and the remaining gaps were filled. Although the
Commission and the academic study groups nowadays avoid the politically sensitive language of
a “European Civil Code”, the 2009 Draft Common Frame of Reference, as the preliminary end result
of the comparative study and drafting process, retains the format of a model code and, fortunately,
also retains the elegance, efficiency, and comprehensibility that were the hallmark of the original
European Principles.14
The DCFR is organized by “books” in the following manner:
• Book I covers “General Provisions”, such as the “intended field of application”, the principle
of “good faith and fair dealing”, and rules about “computation of time”.
• Book II covers “Contracts and Other Juridical Acts” in a general manner, with chapters on
“general provisions”, “non-discrimination”, “marketing and pre-contractual duties”, “for-
mation”, “right of withdrawal”, “representation”, “grounds of invalidity”, “interpretation”,
as well as “contents and effects of contracts”.
• Book III covers “Obligations and Corresponding Rights”, in particular “performance”,
“remedies for non-performance”, problems related to “plurality of debtors and creditors”,
“change of parties”, “set-off and merger” of contracts, and “prescription”.
• Book IV, in many ways the heart of the code, covers “Specific Contracts and the Rights and
Obligations Arising from Them”, with chapters on “sales”, “lease of goods”, “services”,
“mandate contracts”,15 “commercial agency, franchise and distributorship”, “loan contracts”,
“personal security”, and “donation” agreements.
proves the common core or common heritage of law in Europe. For examples in the Ius Commune
Casebooks for the Common Law of Europe series by Hart Publishing see: Beale, H., Hartkamp, A., Kötz,
H. & Tallon, D. (Eds., 2002). Cases, Materials and Text on Contract Law. Oxford: Hart Publishing;
Beatson, J. & Schrage, E. (Eds., 2003). Cases, Materials and Texts on Unjustified Enrichment. Oxford:
Hart Publishing; Micklitz, H., Stuyck, J. & Terryn, E. (Eds., 2010). Cases, Materials and Text on Consumer
Law. Oxford: Hart Publishing; Schiek, D., Waddington, L. & Bell, M. (Eds., 2007). Cases, Materials and
Text on National, Supranational and International Non-Discrimination Law. Oxford: Hart Publishing; and
Van Gerven, W. (2001). Tort Law. Oxford: Hart Publishing [as well as van Erp, S. & Akkermans, B. (Eds.,
2012). Cases, Materials and Text on Property Law, Oxford: Hart Publishing].
13 EU Commission (Ed.). Action Plan on a More Coherent European Contract Law, 12 February 2003,
COM/2003/68 fin.
14 The full text of the Outline Edition of the Principles, Definitions and Model Rules of European Private Law
- Draft Common Frame of Reference (DCFR) can be downloaded for free at https://www.law.ku-
leuven.be/web/mstorme/2009_02_DCFR_OutlineEdition.pdf (Von Bar, Clive, & Schulte-Nölk, 2009). [See
also Documents, pp. ???]
15 These are essentially personal agency contracts.
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• Book V deals with “Benevolent Intervention in Another’s Affairs”.
• Book VI covers “Non-Contractual Liability Arising out of Damage Caused to Another”, i.e.
tort law.
• Book VII deals with “Unjust Enrichment”.
• Book VIII is about “Acquisition and Loss of Ownership of Goods”.
• Book IX covers “Proprietary Security in Movable Assets”.
• Book X is about “Trusts”.
• Finally, there is an extensive annex with definitions and an index, bringing the entire
document to a good 600+ pages.
As can been seen even from this extremely brief introduction, considerable time and money has been
expended for the development of this Draft and this begs the question: What is the point, what is the
purpose, beyond mere academic curiosity, what is the usefulness of the Draft Common Frame of
Reference? This shall now be addressed in the second part of the article.
II. What the Draft Common Frame of Reference Can and Cannot Do Today
The declared purposes of the DCFR are actually quite modest. First, and consistent with the mandate
given to the drafters by the EU Commission, the DCFR is “a possible model for a political CFR”
(Von Bar, Clive & Schulte-Nölk, 2009, para.6 p.7) a proposal for what could eventually evolve into
a European Code of Obligations. Along this path, the DCFR is more likely to be used as a quarry,
from which precious stones are mined to be used in other constructs,16 although it could just as well
form a blueprint to be adopted, lock stock and barrel, as binding European legislation.17
The second purpose is for “legal science, research and education” (Von Bar, Clive & Schulte-Nölk,
2009, para.7 p.7), to show to students, reseachers and professors the vast areas of private law that
are indeed very similar across Europe, or at least typically lead to similar, if not identical, outcomes,
and “the relatively small number of cases in which the different legal systems produce substantially
different answers to common problems.” (Von Bar, Clive & Schulte-Nölk, 2009, para.7 p.7). Indeed,
when I was Dean of an international law school in the Baltics in the early 2000s, where we delivered
a law program in English to students from a number of different countries, I taught Contract Law
on the basis of the PECL instead of any one of the national contracts laws, which were still in flux
in the early years of transition from Communism, and in any case where not available in English or
any one other language accessible to all of our students. What surprised me most about this
experiment was how easy it was to communicate not only the basics but also the intricacies of this
16 The Outline Edition of the DCFR itself refers to a European directive on consumer contractual rights as an
example, see paras. 59 et seq., in particular para. 62, of the Introduction (on p. 37) (Von Bar, Clive, &
Schulte-Nölk, 2009).
17 Cf. According to the European Commission (2011). Proposal for a Regulation of the European Parliament
and of the Council on a Common European Sales Law, 635 final, Brussels 11 October 2011, from:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0635:FIN:EN:PDF, 27.3.2012.
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field of law on the basis of the PECL. With my German background, I had previously thought of the
German Bürgerliches Gesetzbuch (BGB) as the pinnacle of wisdom and had greatly enjoyed my
studies under giants like Dieter Medicus in Munich. While I had already heard that the Dutch
Wetbook was a much more modern and easier code than the BGB and the French Code Civil, it is
one thing to hear such claims and quite another to experience that, indeed, there could be such a
thing as legislation more logical and systematic and ultimately more accessible than German
legislation.
The third declared purpose of the DCFR is to provide “a possible source of inspiration” (Von Bar,
Clive & Schulte-Nölk, 2009, para.8 p.7-9) for legislative drafters. This is different from the first
purpose because it is aimed primarily at the Member State level, as well as any other countries
around the world, where efforts are undertaken at modernization of contract law, independent from
the motive of harmonization in the EU internal market.
The purpose of inspiring lawyers to pursue a “modernization” of their respective contract laws does
not have to be limited to legislative drafting projects, however. The freedom of contract, at least for
commercial agreements between merchants, is virtually unlimited. It not only allows merchants to
design their substantive contract terms any way they see fit. It also extends to the choice of law and
forum for the settlement of any disputes. And, as already stated above, the choices for the applicable
law and forum are many, including some that make sense and some that don’t. Among the
considerations that should go into a well drafted contract are the following:
1) The applicable law has to be predictable. This requires an explicit and effective choice of law.
Avoiding a choice altogether or trying to make a choice that turns out to be ineffective, creates
unnecessary problems in case of a dispute over correct performance of the contractual obligations.
Even before substantive issues can be addressed, the parties may have to spend time and money
fighting over the applicable law as a preliminary question. Depending on where such a fight may
be taken, the court (= forum) will apply its own private international law to determine the applicable
substantive law. And this can be unpredictable. Some countries simply refer to seller’s law as the
applicable law. Others refer to the law of the country with the closest connection to the contract.
This, in turn, may be seller’s law if it is defined as the country where the party that has to effect the
characteristic performance is domiciled. However, it can also be a reference to the place where the
characteristic performance has to be effected, which in turn can depend on the chosen Incoterm.
2) The choice of law and forum also has to be efficient. This may require considerations about
speediness of a particular venue, travel and translation expenses, other costs and their distribution
between the parties, and the enforceability of the decision(s) of the dispute settlement body.
3) Finally, the choice of law and forum has to be fair. Unfortunately, the lawyers like to forget that
for their clients it is often more important to continue a business relationship than to win a particular
dispute. A settlement on reasonable terms may be more advantageous in the long term than the
extraction of maximum benefits in the short term.
With regard to consumer contracts, most national legal systems provide safeguards to assure that
the professional party cannot take advantage of the lack of experience and specialized knowledge
of the private party. For business-to-business contracts, by contrast, no such safeguards are provided
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since it is assumed that merchants know what they are doing. In practice, however, this is by no
means always the case and the majority of agreements for the sale of goods, let alone agreements
for more complex business dealings, are drafted by in-house lawyers or external attorneys. And this
is where the DCFR could and should come in, as inspiration to the lawyers drafting the international
sales agreements and – ideally – as the chosen legal system for such agreements. In spite of many
obvious advantages, however, our lawyers are rarely inspired and generally opt for their own legal
system as the applicable law. Unfortunately, they do this primarily in their own best interest –
because that happens to be the legal system they know best and often the only legal system they
know at all – and not necessarily in their client’s best interest. This will be illustrated in Part III with
an example.
III. Application of the DCFR in Contemporary Commercial Practice
In our hypothetical, Botellas PET SA in Bogotà wants to buy a new injection molding machine for
the production of plastic bottles for non-alcoholic carbonated beverages. B has identified Shure
Robotics Inc in Indianapolis as the manufacturer offering the fastest machines at the lowest prices.
According to S’s website, their model TX1500 can make 30 bottles per cycle and 50 cycles per hour,
adding up to 1'500 bottles every hour. The purchase price of the machine is USD 2.4 million EXW,
which makes it the largest single acquisition in the history of B. Therefore, they need to make
absolutely sure that all required elements of the documentary sale are carefully drafted to ensure
smooth implementation of this important transaction.
The typical documentary sale consist of four separate contracts, all of which have to be drafted and
negotiated between the parties. The most important is the contract for the sale of the machine. In
addition, there will be a financing contract for the payment of the purchase price, typically in the
form of a letter of credit. Then there will be a shipping contract, typically in the form of a bill of
lading. Finally, the party or parties bearing the risk of loss or damage during transport will enter into
an insurance contract. The second, third and fourth are usually pre-formulated by the bank, shipping
and insurance company respectively. Nevertheless, the merchants have to make certain choices in
them and have to do so in a way that is both fair and efficient.18 The contract for the sale of the
goods, by contrast, is in no way pre-determined and can be anything from a very superficial oral
agreement to a very sophisticated document of 50-100 pages.
Although all elements of the contract of sale can usually be written down in clear and unambiguous
language on about 6-10 pages, the average law firm, certainly in the United States, typically comes
up with a multiple of this. They will claim that their lengthy elaborations are necessary to cover all
eventualities and yet, they accomplish often the exact opposite. The large majority of these contracts
are copy-pasted patchwork from previously drafted agreements that have been sitting on computer
18 It would go beyond the scope of the present article to try to outline even just the most important elements
and the most common mistakes in all of these agreements. It usually takes me anywhere from a couple of
weeks to an entire semester to teach all of these. While my own textbook on International Business
Transactions is still being written, I recommend Chow, D. (2010). International Business Transactions.
