1. © B. Fasterling 2003 EDHEC MBA Björn FASTERLING International Contract Law and Negotiation Legal issues related to sales contracts

2. © B. Fasterling 2003 Principle issues n Formation / Validity n Warranties n Remedies n Exemptions n Risk of loss and shipping terms

3. © B. Fasterling 2003 Validity and Formation of International Contracts n Principal Elements: o Mutual assent (offer and acceptance of the contract’s material terms o Legally sufficient Consideration - intention to enter into a legally binding obligation o Legal capacity of the parties o The contract must not be for illegal purposes or to carry on an activity that is contrary to public policy. o Observation of form requirements

4. © B. Fasterling 2003 Selected Issues as regards validity and formation n Silence as acceptance? o Principle: offeree’s silence is not interpreted as an acceptance. o Possible exceptions: n Trade usages (silence after letter of confirmation) n Individual Business Practice between parties, see Article 18 (3) CISG n « Battle of the forms » o Mirror image rule (The rule requires that an offeree respond to an offer with an acceptance that is definite and unconditional, and that matches the terms of the offer exactly and unequivocally) o Problem: conflict between the parties’ respective standard terms n Solution under Common Law / Civil Laws: performance/action as acceptance of the other party’s last form n Solution under CISG: see Article 19 n Solution under US law (UCC): see subsection 2 of UCC 2-207: « If both parties are merchants, any additional terms contained in the seller’s confirmation automatically become a part of the contract unless: (a) The buyer’s purchase order expressly lilits acceptance to the terms in that order; (b) The additional terms in the confirmation materially alter the terms of the oder; or (c) The buyer notifies the seller of an objection to the additional terms within a reasonable time after receiving the confirmation containing the new terms. »

5. © B. Fasterling 2003 Warranty provisions n Warranties are contractual terms that define performance characteristics and quality. These terms must be spelled out clearly so that no confusion arises over what one party is responsible for doing. Warranties are often at the heart of the bargaining procedure between the parties. In sales contracts o Sellers typically want to limit the scope of their liability, place a ceiling on the amount of damages for which they can be liable, and place a time limit on the time that the warranty will run. o Buyers typically will want to negotiate the broadest provisions and gain the most legal protection.

6. © B. Fasterling 2003 Warranty Provisions – selected issues n Notice of nonconforming goods o Most legal systems require the buyer to notify the seller in the event of a breach. If the buyer fails to give proper notice, it will lose its right to assert the breach against the seller (however, see Art. 44 CISG). The notice must be given n within a certain time period (regularly fairly short) n with sufficient specification of the claimed defect o CISG: See Articles 38 and 39 CISG n Implied warranties o Implied warranties are those warranties that are not expressly given by the seller but are « read into the contract » by the law. o CISG: Article 35 CISG.

7. © B. Fasterling 2003 Overview: Remedies for breach of contract according to the CISG n Avoidance n Seller’s obligation and right to cure defects n Price reduction n Damages n Anticipatory breach

8. © B. Fasterling 2003 Avoidance n Avoidance is a remedy, according to which a party may cancel the contract because of the other party’s breach. Under the CISG, the right to avoid the contract is confined to narrow limits: a party may only avoid the contract under the CISG in the event of a fundamental breach (see Art. 49, 64, Art. 25). n A party who avoids the contract may still sue the other party for damages resulting from the breach. n Requirements for effective avoidance rights: o Fundamental breach (Art. 25 CISG) o Non-delivery (seller) or – respectiveley – non-payment/non taking delivery (buyer) + lapse of additional time period (Art. 49, 64 CISG) o Notice (Art. 26 CISG) n Effects of avoidance: restitution (Art. 81 – 84 CISG) n Reasons why avoidance is confined to narrow limits in international contracts: o International Contracts often involve higher transaction costs o International deliveries generate many transport costs that should only be in vain in exceptional cases o Business parties can often use nonconforming goods o Restitution of goods generates even more costs

9. © B. Fasterling 2003 Seller’s obligation and right to cure defects n Seller’s obligation to cure: o Art. 46 (1) CISG: specific performance (see however Art. 28 CISG) o Art. 46 (2) CISG: delivery of substitute goods only in case of a fundamental breach o Art. 46 (3) CISG: Request for repair n Seller’s right to cure defects o Art. 36 (1) CISG: Until the passing of the risk, the seller may remedy any lack of conformity (see also Art. 34 CISG) o Art. 48 (1) CISG: right to remedy after the date of delivery: n If seller can do so « without unreasonable delay » and n Without causing the buyer « unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer ». n Buyer retains damages claim