(2.nd ed.). New York: Wolters Kluwer Law & Business; and Moens, G. & Gillies, P.(2006). International
Trade & Business - Law, Policy and Ethics. Oxford: Routledge/Cavendish.
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hard-drives at the firm. As a consequence, verbose language and generally poor drafting, including
ambiguous language and even mutually contradictory terms in different parts of a contract, are
perpetuated. Individual provisions are not individually thought through and may indeed be bad for
the client. One example is the choice of law and forum. Few and far between are the attorneys that
will even consider a choice of law other than their own or a forum outside of their own bailiwick.
After all, if a dispute should arise, the attorneys would not get to handle it if they are not familiar
with the applicable law and/or are not admitted to the bar in the country where the court will be
hearing the case.
In our hypothetical, if the seller S is providing the first draft of the sales agreement, chances are that
her lawyers will choose the law of Indiana as the applicable law and the courts of Indiana as the
chosen forum. Under no circumstances will they consent to buyer’s law (Columbia) and buyer’s
courts. If the buyer refuses to litigate in US courts, seller will probably accept to go to arbitration
but will probably continue to insist on the application of the UCC. Let’s consider the consequences
of such a choice of law and forum. The most common problems of performance are a) buyer does
not pay, and b) seller’s machine does not perform. If there should be a problem for the seller to get
paid, she would be very poorly served if she now had to go to court in Indiana. While application
of Indiana law or UCC would not be a problem, a judgment from a U.S. court will not easily be
enforceable in Columbia, where buyer’s assets are located. This would already be quite different if
the parties had agreed to arbitration because Columbia is a signatory to the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards. Pursuant to Article III et seq. of
that Convention, Columbian courts will enforce an international arbitral award without further
complications. [...]
The issue gets even more interesting if there is a problem with seller’s performance, i.e. if the
machine does not produce 1'500 bottles per hour. If the seller insisted on application of the UCC,
she will be bound by the so-called “perfect tender” rule in §2-601. This would entitle the buyer to
reject the entire performance if “the goods or the tender fail in any respect to conform to the
contract” (emphasis added). In practice, an injection molding machine will require several days for
installation, potentially up to several weeks of running-in and training, and only then it will become
apparent whether or not the machine is capable of producing the contractually promised number of
units. Let’s assume the machine, after the required preparations, simply does not get up to the
promised 1,500 bottles. On a good day, it may come close, say 1'400 or even 1'450, but on a bad day
it barely produces 1'300 bottles in an hour. My clients in the industry assure me that this is a fairly
common type of issue with these kind of machines.
Under the perfect tender rule of the UCC, as originally conceived and phrased, a buyer could
potentially reject the seller’s performance if the machines fell short by even just a single bottle.
Fortunately, no court in the U.S., let alone the rest of the world, today applies a strictly literal
interpretation of the perfect tender rule. However, once a performance of the type here in question
falls short, on average, by more than 5-10%, the UCC kicks in and the buyer can indeed reject the
performance. What this means in practice can be nicely illustrated by our case. Once the buyer
reject’s the seller’s performance, the seller has just two choices: she can send another machine to
Columbia in the hope that it will do better and that the buyer will eventually have to pay the
contracted price, minus damages for delay, lost profit, etc. Or she can give up on the transaction,
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waive her claim to the contracted price and refund any money that has already been paid, plus any
damages for delay, lost profit, etc. In both cases, the imperfect machine sitting in Colombia has
probably become a very expensive piece of scrap metal, much more of a liability for the seller than
an asset.19
The situation for the seller changes dramatically if the contract is not subject to the UCC but to any
of the laws in the continental European tradition. These legal systems do not have a similarly strict
standard for the performance of the seller. Instead, they usually apply the test whether there was a
“fundamental breach” of the contractual obligations, which means that the buyer can only reject the
performance of the seller if there is a “fundamental breach”. In the practice of the courts, a
fundamental breach is found either if the performance objectively deviates so significantly from
what had been promised and expected that a mere compensation for damages is inadequate. A
deviation of 5 or 10% from the expected performance will normally not fulfill this test. A stricter
standard is applied only if the seller knew that strict compliance with the contractual promises was
of essential importance to the buyer. In our hypothetical, this would only be the case if the buyer had
clearly communicated that an output of 1'500 bottles per hour was the very reason for choosing this
machine and that anything less would be basically useless to the buyer.
As a consequence, if Dutch, French, German, or Swiss law, to name just a few, would be applied
to the contract in our example, the buyer would not be entitled to reject the performance altogether.
Instead, the buyer would have to keep the machine and pay for it, however, with a set-off equivalent
to damages for the lower output.
Of course, a choice of a particular national European legal system would be inefficient for the parties
in the example. Neither of them probably knows much about these legal systems and in most
likelihood, neither speaks the respective language (well enough). Furthermore, the chosen forum has
to be considered. State courts, whether in Indiana or anywhere else, should never be made to apply
a foreign law. They would ask for extensive expert opinions and translations, which creates
unnecessary costs. Arbitrators, of course, can be selected to have any required expertise, but they
may be more expensive if they are not from the country or region where the dispute has to be settled.
Much better, therefore, would be the choice of one of the international contract regimes. The best
known and most widely used is the CISG. In fact, this regime would become the applicable law of
its own motion in a contract between an American and a Colombian party on the basis of its Article
1(1)(a), unless it is specifically excluded. However, if the parties are making a conscious choice of
an international contract law regime, the CISG is not necessarily the best choice they can make. For
the most part, the provisions of the CISG, the Unidroit Principles, and the DCFR should lead to the
same result, certainly with regard to the problem in our hypothetical. That being said, there are
differences in detail between the three regimes. First, there is the question whether the regime is well
known to whichever forum is selected by the parties. The CISG has the advantage here and the
DCFR is probably the least well known, although it is catching up. Second, there is the question of
19 The perfect tender rule is by no means the only problem with the application of the UCC to international
commercial contracts. Several other important rules differ from the standards used in most other countries
and do so often to the disadvantage of (American) exporters.
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comprehensiveness. All three regimes do not cover every possible question and need to be
accompanied with a backup choice of law, for example “the contract shall be governed by the CISG;
for any questions not covered therein, Swiss law shall apply”.20 In this respect, the advantage is with
the DCFR, which is the most comprehensive and leaves the fewest questions unresolved. Finally,
the third question is about comprehensibility and efficiency. Once again, the DCFR has the
advantage here. Even a superficial reading of the three texts shows right away that the DCFR is
more easily understandable, better organized, and generally more clear and straightforward than the
other two.
In concluding, I would advise the American seller to make a choice for the DCFR and arbitration.21
As for the Colombian buyer, the best choices would probably be for the UCC with litigation in
Indiana. Although the latter would be expensive, Indiana courts would happily apply the prefect
tender rule and any decisions could be easily enforced against the American seller. Ironically, UCC
and Indiana courts are most likely also the recommendation of the attorneys retained by Shure
Robotics at considerable expense.
* * *
While the CFR is of considerable interest to professional traders and their lawyers, it does not
contain specific protections for consumers or small businesses. Therefore, having identified diffe-
rences in the contract law regimes of the different Member States of the European Union as one of
“the top barriers in business-to-consumer transactions”, the EU Commission, building on the work
done by Unidroit and in the context of the CFR, presented in 2011 a Proposal for a Regulation of
the European Parliament and of the Council on a Common European Sales Law (CESL).1
Pursuant to its Article 1, the CESL “can be used for cross-border transactions for the sale of goods,
for the supply of digital content and for related services where the parties to a contract agree to do
so.”2 By contrast to a number of other contract law regimes, the CESL specifically includes
elaborate consumer protection rules, and offers itself “1. [...] only if the seller of goods or the
supplier of digital content is a trader. Where all the parties to a contract are traders, the Common
European Sales Law may be used if at least one of those parties is a small or medium-sized
20 Anything else would be an incomplete choice of law and would require, in case such a problem did arise,
that the backup is determined by the forum on the basis of its private international law.
21 I would not advise any party at this time to bring the DCFR to a regular court, since the outcome is still too
unpredictable, given the limited experience of most courts with this regime.
1 Preamble (1), COM(2011) 635 final, Brussels, 11 October 2011; available at http://eur-lex.euro-
pa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0635:FIN:en:PDF. For detailed analysis see Reiner
Schulze (ed), Common European Sales Law (CESL) – Commentary, C.H. Beck/Hart/Nomos, Munich et al.
2012; see also Stefan Grundmann, Costs and Benefits of an Optional European Sales Law (CESL),
Common Market Law Review 2013, Vol. 50, No. 1/2, pp. 225-242; Martijn W. Hesselink, How to Opt into
the Common European Sales Law? Brief Comments on the Commision’s Proposal for a Regulation,
European Review of Private Law 2012, Vol. 20, No. 1, pp. 195-212; Ole Lando, Comments and Questions
Relating to the European Commission’s Proposal for a Regulation on a Common European Sales Law,
European Review of Private Law 2011, Vol. 19, No. 6, pp. 717-725;
2 Article 13 makes it clear, however, that EU Member States can allow the use of the CESL also for purely
domestic B2C transactions.
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enterprise (‘SME’). 2. For the purposes of this Regulation, an SME is a trader which (a) employs
fewer than 250 persons; and (b) has an annual turnover not exceeding EUR 50 million [...]” (Article
7). In practice, of course, it is not likely that an SME, let alone a consumer, would know about the
CESL and have the negotiating power to get it as the governing law of a contract. At the same time,
a larger business contracting with an SME or a consumer is not likely to propose the CESL or agree
to it, not least because in actual B2C transactions, the CESL “may not be chosen partially, but only
in its entirety” (Article 8(3)). This begs a bit the question of the usefulness of the CESL, unless it
is eventually adopted as mandatory for cross-border consumer contracts in Europe. Because of this
unclear mission, the proposal was widely misunderstood as an attempt at replacing the national
contract laws and enforcing a uniform European contract law regime from the top down, rather than
an additional and entirely voluntary option for cross-border contracts in the internal market of the
EU. As a consequence, there was considerable resistance in a number of Member States, most
notably the United Kingdom. Therefore, in 2014, the Commission withdrew the Proposal to take
account of criticism, suggestions by the European Parliament, and to work on a revision that will
include more advanced rules on e-commerce.
The resistance of the EU Member States against the CESL should also serve as a warning for anyone
dreaming about the enactment of the CFR, in the foreseeable future, as a pan-European civil code.
In practice, these transnational codifications will remain model codes available for sophisticated
lawyers and businesses as voluntary choices of law. The only one applicable by law, unless
explicitly excluded, is and will be the CISG.
* * *
After this discussion of the relative strengths and weaknesses of the modern contract laws available
to parties in B2B transactions, we can see that the choice will usually boil down to the CISG as
representative of the civil law tradition versus the UCC as representative of the common law
tradition. However, parties still make a selection in favor of the “lex mercatoria” quite regularly,
which justifies a closer look at the Unidroit Principles as well. Similarly, some remarks about the
Restatement (Second) on Contracts are warranted since it is used for the interpretation of terms and
if there are gaps in the UCC. Last but not least, the author considers the CFR to be such a brilliant
and forward looking code, standing heads and shoulders above all other contract laws. This is why
a somewhat detailed introduction and comparison to the CISG, UCC and Unidroit Principles is also
included below, a kind of marketing stint for the CFR.1 A future edition may require a closer look
at the CESL as well.
In the coming sections, after a brief discussion of the mechanics of making a valid choice of law and
forum and the question what happens if the parties did not make an effective choice, we will take
a look at an actual contract of sale and then proceed with a more detailed analysis of the rules of the
1 For in-depth analysis see Christian von Bar & Eric Clive (eds): Principles, Definitions and Model Rules of
European Private Law – Draft Common Frame of Reference (DCFR), Oxford University Press, Oxford,
2010.
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CISG, UCC, Unidroit Principles and CFR as they would settle the most common problems that arise
in the implementation of such an international contract of sale.1
2. How Does a Choice of Law and a Choice of Forum Have to Be Made to Be Valid and
Enforceable?
In commercial contracts, the freedom of choice of the parties with regard to the applicable law is
largely unlimited. However, a few exceptions do apply:
– almost all legal systems impose limitations if one of the parties to the contract is a consumer
(e.g. §1-301(e) UCC; Article 6 Rome I Regulation);
– some legal systems also impose limitations in case of employment contracts (e.g. Article 8
Rome I Regulation);
– furthermore, almost all legal systems have a safeguard provision for ordre public or public
order considerations (pursuant to §1-301(f) UCC, the parties cannot make a choice in favor
of another legal system if that “would be contrary to a fundamental policy” of the country
whose legal system would apply pursuant to the rules of private international law, respec-
tively international conflicts of law; similarly, Article 9 Rome I Regulation allows a forum
to apply any “overriding mandatory provisions” applicable at its seat and/or those that apply
where the contract has been or should be performed).
In typical B2B transactions, these exceptions will rarely be a problem for the validity of a choice of
law made by the parties. Thus, we just need to remember that choice of law and choice of forum are
related because a particular forum should normally not be made to apply a law with which it is
unfamiliar, if it can be avoided. Thus, when drafting or reviewing contracts, we should consider the
desired forum (courts of seller or buyer? third country courts? arbitration...) and the preferred
substantive law together, i.e. whether the preferred or required forum will be competent to handle
the preferred substantive law. Ideally, these considerations will be made during the negotiations of
a contract and will be included via valid choice of law and choice of forum clauses when the
contract is finalized. If a contract does not include valid clauses for choice of law and forum or if
the choices turn out to be less than ideal, the parties can make new or different choices at a later
stage, in particular when a dispute has already arisen. However, this requires an agreement between
the parties which may no longer be forthcoming when problems with the contract or the business
relationship have already materialized and litigation or arbitration is imminent.
If there are no valid choices in the original agreement and the parties are unable to agree later, the
applicable law and forum have to be determined via the rules of private international law, respec-
tively international conflict of laws. This will be discussed in the next section. At the present time,
we will focus on the drafting of valid choice of law clauses to be included in a contract for an IBT.
Choice of forum will be discussed at length in Chapter 10 on Dispute Settlement (below, p. ???).
1 A similarly broad approach is also taken in Henry Deeb Gabriel: Contracts for the Sale of Goods – A
Comparison of U.S. and International Law, Oxford University Press, Oxford, 2nd ed. 2008.
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The relative strengths and weaknesses of different substantive contract laws were discussed earlier.
However, a dispute may go beyond contract law in the narrow sense and include pre-contractual
issues such as capacity and agency, as well as ancillary or consequential issues such as tort liability.
Thus, a narrow choice-of-law clause along the lines of “this contract shall be governed by the law
of X” should be avoided.
Against this background one may find recommendations such as this one:
“This contract shall be governed and construed in accordance with the laws of
[selected State], excluding that State’s choice-of-law principles, and all claims
relating to or arising out of this contract, or the breach thereof, whether sounding in
contract, tort or otherwise, shall likewise be governed by the laws of [selected State],
excluding that State’s choice-of-law principles.”1
While such a clause is probably suitable to achieve the desired result, it is also verbose and inelegant
and violates fundamental principles of good legal writing and drafting. We suggest the following
two models instead:
1) With CISG: “This contract and all related aspects of the business relationship
between the parties shall be governed by the CISG. Any questions not covered by
the CISG shall be governed by the domestic law of [selected country].”
2) Without CISG: “This contract and all related aspects of the business relationship
between the parties shall be governed by the domestic law of [selected country]
without CISG.”
3. What Happens in the Absence of a Valid Choice of Law or Choice of Forum?
Two scenarios usually lead to the same result, the absence of valid choices for law and forum: Either
the parties did not make a choice of law and/or a choice of forum in the first place. This can happen
if they use poorly drafted contract models that do not remind them that a choice of law and forum
should be included or if they do not have a written contract at all and have not discussed the issues
of law and forum in the contractual negotiations. More likely, however, is the situation that the
parties did think of and tried to include a choice of law and a choice of forum but they were unable
to agree which law and which forum to select. In the end, they decide to drop the issue from the
contract in order to be able to move forward with the business transaction anyways.
Alternatively, the parties may have included a choice of law and a choice of forum in their contract
but either one or both of the choices turn out to be invalid or ineffective. A choice may be invalid,
for example, if it is not in writing but written form is required. A choice may be ineffective, for
1 See http://www.lexology.com/library/detail.aspx?g=19184c3b-3d68-427a-87f5-c7e3ef3e60f5, last visited
27 June 2017.
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example, if the chosen forum does not accept jurisdiction over the dispute. If the parties have chosen
arbitration, the choice can be invalid if the arbitral institution is not clearly identified.1
4. Summary: What to Do and What Not to Do About Choice of Law and Choice of Forum
• When drafting a contract for an international business transaction, whether a sales contract,
a services contract, a loan contract, or a larger investment contract, ALWAYS include a
choice of law and a choice of forum clause covering the entire business relationship between
the parties initiated or expanded by the respective contract, not just the rights and obligations
under the present contract itself.
• Any time more than one contract or more than two parties are involved in the same IBT, it
is highly desirable to have THE SAME CHOICE OF LAW AND CHOICE OF FORUM
CLAUSES across the entire IBT. Otherwise it may well happen that disputes over different
aspects of one and the same IBT or between different parties to one and the same IBT have
to be taken to different fora and/or decided under different legal regimes. This is wasteful
and can lead to conflicting outcomes.
• While arbitrators can be selected to be competent to handle pretty much any set of rules,
NEVER force regular judges to apply a legal system other than their own.2 In many
countries, the CISG may be the applicable contract law if both parties to a sale are domiciled
in contracting states but for the average judge the CISG may still be a foreign legal system.
• EVERY TIME a choice of law is made in favor of a transnational set of rules, in particular
the CISG, be sure to also make a choice for a backup system, i.e. a national law that applies
to any questions not covered by the transnational law.
• Remember that the CISG is the default contract law whenever both parties to a contract of
sale are domiciled in contracting states unless it is explicitly excluded. NEVER exclude the
CISG, however, without thinking about the specific consequences this will have for the
client.
• NEVER make a choice in favor of a neutral third country law without very good reasons for
doing so. The mere fact that the chosen law is foreign for both parties and their lawyers is
not a good enough reason.
• The CISG and, even more so, the CFR, are much better choices for a NEUTRAL system that
is equally accessible and familiar or unfamiliar to both sides than a neutral third country law.
1 A very good summary of the issue can also be found in the 2015 Hague Principles on Choice of Law in
International Commercial Contracts, available at https://www.hcch.net/en/instruments/conven-
tions/full-text/?cid=135. For further reading see, inter alia, James J. Fawcett, Jonathan M. Harris & Michael
Bridge: International Sale of Goods in the Conflict of Laws, Oxford University Press, Oxford, 2005; as well
as Symeon C. Symeonides, Choice of Law, Oxford University Press, Oxford, 2016.
2 For more information see Sofie Geeroms, Foreign Law in Civil Litigation – A Comparative and Functional
Analysis, Oxford University Press, Oxford 2004; Michael James, Litigation with a Foreign Aspect – A
Practical Guide, Oxford University Press, Oxford 2009; ???
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• Whenever a dispute arises and it becomes apparent that the underlying contract or contracts
were drafted without any choice of law or choice of forum clauses or with less than ideal
clauses, TRY TO GET THE PARTIES TO AGREE RETROSPECTIVELY to better choice
of law and choice of forum clauses. To this end, use economic arguments and the desire of
the parties to put the dispute behind them and get back to business.
• In sum, make A CHOICE FOR NATIONAL COURTS only if they meet the criteria we will
discuss at length in Chapter 10, in particular that presenting the case to them can be done in
an economically efficient way and that they will normally provide a fair and well reasoned
decision within a year or so. Furthermore, make a choice for these same national courts only
if you are willing to subject the IBT to the normal contract law applicable in that jurisdiction.
• Although ARBITRATION can be more expensive than litigation, there are ways and means
of containing the cost of arbitration. In any case, once there is an appeal against a trial court
judgment, not only the time but also the money expended in litigation is likely to exceed the
cost of arbitration. Thus, do not disregard arbitration on account of its actual or perceived
cost. Make the choice for or against arbitration after careful analysis of its pro’s and con’s
as outlined in detail in Chapter 10.
III. Drafting an Actual Sales Contract
Having discussed some of the considerations that are specific to international business transactions,
we shall now put together an entire contract of sale with all required elements. This is intended as
a model contract, to be modified and adapted in each individual case. Together with the explanations
provided, the reader should be able to make intelligent choices for every contract term in each and
every standard international sales or export/import transaction. Obviously, one model cannot
possibly capture every possible variation, in particular if an IBT does no longer follow the model
we have outlined at the outset of the chapter. However, even for non-standard transactions, the
model provides a lot of useful tips and suggestions for contract terms.
Two final remarks before we get going: First, whenever drafting or reviewing a contract, remember
the goal of brevity, clarity, and fairness. This model is brief, clear and fair. The 85-page sample on
the harddrive at your lawfirm probably meets none of these criteria. Second, the model is just that:
a model. Success comes from the intelligent adaptation of the model to the specifics of the IBT you
are working on. Never cut-and-paste without knowing exactly what you are doing!
International Sales Contract for Manufactured Goods[1] p. 1 of 8
Part A: INDIVIDUALLY NEGOTIATED TERMS[2]
(based on the models of the ICC and other sources) ©Prof. Dr. Frank Emmert, LL.M.
1) Seller (name and address of principal = the person or entity for whom the contract is made AND name
and title of authorized representative and/or contact person with e-mail, phone and fax numbers)[3]
..........................................................................
2) Buyer (name and address of principal = the person or entity for whom the contract is made AND
name and title of authorized representative and/or contact person with e-mail, phone and fax numbers)[4]
..........................................................................
3) Goods sold (description, detailed as may be necessary, in particular if assurances as to performance
or suitability for specific purposes are given, incl. any warranties; quantity sold in units, weight, volume,
as the case may be; specific instructions for packaging, if necessary)[5]
..........................................................................
..........................................................................
..........................................................................
4) Contract price (price per unit, weight or volume; whether price is EXW or includes some or all freight
and insurance charges etc; total contract price; currency, amount in numbers, amount in letters; whether
price is with or without VAT or sales tax)[6]
..........................................................................
[this is the “contract” price, not the price for the goods alone, i.e. it includes any and all costs which are
at the seller’s charge and compensated by the buyer; alternatively, the seller may want to stipulate a net
price plus costs for shipping, insurance (if C or D term), VAT or sales tax, etc.]
5) Delivery terms (all references to Incoterms 2010)[7]
G EXW ex works named place . . . . . . . . . . . . . . . . . . . . . . . . .
G FCA free carrier named place . . . . . . . . . . . . . . . . . . . . . . . . .
G FAS free alongside ship named port of shipment . . . . . . . . . . . . . . . . .
G FOB free on board named port of shipment . . . . . . . . . . . . . . . . .
G CPT carriage paid to named place of destination. . . . . . . . . . . . . . .
G CIP carriage and insurance paid to named place of destination . . . . . . . . . . . . . . .
G CFR cost and freight named port of destination . . . . . . . . . . . . . . . .
G CIF cost insurance and freight named port of destination . . . . . . . . . . . . . . . .
G DAT delivered at terminal named place of destination. . . . . . . . . . . . . . .
G DAP delivered at place named place of destination. . . . . . . . . . . . . . .
G DDP delivered duty paid named port of destination . . . . . . . . . . . . . . . .
G other ...................................................................
6) Carrier
a) Name and address of first carrier [in seller’s country] (if applicable) (with name and title of
authorized representative and/or contact person with phone and fax numbers)[8]
..........................................................................
©Prof. Dr. Frank Emmert, LL.M. p. 2 of 8
b) Name and address of main carrier[9]
(with name and title of authorized representative and/or contact person with phone and fax numbers)
..........................................................................
c) Name and address of third carrier [in buyer’s country] (if applicable) (with name and title of
authorized representative and/or contact person with phone and fax numbers)[10]
..........................................................................
7) Time of delivery (time, day, week and/or month during which seller must perform his delivery
obligations according to above delivery terms. Warning if time is of the essence for the buyer,
which means that any delay by seller can be a fundamental breach.)[11]
..........................................................................
8) Inspection of the goods (depending on the type of goods and customs in the industry, a standard
for the inspection may have to be provided or referred to)
G by the buyer [12]
G before shipment time and place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G other time and place..............................
G by the following third party[13]
at the expense of ...........................
............................................................ time and place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9) Retention of title[14]
G Yes until ......................................
G No
10) Payment conditions[15]
G Payment in advance (= before controlling documents are sent to buyer)
Date .............................. G Total price G ........... % of total price
Account ......................... Holder .......................... Bank ..........................................
G Payment on open account (= payment after controlling documents are sent to buyer)
Time for payment .................. days from date of invoice Other ........................
G Open account backed by demand guarantee or standby letter of credit
Account ......................... Holder .......................... Bank ..........................................
G Documentary collection
G D/P documents against payment G D/A documents against acceptance
Details ..............................................................
G Irrevocable documentary credit G confirmed G unconfirmed
Bank & Place of issue ..................................................
Bank & Place of confirmation (if applicable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit available
G by payment at sight
G by deferred payment, .............. days
G by acceptance of drafts, .......... days
G by negotiation
Partial shipments G allowed G not allowed
Transhipment G allowed G not allowed
Date on which the documentary credit must be notified to seller ...................................
[unless otherwise specified, 30 days before the beginning of the delivery period]
©Prof. Dr. Frank Emmert, LL.M. p. 3 of 8
G [16]In case of delayed payment by buyer, interest shall be payable at a rate of ........... %
above the average bank short-term lending rate for prime borrowers prevailing for the
currency of payment at the place of payment.
G Other ...............................................................
11) Documents [this should conform to the selected Incoterm and Letter of Credit]
a) Documents to be provided by the seller[17]
G Transport documents, namely ...............................................
G Commercial invoice G Packing list
G Certificate of origin G Certificate of inspection by . . . . . . . . . . . . . . . . . .
G Export license G Import license
G Insurance document G Other ..................................
b) Documents to be provided by the buyer[18]
G Transport documents, namely ...............................................
G Commercial invoice G Packing list
G Certificate of origin G Certificate of inspection by . . . . . . . . . . . . . . . . . .
G Export license G Import license
G Insurance document G Other ..................................
12) Cancellation date[19]
If the goods are not delivered for any reason whatsoever (including force majeure) by ............
........[date] the buyer is entitled to cancel the contract immediately by notification to the seller.
13) Liability for delay by seller[20]
Liquidated damages for delay in delivery shall be
G ......... % of price of delayed goods per week,
with a maximum of ........ % of delayed goods
G specific amount ..................... currency ................
In case of termination for delay (points 7 and 12), seller’s liability for damages for delay shall be
limited to
G ......... % of price of delayed goods
G specific amount ..................... currency ................
14) Liability for non-conforming goods[21]
Seller’s aggregate liability for damages, including loss of profit, any and all consequential
damages, court and attorney fees, and other costs of enforcement of rights and obligations, etc.,
arising from lack of conformity of the goods shall be
G limited to proven loss (incl. consequential loss, loss of profit etc.) and not exceeding
..........% of the contract price
Glimited to insurance coverage available at the time of settlement or judgment
G determined as follows...................................................
15) Limitation of liability where non-conforming goods are retained by the buyer[22]
The price abatement for retained non-conforming goods shall
G not exceed ............. % of the price of such goods
G be determined as follows ................................................
©Prof. Dr. Frank Emmert, LL.M. p. 4 of 8
16) Time-bar[23]
GBuyer has to inspect goods immediately upon arrival and notify any lack of conformity in
the time and place of delivery, quality or quantity of the goods, or any accompanying
documents within .......... [hours/days] of arrival. Any non-conformity that was undetect-
able upon arrival has to be notified within .......... [hours/days] of discovery and in any
case no later than ........... [weeks/months/years] of arrival.
G Before any action for non-conformity of the goods is taken, the buyer has to notify the
seller and provide an opportunity for the seller to cure the lack of conformity.
G Any action for non-conformity of the goods must be taken by the buyer not later than
...........[days] from the date of arrival of the goods at the destination.
17) Applicable law[24]
GThis sales contract and all related aspects of the business relationship of the parties shall
be governed by the CISG. Any questions not covered by the CISG shall be governed by
the domestic law of ..................................
G This sales contract and all related aspects of the business relationship of the parties shall
be governed by the domestic law of ................ without CISG
G This sales contract and all related aspects of the business relationship of the parties shall
be governed by ........................................ Any questions not covered by this international
set of rules shall be governed by the domestic law of ..................................
18) Resolution of disputes[25]
G Any disputes related to this contract shall be subject to arbitration
G ICC at .................................. (place)
G other arbitral tribunal (ad hoc or institutional)........................................
The number of arbitrators shall be ..................................................................
The language of the arbitration shall be ..........................................................
G The parties shall not resort to arbitration unless good faith attempts to resolve the
dispute with the help of a mediator have not produced a satisfactory result within
........ weeks.
G Any disputes related to this contract shall be subject to litigation in the ordinary courts of
..........................................................................
19) Additional specifications agreed upon between the seller and the buyer[26]
G Applicability of our General Conditions of Sale (see below pp. 5-8) to the extent they are
compatible with the specific agreements on pp. 1-4
G other ...................................................................
20) Merger clause[27]
GThis is the entire agreement between the parties and supersedes any communications,
negotiations, and agreements with respect to its subject matter prior to its conclusion. Any
subsequent agreements and modifications must be in writing and signed by duly
authorized representatives of both parties.
Gother................................................................
For the seller For the buyer
signature[28] signature
..........................................................................
name and title name and title
..........................................................................
date and place date and place
..........................................................................
p. 5 of 8
Part B: GENERAL CONDITIONS
based on ICC General Conditions of Sale (Manufactured Goods Intended for Resale)[29]
Art. 1 General
1.1 These General Conditions are intended to supplement the Specific Conditions (pages 1-4 of the
present contract). In case of contradiction between these General Conditions and any Specific Conditions
agreed upon between the parties, the specific conditions shall prevail.
1.2 Any questions relating to this contract which are not expressly or implicitly settled by the provisions
contained in the contract itself (i.e. these General Conditions and any specific conditions agreed upon
by the parties) shall be governed:[30]
A. by the United Nations Convention on Contracts for the International Sale of Goods (Vienna
Convention of 1980, hereafter referred to as CISG), and
B. to the extent that such questions are not covered by CISG, by reference to the law of the country
where the Seller has his place of business.
1.3 Any reference made to trade terms (such as EXW, FCA, etc. ) is deemed to be made to the relevant
term of the INCOTERMS published by the International Chamber of Commerce.[31]
1.4 Any reference made to a publication of the International Chamber of Commerce is deemed to be
made to the version current at the date of conclusion of the Contract.
1.5 No modification of the Contract is valid unless agreed or evidenced in writing. However, a party may
be precluded by his conduct from asserting this provision to the extent that the other party has relied on
that conduct.[32]
Art. 2 Characteristics of the goods
2.1 It is agreed that any information relating to the goods and their use, such as weights, dimensions,
capacities, prices, colors and other data contained in catalogues, prospectuses, circulars, websites,
advertisements, illustrations, price-lists of the Seller, shall not take effect as terms of the contract unless
expressly referred to in the Contract.[33]
2.2 Unless otherwise agreed, the Buyer does not acquire any property rights in software, drawings, etc.
which may have been made available to him. The Seller also remains the exclusive owner of any
intellectual or industrial property rights relating to the goods.[34]
Art. 3 Inspection of the goods before shipment[35]
If the parties have agreed that the Buyer is entitled to inspect the goods before shipment, the Seller must
notify the Buyer within a reasonable time before the shipment that the goods are ready for inspection at
the agreed place.
Art. 4 Price[36]
4.1 If no price has been agreed, the Seller' s current list price at the time of the conclusion of the Contract
shall apply. In the absence of such a current price, the price generally charged for such goods at the time
of the conclusion of the Contract shall apply.
4.2 Unless otherwise agreed in writing, the price does not include VAT, and is not subject to price
adjustment.
4.3 The price indicated under A-4 (contract price) includes any costs which are at the Seller' s charge
according to this Contract. However, should the Seller bear any costs which, according to this Contract,
are for the Buyer' s account (e.g. for transportation or insurance under EXW or FCA), such sums shall
not be considered as having been included in the price under A-2 and shall be reimbursed separately by
the Buyer.
p. 6 of 8
Art. 5 Payment conditions
5.1 Unless otherwise agreed in writing, or implied from a prior course of dealing between the parties,
payment of the price and of any other sums due by the Buyer to the Seller shall be on open account and
time of payment shall be 30 days from the date of invoice. The amounts due shall be transferred, unless
otherwise agreed, by teletransmission to the Seller' s bank in the sellers country for the account of the
Seller and the Buyer shall be deemed to have performed his payment obligations when the respective
sums due have been received by the Seller' s bank in immediately available funds.[37]
5.2 If the parties have agreed on payment in advance, without further indication, it will be assumed that
such advance payment, unless otherwise agreed, refers to the full price, and that the advance payment
must be received by the Seller' s bank in immediately available funds at least 30 days before the agreed
date of delivery or the earliest date within the agreed delivery period. If advance payment has 'been
agreed only for a part of the contract price, the payment conditions of the remaining amount will be
determined according to the rules set forth in this article.[38]
5.3 If the parties have agreed on payment by documentary credit, then, unless otherwise agreed, the
Buyer must arrange for a documentary credit in favor of the Seller to be issued by a reputable bank,
subject to the Uniform Customs and Practice for Documentary credits published by the International
Chamber of Commerce, and to be notified at least 30 days before the agreed date of delivery or at least
30 days before the earliest date within the agreed delivery period. Unless otherwise agreed, the
documentary credit shall be payable at sight and allow partial shipments and transshipments.[39]
5.4 If the parties have agreed on payment by documentary collection, then unless otherwise agreed,
documents will be tendered against payment (D/P) and the tender will in any case be subject to the
Uniform Rules for Collections published by the International Chamber of Commerce.[40]
5.5 To the extent that the parties have agreed that payment is to be backed by a bank guarantee, the
Buyer is to provide, at least 30 days before the agreed date of delivery or at least 30 days before the
earliest date within the agreed delivery period, a first demand bank guarantee subject to the Uniform
Rules for Demand Guarantees published by the International Chamber of Commerce, or a standby letter
of credit subject either to such Rules or to the Uniform Customs and Practice for Documentary Credits
published by the International Chamber of Commerce, in either case issued by a reputable bank.[41]
Art. 6 Interest in case of delayed payment[42]
6.1 If a party does not pay a sum of money when it falls due the other party is entitled to interest upon that
sum from the time when payment is due to the time of payment.
6.2 Unless otherwise agreed, the rate of interest shall be 2% above the average bank short-term lending
rate to prime borrowers prevailing for the currency of payment at the place of payment, or where no such
rate exists at that place, then the same rate in the State of the currency of payment. In the absence of
such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State
of the currency of payment.
Art. 7 Retention of title[43]
If the parties have validly agreed on retention of title, the goods shall remain the property of the Seller until
the complete payment of the price, or as otherwise agreed.
Art. 8 Contractual term of delivery[44]
Unless otherwise agreed, delivery shall be "Ex Works" (EXW).
Art. 9 Documents[45]
Unless otherwise agreed, the Seller must provide the documents (if any) indicated in the applicable
Incoterm or, if no Incoterm is applicable, according to any previous course of dealing.
p. 7 of 8
Art. 10 Late-delivery, non-delivery and remedies therefor[46]
10.1 When there is delay in delivery of any goods, the Buyer is entitled to claim liquidated damages equal
to 0.5% or such other percentage as may be agreed of the price of those goods for each complete week
of delay, provided the Buyer notifies the Seller of the delay. Where the Buyer so notifies the Seller within
15 days from the agreed date of delivery, damages will run from the agreed date of delivery or from the
last day within the agreed period of delivery. Where the Buyer so notifies the Seller after 15 days of the
agreed date of delivery, damages will run from the date of the notice. Liquidated damages for delay shall
not exceed 5 % of the price of the delayed goods or such other maximum amount as may be agreed.
10.2 If the parties have agreed upon a cancellation date in A-12, the Buyer may terminate the contract
by notification to the Seller as regards goods which have not been delivered by such cancellation date
for any reason whatsoever (including a force majeure event).
10.3 When article 10.2 does not apply and the Seller has not delivered the goods by the date on which
the Buyer has become entitled to the maximum amount of liquidated damages under article 10.1, the
Buyer may give notice in writing to terminate the contract as regards such goods, if they have not been
delivered to the Buyer within 5 days of receipt of such notice by the Seller.
10.4 In case of termination of the contract under article 10.2 or 10.3 then in addition to any amount paid
or payable under article 10.1 the Buyer is entitled to claim damages for any additional loss not exceeding
10% of the price of the non-delivered goods.
10.5 The remedies under this article are exclusive of any other remedy for delay in delivery or non-
delivery.
Art. 11 Non-conformity of the goods[47]
11.1 The Buyer shall examine the goods as soon as possible after their arrival at destination and shall
notify the Seller in writing of any lack of conformity of the goods within 15 days from the date when the
Buyer discovers or ought to have discovered the lack of conformity. In any case the Buyer shall nave no
remedy for lack of conformity if he fails to notify the Seller thereof within 12 months from the date of arrival
of the goods at the agreed destination.
11.2 Goods will be deemed to conform to the contract despite minor discrepancies which are usual in the
particular trade or through course of dealing between the parties but the Buyer will be entitled to any
abatement of the price usual in the trade or through course of dealing for such discrepancies.
11.3 Where goods are non-conforming (and provided the Buyer, having given notice of the lack of
conformity in compliance with article 11.1, does not elect in the notice to retain them), the Seller shall at
his option:
(a) replace the goods with conforming goods, without any additional expense to the Buyer, or
(b) repair the goods, without any additional expense to the Buyer, or
(c) reimburse to the Buyer the price paid for the nonconforming goods and thereby terminate the
contract as regards those goods.
The Buyer will be entitled to liquidated damages as quantified under article 10.1 for each complete week
of delay between the date of notification of the non-conformity according to article 11.1 and the supply
of substitute goods under article 11.3 (a) or repair under article 11.3 (b) above. Such damages may be
accumulated with damages (if any) payable under article 10.1, but can in no case exceed in the
aggregate 5% of the price of those goods.
11.4 If the Seller has failed to perform his duties under 11.3 by the date on which the Buyer becomes
entitled to the maximum amount of liquidated damages according to that article, the Buyer may give
notice in writing to terminate the contract as regards the non-conforming goods unless the supply of
replacement goods or the repair is effected within 5 days of receipt of such notice by the Seller.
11.5 Where the Contract is terminated under article 11.3 (c) or article 11.4, then in addition to any amount
paid or payable under art.11.3 as reimbursement of the price and damages for any delay, the Buyer is
entitled to damages for any additional loss not exceeding l0% of the price of the non-conforming goods.
p. 8 of 8
11.6 Where the Buyer elects to retain non-conforming goods, he shall be entitled to a sum equal to the
difference between the value of the goods at the agreed place of destination if they had conformed with
the Contract and their value at the same place as delivered, such sum not to exceed 15% of the price of
those goods.
11.7 Unless otherwise agreed in writing, the remedies under this article 11 are exclusive of any other
remedy for nonconformity.
11.8 Unless otherwise agreed in writing, no action for lack of conformity can be taken by the Buyer,
whether before judicial or arbitral tribunals, after 2 years from the date of arrival of the goods. It is
expressly agreed that after the expiry of such term, the Buyer will not plead non-conformity of the goods,
or make a counterclaim thereon, in defense to any action taken by the Seller against the Buyer for non-
performance of this Contract.
Art. 12 Cooperation between the parties[48]
12.1 The Buyer shall promptly inform the Seller of any claim made against the Buyer by his customers
or third parties concerning the goods delivered or intellectual property rights related thereto.
12.2 The Seller will promptly inform the Buyer of any claim which may involve the product liability of the
Buyer.
Art. 13 Force majeure[49]
13.1 A party is not liable for a failure to perform any of his obligations in so far as he proves
(a) that the failure was due to an impediment beyond his control, and
(b) that he could not reasonable be expected to have taken the impediment and its effects upon his
ability to perform into account at the time of the conclusion of the contract, and
(c) that he could not reasonably have avoided or overcome it or its effects.
13.2 A party seeking relief shall, as soon as practicable after the impediment and its effects upon his
ability to perform become known to him, give notice to the other party of such impediment and its effects
on his ability to perform. Notice shall also be given when the ground of relief ceases.
Failure to give either notice makes the party thus failing liable in damages for loss which otherwise could
have been avoided.
13.3 Without prejudice to article 10.2, a ground of relief under this clause relieves the party failing to
perform from liability in damages, from penalties and other contractual sanctions, and from the duty to
pay interest on money owing, as long as and to the extent that the ground subsists.
13.4 If the grounds of relief subsist for more than six months, either party shall be entitled to terminate
the contract without notice.
Art. 14 Resolution of disputes[50]
14.1 Unless otherwise agreed in writing, all disputes arising in connection with the present contract shall
be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more
arbitrators appointed in accordance with the said Rules.
14.2 An arbitration clause does not prevent any party from requesting interim or conservatory measures
from the courts.
2 – SALES CONTRACTS
Version as of 18 September 2017 p. 71 of 245
Explanations
[1] Suitability of this model contract: The model was designed for one-off contracts for the sale of
manufactured goods. It has to be suitably adjusted for sales transactions involving significant service
components, for example the installation of equipment at buyer’s premises, or the training of buyer’s
operators. The same is true for contracts envisaging a long-term business relationship, including
repeat delivery or subscription contracts, and in particular, if an exclusive supplier or distributor
relationship is intended.
[2] Individually negotiated terms: The individually negotiated terms, sometimes casually referred
to as “the front of the contract”, have to be modified for each and every IBT. They are distinguished
from general terms or conditions, sometimes referred to as “the back of the contract”, which a
company will often include in each and every IBT without review or adjustment. Sustainable
business relationships based on win-win interactions require general terms without surprises and
individually negotiated terms reflecting, to the greatest possible extent, the real requirements and
intentions of the parties. In particular, if there is an imbalance of power, information, or experience
between the parties, for example because one party has a monopoly on the goods or services based
on intellectual property rights, or because the other party has little or no experience in international
business, or because one side works in its native English, while the other struggles with English as
her third or fourth language, it is important to communicate clearly and negotiate fairly to ensure
a genuine and unforced agreement. The party drafting the contract or proposing certain clauses
should also remember the principle of contra proferentem pursuant to which an ambiguous provision
in a contract, in case of a dispute, will be interpreted against the drafter.
[3] Seller’s name and contact information: The seller is the natural or legal person who is bound
by the contract. In particular, if negotiations are conducted by representatives of the parent company
and a subsidiary, it is important to identify the seller in unambiguous terms. Whenever the seller is
a corporate entity, there should also be the name, phone number, and e-mail of the person authorized
to send or receive any communication regarding the transaction. This avoids disputes over messages
sent by the other party but not received in time by the right person. If the person conducting the
negotiations is not a high ranking employee of the seller, he or she should present a power of
attorney or other proof of authority to be negotiating on behalf of the seller. In the absence of actual
or apparent authority, the principal is not bound unless she ratifies the actions of the agent.
[4] Buyer’s name and contact information: Same as [3]. Additional ambiguity can arise if the
goods are purchased by one natural or legal person for delivery to another. The entity identified as
buyer is the one who pays the purchase price. It may make sense in such a case to mention already
here that the goods are “for delivery to [third party]”. Ambiguous language such as “x on behalf of
y” is to be avoided.
[5] Description on goods sold under the present contract: The contract of sale supersedes all prior
communications between the parties, see below, #20. This includes any indicators of suitability of
the goods for particular purposes or promises of performance, whether made on the website or in
other marketing materials, or even in letters, faxes, e-mails or phone conversations between the
parties. Thus, both sides have a strong interest to incorporate in the description of the goods
2 – SALES CONTRACTS
p. 72 of 245 Version as of 18 September 2017
everything the seller is promising to deliver and everything the buyer is expecting for the successful
execution of the IBT. The buyer, in particular, should ensure that any promises made earlier regar-
ding qualities of the goods, quantity, suitability, performance, durability, etc. are incorporated here.
The seller, on the other hand, should ensure that he does not promise anything he cannot or does not
plan to deliver and that any promises regarding ancillary services, such as special packaging,
extended warranties, etc. are reflected in the overall contract price.
[6] Specifics as to the price payable under the present contract: To avoid disappointment on either
side, let alone dispute between the parties, it is imperative that the parties understand all expenses
involved in the transaction, in particular for the shipping of the goods on the one side and the
transfer of payment on the other. Once the parties have a clear understanding of all performance
elements and their respective cost, they have to agree a) which performance elements are seller’s
responsibility and compensated within the price of the goods, b) which performance elements are
seller’s responsibility but to be compensated by the buyer in addition to the price of the goods, and
c) which performance elements are buyer’s responsibility and neither compensated by seller nor
deductible from the price of the goods. The contract price is the total price payable by the buyer
and should include full compensation for all obligations of the seller (a and b above). To avoid
ambiguities, it is recommended that the price is broken down into key elements such as price per
unit, number of units and corresponding total price of the goods, any payments to be made in addi-
tion by the buyer for packing & handling, freight and/or insurance, as well as any sales or other taxes
to be paid by the buyer separately from the price per unit. Unless otherwise specified, the parties
should understand that the contract price also covers the cost of any warranties given by the seller
(Contract Clause 3), inspection by a third party, if the seller has agreed to organize and pay for this
(Contract Clause 8), any costs incurred by the seller with regard to payment conditions, in particular
incoming wire fees of seller’s bank and/or the fees of seller’s bank or another bank in seller’s
country for advising or confirming a letter of credit (Contract Clause 10 and Part ??? below), as well
as the cost of procuring any documents for which the seller is responsible (Contract Clause 11).
???harmonize 5 & 6 with Purchase Order
[7] Delivery terms: Incoterms consist of a three letter abbreviation and a specification of a place
where the exchange will take place. They are a convenient and efficient way of geographically
delimiting the responsibilities of seller and buyer with regard to a) passing of the risk of damage,
deterioration or loss of the goods, b) organization and payment for carriage, and c) organization and
payment for insurance during carriage. For details see below, chapter ???. Clause no. 5 of the
contract lists all options. The acronyms in bold face are recommended for multi-modal transport,
while the others are only recommended for maritime transport. If the seller is drafting the contract,
she would only include the term she wants to offer. However, the buyer should be aware of all
options and may try to negotiate for a different term that would be more attractive to her. If the
parties agree to change the Incoterm from the original proposal of the seller, they should not forget
to adjust the contract price accordingly.
[8] Name and contact information of first carrier in seller’s country: The “first” carrier provides
the carriage service from the seller to the port or airport from where the international voyage begins.
If the seller is in a landlocked country or if the main carriage begins from a port or airport in a
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neighboring country, even the first leg of the journey may involve a cross-border service. As with
the seller and buyer themselves, it is important to specify the name of the person who becomes the
party to the shipping contract – typically the name of the shipping company – as well as the name,
title, phone, fax number, and e-mail, of the contact person within that company to whom any notices
should be sent, in particular if there is a delay or change of plans.
[9] Main carrier’s name and contact information: In our typical export/import sales transaction,
this will be the maritime carrier (see chart ??? above). If the parties use an integrated logistics
provider who will render door-to-door service, only this “main” carrier should be specified in the
contract and sections 6a and 6c should be suppressed. If the integrated logistics provider uses a sub-
contractor for some or all of the transport services, to which they are typically entitled pursuant to
the industry-standard contracts, this is of no concern to our seller and buyer. At the time of conclu-
sion of the contract, they will usually not know that a subcontractor will be used, let alone the iden-
tity of the subcontractor. Seller and buyer should address any questions, notices, and complaints
concerning the carriage service only to the integrated logistics provider.
[10] Name and contact information of third carrier in buyer’s country: The “third” carrier pro-
vides the carriage service from the port or airport where the international voyage ends to the
premises of the buyer or a third party beneficiary/consignee. If the buyer is in a landlocked country
or if the main carriage ends at a port or airport in a neighboring country, even the final leg of the
journey may involve a cross-border service. As with the seller and buyer themselves, it is important
to specify the name of the person who becomes the party to the shipping contract – typically the
name of the shipping company – as well as the name, title, phone, fax number, and e-mail, of the
contact person within that company to whom any notices should be sent, in particular if there is a
delay or change of plans.
[11] Time of delivery: Delivery is the passing of risk as stipulated in the Incoterm. After the risk has
passed from the seller to the buyer, the seller is no longer responsible for any delays. The time when
this has to happen should be stipulated in clear and unambiguous terms. As with #5 above, the
interests of the parties are somewhat at odds. While the buyer will often have a preference for a very
specific (and early) time of delivery, a high level of specificity can be problematic for a seller who
still has to acquire or manufacture the goods and bring them to the place of delivery. In some
industries, it is still customary to specify only the calendar week when delivery has to be made and
leave the detailed arrangements to the parties for subsequent specification. In other industries, where
“just in time” delivery is required to minimize buyer’s need to hold inventory, the time of delivery
may be specified down to the hour and even the minute.
Under the CISG and in most Continental European legal systems, a relatively minor delay is not
considered a fundamental breach by the seller and entitles the buyer only to damages but not to
avoidance of the contract. This is different, however, if the buyer indicates and the seller accepts that
timely delivery is essential.
The standard under the UCC is generally stricter on account of the perfect tender rule in §2-601
pursuant to which seller’s tender of delivery must not “fail in any respect to conform to the
contract”. This includes the time of delivery and potentially entitles the buyer to avoid the contract
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for delay. However, the provision is moderated by §2-504 pursuant to which the buyer can often
reject the contract only “if material delay or loss ensues.” As with the CISG, buyer’s can insist on
and seller’s can accept a stricter standard. This will be binding and entitle the buyer to additional
damages and/or avoidance, as long as it is clearly reflected in the contract.
[12] Inspection of the goods by the buyer: The seller will always inspect the goods of his own
motion to protect himself and his reputation. However, for the buyer this may not be enough, in
particular if payment has to be made in advance or if collection against documents or credit is
foreseen before the goods arrive at the buyer’s premises. The buyer has several options to protect
her interests. First, she can inspect the goods herself or send an agent or trusted business partner to
do so. Second, she may bring in a professional inspection company. For practical matters, it also has
to be decided where and when the inspection will take place and who has to pay for it. Since the
inspection is in the interests of the buyer, the basic assumption is that the buyer will bear the costs
of the inspection unless the contract specifically stipulates otherwise. The parties should consider
the options carefully to avoid delays and extra expenses, for example if the goods have to be
unloaded and unpacked en route for the inspection.
[13] Inspection by an independent party: If the buyer is unable to inspect the goods herself or have
a representative conduct the pre-shipment inspection, or if the conformity of the goods to the
required standards of quality is only discernible by professional inspectors, it may be necessary to
bring in a third party. Depending on the type of goods, different companies provide independent
inspections in different countries and regions of the world. An example is Lloyds Inspection Agency
(www.lloydsinspection.com/), which provides services in multiple countries and regions of the
world and to many different industries. Since the inspection is mainly in the interests of the buyer,
the choice of the inspectors has to be acceptable to the buyer, who will also have to pay for them,
unless expressly stipulated otherwise in the contract.
[14] Retention of title: This creates a kind of conditional sale. The seller retains title (= ownership)
of the goods until full and timely payment by the buyer. Upon full payment, seller’s title disappears
(= resolving condition), and the buyer automatically obtains title and ownership. Prior to full pay-
ment, the buyer is not without rights either, since the seller cannot easily transfer the goods to a third
party. Dalhuisen, for example, argues that the buyer initially obtains a kind of title too, however
pending full payment (= suspending condition).1 The question whether the buyer can pay early to
complete his rights and deal with the goods like an owner depends on the applicable sales law; see,
for example, Article III.-2:103 CFR. Of greater importance in practice is the question what happens
when the buyer is late with payment. Again, the answer must be sought in the applicable sales law,
for example Articles 61-64, 25, 81, 84 CISG.
In international transactions, the reservation of title is not always of much use, even if the buyer does
not pay at all or pays so late or so little that it entitles the seller to recover the goods. In addition to
the problems this may cause in a domestic setting, if the goods have been processed or commingled
1 See Jan H. Dalhuisen: Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law,
Vol. II Contract and Movable Property Law, 4th ed. 2010, p. 457.
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in buyer’s business or sold onward by the buyer (compare Article 82 CISG; §§2-403, 7-205 and 9-
320 UCC), any property rights in the goods would have to be pursued wherever the goods are now
located, most likely in buyer’s country. Whether this will be promising, in particular whether the
goods can be seized via a prejudgment writ of attachment or a temporary restraining order or similar
interim or conservatory measures depends in large measure on the method of dispute settlement
agreed upon by the parties or applicable by law (for details see Chapter 10).
[15] Payment conditions: The parties have numerous options how and when payment should be
made from the buyer to the seller. These are outlined and compared in Chart 3-1 below. The most
suitable option depends on many factors, including the level of trust between the parties, the
importance of the amount at issue relative to the size of the companies involved, i.e. whether a
significant delay or a default by the buyer could become a major or even existential issue for the
seller, whether the seller or a third party grant extra time for payment by the buyer, i.e. provide
credit, and the cost of a particular mode of payment. As a rule of thumb, the higher the level of
security for the seller and/or the longer the credit until the buyer has to pay, the more expensive the
transaction will be. Four options are most commonly used in practice:
a) Payment or cash in advance requires the buyer to wire the money or send a check or bank draft
(certified check) before the seller does anything. While this method is inexpensive, it provides no
security to the buyer. Since the buyer has to advance her performance, she is essentially financing
the transaction. In practice, this method is used mainly if the seller needs advance payment to be able
to acquire or manufacture the goods. Most often, only a percentage of the purchase price is paid in
advance. Unless there is a high level of trust between the parties, the buyer who is advancing the
payment may want to get a bank guarantee to get her money back in case the seller never performes.
b) Payment on open account is largely the opposite of payment or cash in advance. It requires the
buyer to wire the money or send a check or bank draft after the goods have been delivered. Again,
this method is inexpensive but this time the risk is on the seller, who gets no security. Since the
seller now has to advance his performance, he is essentially financing the transaction. In practice,
this method is used primarily if the seller is willing and able to wait for payment, for example 30 or
45 or 60 or even 90 days after the invoice is drawn up and delivery is made.
Seller’s risk can be mitigated if he also receives a standby letter of credit or a demand guarantee.
These are backup payment options not intended to be used. They will only be activated if the buyer
does not pay at the agreed upon time. Naturally, the transaction gets more expensive if such backup
options are included. However, since the demand guarantee or the standby are not intended to be
used, they may cost less than a regular letter of credit. In practice, inclusion of a standby or a
demand guarantee are used mostly for installment contracts or other repeat transactions where it
would be too expensive to provide a regular letter of credit for each payment. This will be discussed
in detail in Chapter 3.
c) Documentary collection requires payment to be made when the seller has performed and is
presenting the controlling documents, in particular the Bill of Lading, to the bank. It provides a
relatively high level of security for the buyer because the seller cannot get paid until he has
performed. However, it does not provide much or any security for the seller because the only party
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promising to pay when the documents are presented is the buyer. The bank is just a facilitator and
does not provide credit nor undertake a payment obligation. Thus, if the buyer is no longer willing
or able to pay when the documents are presented, the seller does not get paid. The only protection
for the seller at this point is that he will not hand over the documents without getting paid. Thus, the
seller can recover the goods from the carrier because he still has the Bill of Lading. Payment can be
made in cash (sight draft) or via check or bank draft (time draft). Under “details”, the parties have
to specify, in particular, the documents to be presented for collection.
d) Documentary credit involves a Letter of Credit (L/C) issued by buyer’s bank and potentially
confirmed by a bank in seller’s country. By contrast to documentary collection, the L/C is an
irrevocable payment promise by the bank, independent of buyer’s willingness and ability to make
payment at the time of delivery. The seller has a high level of security, as long as he can procure all
documents required under the credit. Details will be discussed in Chapter 3.
[16] Interest in case of late payment: This is a provision for liquidated damages, i.e. a contractual
agreement that the buyer will pay a certain percentage of interest if payment is late. In general, if
there is no such clause for late payment, the seller can still ask for interest and enforce it in court or
arbitration, if necessary. In practice, however, it will be easier to get damages for late payment if
they have been specifically agreed upon. For example, if the contract provides for interest of 5 to
8% above the prime lending rate, a court or tribunal will normally enforce this without asking
questions. If the contract does not stipulate an interest rate, the seller would have to prove his cost
of borrowing in order to get more than 2 or 3% above the prime rate. Also, if the seller was
eventually paid the contract price, he is unlikely to start proceedings over an unmet demand for
unspecified interest. But if an actual $$ amount can easily be calculated based on the inclusion of
a specific rate in the contract, the seller is much more likely to ask for and get this compensation.
The importance of this should not be underestimated in a day and age where the majority of all
international contract payments are late, often by months.
A different approach has to be taken in contracts with parties based in certain Muslim countries. For
example, in Iran and Saudi Arabia, many judges refuse to award interest as a matter of principle and
may even refuse to enforce an entire contract or an arbitral award if it includes provisions for interest
among others. Thus, in these situations, the contract should provide for liquidated damages without
mentioning the word “interest” and without a clear connection to the passing of time.
[17] Documents to be provided by the seller: By definition, an IBT results in the movement of
goods across an international border. This has always necessitated additional documents that are not
needed for domestic transport, in particular for customs processing. Trade embargoes on certain
goods and countries for political reasons, as well as restrictions on the movement of certain goods
for security reasons, have added to the bureaucratic complexity of these kind of transactions. In
practice, if certain documents are missing or incomplete, goods are likely going to be held up at the
border, either upon exportation or importation or both. If this happens, it invariably causes delays,
extra work, and extra expenses. In extreme cases, the goods may be so much delayed that they are
no longer of interest to the buyer or they may never arrive. It is, therefore, of great importance that
the parties are aware of all required documents and come to a clear understanding who has to
provide what. Ideally, they should also divide the responsibilities in a way that corresponds to
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practical and economic realities, i.e. charge the seller with the provision of those documents that
only the seller can provide (commercial invoice, packing list), and those documents which are
(much) easier for the seller to obtain (in general, documents to be procured from the authorities in
seller’s country, such as certificates of origin and export licenses).
[18] Documents to be provided by the buyer: By contrast to #17, the buyer should be charged with
the procurement of those documents that are (much) easier for her to obtain (in general, documents
to be procured from the authorities in buyer’s country, such as import licenses).
If one of the parties is much more experienced in the field of international business transactions and
international shipping of goods, she may agree to a different distribution of responsibilities and
handle even some of the formalities in the other country by relying on established practices and
contacts. This would generally be considered a concession and may need to be reflected in the price.
Importantly, the distribution of responsibilities agreed upon by the parties here should correspond
to the distribution of responsibilities agreed upon elsewhere. Every commercial Letter of Credit also
contains a list of documents to be presented by the seller at the bank to get paid. If the list in the
contract of sale is different from the list in the L/C, the seller will have to procure one set of
documents to get paid and a different set to meet his contractual obligations. Another issue to pay
attention to is the INCOTERM and the distribution of responsibilities and risks it provides. All of
these should be in harmony.
[19] Cancellation date in case of late delivery: In general, minor delays in delivery do not entitle
the buyer to avoid or cancel the contract, although the details depend on the applicable sales law.
Even in case of major delays, buyer’s rights may be limited if the seller is not responsible for the
delays (see, for example §2-615 UCC). The suggested contractual provision enables the buyer to
free herself from the contract after a reasonable time, regardless of the cause or causes of delay.
[20] Liquidated damages for late delivery: This is a provision for liquidated damages in parallel to
#16, i.e. a contractual agreement that the seller will pay a certain amount of damages if delivery is
late. In general, if there is no such clause for late delivery, the buyer can still ask for damages and
enforce them in court or arbitration, if necessary. In practice, however, it will be easier to get
damages for late delivery if they have been specifically agreed upon. If the contract does not
stipulate an amount for the damages, the buyer would have to prove his damages on a case-by-case
basis in order to get any compensation. This can be quite difficult. Also, if the seller eventually
delivered conforming goods, the buyer is unlikely to start proceedings unless she had specific,
clearly identifiable and significant losses. But if an actual $$ amount can easily be calculated based
on the inclusion of a specific rate in the contract, the buyer is much more likely to ask for and get
this compensation. Incidentally, the perspective of having to pay significant amounts in liquidated
damages can also motivate the seller to make special efforts in order to meet the delivery date.
[21] Liability for non-conforming goods: While #20 works in favor of the buyer, this is a limitation
of liability in favor of the seller. Without a limitation of liability, the supplier of a minor component
that fails and causes significant damages to much larger and more expensive things and their users
could be on the line for virtually unlimited consequential losses. The suggested clause would limit
any and all payments, including the expenses for dispute settlement, to a percentage of the contract
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price or to the available insurance coverage. Even if the percentage is put at 100% of the contract
price, the seller should be able to survive a conformity problem, regardless of the actual losses
incurred by the buyer.
The clause cannot protect the seller against claims by third parties, for example employees or
customers of his buyer, and any other damaged parties or interests, since these are not party to the
contract and did not consent to the limitation of liability. However, in most cases, a tort liability in
favor of third parties will only exist if some kind of fault of the seller can be proven.
[22] Limitation of liability where non-conforming goods are retained by the buyer: In case of non-
conformity of the goods the buyer may have a choice between avoidance of the contract and price
abatement (cf. Articles 49 and 25 CISG vs. Article 50 CISG, as well as UCC §§2-711 and 2-714).
The clause limits the right of the buyer to reduce the price. If the reduction is too restrictive,
however, it may create an incentive for the buyer to avoid the contract and ask all of her money
back.
[23] Time bar: The purpose of this provision is to provide legal certainty to the seller that there will
be no claims of non-conformity after a specified amount of time has passed. The provision contains
three elements. First of all, it requires that the buyer must inspect the goods immediately upon
arrival and notify any lack of conformity within a specified amount of time. The default pursuant
to CISG Article 38(1) is that buyer must inspect the goods “within as short a period as is practicable
in the circumstances.” CISG Article 39(1) provides that the buyer has to notify non-conformity
“within a reasonable time” after he has become aware or ought to have become aware. The time
when the buyer ought to have become aware is the time provided in CISG Article 38, unless the
defects are hidden. Some continental European legal systems require inspection and notification
“without undue delay” (source???). The UCC provides in §2-606 “a reasonable opportunity” for the
buyer to inspect the goods. If the non-conformity was not immediately discoverable, §2-608
provides the buyer with “a reasonable time” after discovery of the non-conformity to revoke her
acceptance of the goods. The suggested contract clause makes both the time for inspection and the
time for notification more specific. Second, the clause also suggests a definitive cut-off point for any
claims of non-conformity, even if they were not detectable before. Since CISG Article 39(2)
provides an upper limit for such cases, this clause only makes sense if it provides for less than two
years of time. Note, however, that CISG Article 40 provides an exception to CISG Article 39(2) if
the seller acted in bad faith. Although the clause here suggested could be interpreted as overriding
both CISG Article 39(2) and CISG Article 40 and impose a definitive cut-off even if the seller knew
of or could not have been unaware of the defect, it is likely that a court or arbitration tribunal would
set aside an absolute time-bar in cases where the seller acted in bad faith. Of course, the fact that
seller knew or could not have been unaware would have to be proven by the buyer. Last but not
least, the clause offers a procedural requirement, namely that the buyer has to give an opportunity
to the seller to cure the lack of conformity before taking decisive action, in particular before
avoiding the contract.
[24] Choice of law clause: The considerations for choice of law are discussed in detail above, p. ???,
and below, p. ???. They should be reviewed at this time.
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[25] Method and forum for dispute resolution: The considerations for choice of forum, for the pro’s
and con’s of arbitration vs. litigation, and for the drafting of arbitration clauses are discussed in
detail above, p. ???, and below, pp. ??? and ???. They should be reviewed at this time.
[26] Reference to “General Terms”: Whenever the parties want to include general terms into their
agreement, a reference must be included in the specifically negotiated clauses on the front of the
contract. Unfortunately, unreflected references by each side to its own general clauses in com-
munications sent back and forth, the proverbial “battle of the forms”, leads to a lot of uncertainty
and ultimately frustration, in particular if the general clauses contain “material alterations” to the
agreement in the sense of Article 19 CISG. The problem can be minimized if both parties ultimately
sign on to one and the same written version of the contract (front and back) and this final version
contains a merger clause as per #27. By contrast, if the formation of the contract has to be deter-
mined on the basis of multiple drafts sent back and forth and the final acceptance may be in the form
of initiation of performance, the inclusion of the general terms may cause more harm than good
under the CISG. The UCC has a better solution in this regard but is also not without problems. The
reader should look out for this problem in the context of our discussions on contract formation.
[27] Merger clause: Article 11 CISG allows “any means, including witnesses” to be used in the de-
termination whether a contract has been formed and what is says. In a similar way, §2-202 UCC
allows “parol or extrinsic evidence” to be used, under certain conditions, to clarify or supplement
contract provisions. The merger clause largely cuts this off and prevents a party from claiming that
statements made or allegedly made in one form or the other during the negotiations are binding even
if they did not make it into the final written agreement. This facilitates the determination of the
rights and obligations of the parties and avoids lengthy depositions of witnesses, invariably tainted
by their association with either of the parties, and other fact finding missions during dispute settle-
ment.
[28] Signatures: Each party should ensure that the person signing the contract for the other side has
signing authority for the amounts and commitments in question. Actual authority is either based on
the position in the company or a specific power of attorney. When in doubt, corporate statutes,
corporate resolutions, employment agreements or express authorizations should be examined. Even
if actual authority was not established and may not exist, a contract binding on the principal can also
be made on the basis of apparent authority. This may have to be established in case a party should
claim that it is not bound by the signature on the contract because the person in question did not act
on its behalf. Apparent authority can be based on the way the agent acted with knowledge of the
principal, his or her title or function in the principal’s organization, previous contract negotiations
involving the same agent and principal, and many other factors. Since disputes over authority can
be tedious and unpredictable, establishment of actual authority is highly recommended.
[29] ICC General Conditions for Sale of Manufactured Goods for Resale: The general terms
reproduced here are largely based on the general terms suggested by the International Chamber of
Commerce (ICC) for international contracts of sale. They are not entirely neutral – for example the
default dispute settlement clause is in favor of arbitration administered by the ICC – but as a set they
are very good and suitable for most of these kind of contracts. Importantly, Article 1.1 of the
General Terms is a reflection of Clause 19 of our contract, namely that the general terms of pp. 5-8
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only become relevant to the extent an issue is not or not clearly elaborated in the individually
negotiated terms of pages 1-4.
[30] Choice of law clause: This provision provides a default choice of law in favor of the CISG and,
as a backup system, seller’s law. If the parties include a specifically negotiated clause, as suggested
in Contract Clause 17, the provision in the general terms is superseded. It’s function is, primarily,
to have an unambiguous choice of law even if the parties, for whatever reasons, do not otherwise
make or include such a choice in their agreement.
[31] INCOTERMS: This clause clarifies that “trade terms” such as EXW, FOB, CIF, are
INCOTERMS. In combination with clause 1.4, it clarifies that the reference is always to the latest
and current version of these terms. For detailed discussion, see below, p. ???.
[32] Subsequent amendments of the contract: This clause is a modified version of the second part
of the merger clause suggested in #27. Contract Clause 20 seeks to exclude any subsequent
modifications of contractual rights and obligations unless agreed upon in writing and duly signed
by both parties. By contrast, Article 1.5 of the general terms is qualified. Pursuant to the second
sentence, a party may have to acknowledge a modification of the contract if its conduct led the other
side to presume consent and was relied upon. Article 1.5 can be problematic from an evidentiary
perspective and Clause 20 would provide a clearer cut rule. However, a complete exclusion as
suggested by Clause 20 may not always be acceptable in court or arbitration.1
[33] Exclusion of various forms of parol evidence: This provision is a milder version of the first
part of the merger clause suggested in #27. It stipulates that general informational materials of the
seller do not amount to contractual and enforceable promises. However, by contrast to our Contract
Clause 20, this provision does not exclude earlier offers and counter-offers and/or various elements
of the contract negotiations to be relied upon in the interpretation of the contract and the deter-
mination of the rights and obligations of the parties. Clause 20 would provide a clearer cut rule.
However, a complete exclusion as suggested by Clause 20 may not always be acceptable in court.2
[34] Intellectual property rights: Article 2.2 clarifies that any IP does not get transferred with the
contract of sale unless specifically agreed upon. This should be self-evident but it is a good
reminder. If IP intensive goods are sold, it may be advisable to include this provision in the main
parts of the contract.
[35] Inspection: Pre-shipment inspection is common, although usually not done by the buyer
herself. Instead, the buyer will usually involve an inspection company or agent in seller’s country
with specific knowledge of the contracted goods. Since the inspection should best be done before
the goods are packaged and shipped, it is important for the seller to notify the most suitable time for
the inspection.
[36] Price: Since agreement on price, or at least a way how the price can be determined, is an
essential element of a valid contract of sale, Article 4 provides just that, in case the parties did not
1 Examples?
2 Examples?
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include a clear provision in the main part of the contract. Article 4.3 reflects the principle that each
side has to cover its own obligations: the seller is responsible for expenses incurred up to the point
of delivery; the buyer is responsible from the point of delivery. The point of delivery is generally
the place where the risk passes from the seller to the buyer. For example, under INCOTERMs FOB
or FCA, this would be when the goods are loaded onto the ship or handed over to the carrier. An
exception applies under C-terms, as will be discussed below, pp. ???.
[37] Payment terms: Article 5 provides backup provisions for payment terms, as well as some
specifics for each of the five option. 5.1 refers to payment by wire transfer into an open account after
the goods have been shipped. Making this the default in the absence of party agreement on different
payment terms is very buyer friendly, as is explained above, p. ??? and below, pp. ???. Sellers
should not include this provision in their general terms without full understanding of its potential
impact. Article 5.2 refers to payment by wire transfer into an open account before the goods are
shipped. This is by and large the opposite of the arrangement under 5.1 and very seller friendly.
Buyers should not include this provision in their general terms without full understanding of its
potential impact. 5.3 refers to payment by documentary credit, the most common form and most
secure payment term, however, not the cheapest way of handling payment. In contracts where seller
and buyer do not know each other and have no particular reasons to trust that the other side will
perform as promised, this should be the default payment term. The payment terms referred to in
Article 5.4 and 5.5 – documentary collection and payment by wire transfer backed up with a bank
guarantee or a standby letter of credit – have various advantages and disadvantages that will be
discussed below, pp. ???. In general, neither sellers nor buyers should include these provisions in
their general terms without full understanding of their potential impact.
[38] Interest for late payment: This is a more general version of the contract clause suggested in
???. 2% above prime is a relatively low level for the interest obligation, which is adequate for
general contract terms that should not contain surprises. However, with a clear and specifically
agreed upon clause such as ???, sellers can generally get a higher level of interest.
[39] Retention of title: This is a more general version of the contract clause suggested in ???. The
default is “complete payment of the price”, which is the most common condition. For a general
contract clause, the following might be even better: “Unless otherwise agreed in writing, the goods
shall remain the property of the seller until the complete payment of the price. Complete payment
shall be understood as receipt of any sums due by seller’s bank in immediately available funds.”
[40] Default delivery term/INCOTERM: This provision reflects the customary rule that goods have
to be picked up, while money has to be sent, unless the parties have agreed otherwise. Thus, the
default delivery term, in the absence of a specific agreement suggested in Contract Clause 5, is ex
works. The seller only promises to make the goods available at his facility for the buyer, or her
agent, to pick them up. This clause is seller friendly, the seller has minimal responsibilities.
Buyers might want to put “FOB” or “FCA” as default into their general terms as it makes sense that
each party should be responsible for the documents and services that need to be provided or
procured in her country. For further discussion see below, pp. ???.
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[41] Documents to be supplied by seller: This clause is redundant because the agreed upon
INCOTERM will impose the same requirement anyways. It is also a waste of opportunity. Since the
default INCOTERM, pursuant to the ICC General Terms, is ex works, the buyer may find herself
in the difficult position of having to procure various documents for export processing in seller’s
country. At the very least, the seller should be obliged to support the buyer by providing his docu-
ments, such as invoices and packing lists, in the format required for export.
[42] Buyer’s remedies for late delivery and non-delivery: This is a more general version of the
contract clause suggested in ???. 0.5% per week of delay and a cap of 5% is very seller friendly. An
individually negotiated contract clause such as Contract Clause 13 could easily provide for
significantly higher percentages, in particular if the buyer could show that the liquidated damages
are not entirely disconnected from actual business losses. Even if a modest percentage per week is
agreed upon, it may be worthwhile for the buyer to insist on a minimum compensation amount if the
goods are more than a few days or a week late.
[43] Buyer’s obligations and remedies in case of non-conformity of the goods: This clause
contains seller friendly elements, in particular Articles 11.2 and 11.3, but also buyer friendly ele-
ments, since Article 11.1 is more generous than our Contract Clause 16. In general, limitations of
liability like these have to be used with caution. The CISG, via Articles 49, 25, and 74, 75, does not
limit the amount of damages if the seller commits a fundamental breach. The only limits under the
CISG are the foreseeability rule in Article 74, the obligation to mitigate damages under Article 77,
and the exemptions under Article 79, force majeure, and Article 80, contributory fault. Article 11.7
of the general terms cuts off recourse to these other provisions, i.e. it limits the buyer to the
liquidated damages even if she could easily prove more extensive losses caused by seller’s breach.
Thus, overall the clause favors the seller. A contract drafted by the buyer might provide for similar
levels of liquidated damages regardless of foreseeability and leave the option open for the buyer to
seek larger amounts of damages if these can be specifically proven and were foreseeable.
[44] Cooperation between the parties in case of third party claims: This clause provides for a
useful information exchange in case of third party claims. It does not obligate the parties to support
each other in litigation or arbitration against third parties.
[45] Force majeure: Article 13.1 is a verbatim reproduction of Article 79(1) of the CISG. Article
13.2 is largely a reflection of Article 79(4) of the CISG. The innovation of the general terms is
tucked away in Articles 13.3 and 13.4. Under the CISG, force majeure only exempts from damages
“under this Convention” (Article 79(5)), i.e. under Articles 74 to 77. This does not cover contractual
or liquidated damages, any contractual penalties (as suggested in #42), as well as interest. The
general terms overrule these limitations and also provide a right of termination after six months,
unless otherwise agreed upon specifically in Contract Clause 12.
[46] Choice of forum / dispute resolution: The dispute resolution clause is very general and does
not specify the number of arbitrators, nor the seat or the language of the arbitration. While all these
can be determined by the ICC pursuant to its Arbitration Rules, the parties to the contract should
agree on the most appropriate arrangements before a dispute arises and such agreement may become
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elusive. In Chapter 10, we will discuss not only better options for dispute settlement clauses but also
suggestions for cost control in arbitration.
Section 5. The UN Convention on
Contracts for the International Sale of Goods (CISG)
I. History and Purpose of the CISG
The International Institute for the Unification of Private Law – better known as UNIDROIT – is not
only the birthplace of the Unidroit Principles of International Commercial Contracts (PICC), which
we have already mentioned on several occasions and will discuss in some detail below. Founded in
1926 as an auxiliary organ of the League of Nations and based in Rome, the Institute drew up its
first workplan in 1928 and, following a suggestion by Ernst Rabel, already established as one focus
the unification of international sales law.1 As early as 1935, this resulted in a draft for a Uniform
Law on the International Sale of Goods (ULIS) and a draft for a Uniform Law on the Formation of
Contracts for the International Sale of Goods (ULF). Both were eventually adopted at a diplomatic
conference in The Hague in 1964. However, subsequent endorsements were disappointing. The 1964
Hague Convention Relating to a Uniform Law on the International Sale of Goods (ULIS) and the
1964 Hague Conventions Relating to a Uniform Law on the Formation of Contracts for the
International Sale of Goods (ULFC) were each signed by 12 countries but only ratified by 8, all of
them in Europe. This did not stop the documents from becoming models for both the Unidroit
Principles and the CISG, however. ???continue here
1 See Schlechtriem, Introduction, in Peter Schlechtriem & Ingeborg Schwenzer (eds), Commentary on the
UN Convention on the International Sale of Goods (CISG), Oxford University Press, 4th ed. 2016, p. 1. For
details on the working methods of UNIDROIT, see the website of the organization at www.unidroit.org.