10. © B. Fasterling 2003 Extra: Specific performance n Difference between Common Law and Civil Law traditions: n In Common Law countries the usual remedy is an award for money in damages. Specific performance is limited to exceptional cases. n In Civil Law countries courts in principle require a party to perform its duties (to carry out its part of the bargain) without regard to whether money damages are inadequate. n Solution in CISG: Under Article 46, a court may grant specific performance if the following conditions are met: o Buyer did not resort to other remedy such as price reduction or avoidance o Non-delivery or fundamental breach o Notice by buyer o Request to provide substitute goods o Article 28 places a limit on the buyer’s right to specific performance by providing that a court need not grant specific performance unless « it would do so under its own law ».

11. © B. Fasterling 2003 Price reduction n Art. 50 CISG – formula: the price should be reduced in the same proportion as the value that the goods actually delivered (value of non-conforming goods) had at the time of delivery compared with the value that conforming goods would have had at that time. n This remedy is different from an action in damages: o No exemption under Art. 79 CISG (Art. 79 (5) CISG) o Damages may lead to a higher compensation than price reduction, particularly if the buyer has bought the goods for a price lower than the market price (price reduction concerns the contract price and not the market price).

12. © B. Fasterling 2003 Damages n Basic principle: Article 74 CISG: « sum equal to the loss », including o Lost profits o Other consequential damages provided that the damages do not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. Art. 74 CISG can flexibly accomodate an application of many principles used different jurisdictions (e.g. « adequate causation » in civil law and Scandinavian countries or « foreseeability » in Common Law systems) Recommendable that parties agree in their contract how compensation should be computed. Example 1997 ICC Model Contract for International Sale of Goods n Articles 75 – 76 CISG: Calculation of damages in the event of avoidance n Article 77 CISG: Duty to mitigate losses

13. © B. Fasterling 2003 Anticipatory breach n Situation: Anticipatory breach occurs when one party clearly sees that the other party to the contract either will not perform a substantial part of its obligations or that it will commit a fundamental breach. n Rights: o Suspension of performance (Art. 71) o Avoidance (Art. 72): typical cases n Declaration of the other party that it does not intend to fulfil the contract, or n Wrongful repudiation of the contract by the other party (would be deemed to comprise a declaration as mentioned above)

14. © B. Fasterling 2003 Exemptions – Impediments beyond control n Exemption under Art. 79 CISG: requires proof that the failure to perform an obligation was due to « an impediment beyond control » and further that the non-performing party « could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. n Interpretation: possible categories: war, sabotage, natural disasters, fires and explosions, but also unforeseen acts of governments, general shortage of energy, labour disturbances. n Force majeur clauses (see article 13 of the ICC Model International Sales Contract) n Price adjustment / currency clauses (principle: it is for the sellers to take the risk of inflation into account), possibilities o Parties agree on payment in currency in which the seller would have the major part of its costs o Multi-currency clauses o Price adjustment clauses referring to general indices

15. © B. Fasterling 2003 Risk of loss and shipping terms n As soon as the risk passes to the buyer, it must pay the contract price even if it does not receive the goods, or if the goods have been damaged (after the risk passed). See e.g. Article 66 CISG. n The allocation of the risk of loss of or damage to the goods in transit is of vital importance during contract negotiations and for the determination of a contract price. n Whoever bears the risk may turn to the carrier to obtain compensation. However, regularly the carrier’s liability will be limited, while the buyer’s liability to pay remains strict. n The shipping terms negotiated by the parties usually have direct influence on the determination of risk allocation. See e.g. Art. 67 – 69 CISG. n Standard shipping terms (such as EXW, CIF, FOB) as defined by the ICC Incoterms contain clear allocations of risk.

16. © B. Fasterling 2003 Examples for Incoterms n EXW (Ex Works): The ICC defines: « Ex works » means that the seller fulfils his obligation to deliver when he has made the goods available at his premises (i.e. works, factory, warehouse etc.) to the buyer. In particular, he is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination. This term thus represents the minimum obligation for the seller. This term should not be used when the buyer cannot carry out directly or indirectly the export formalities. In such circumstances, the FCA term should be used.

17. © B. Fasterling 2003 Examples for Incoterms n FOB (Free on Board): The ICC defines: « Free on Board » means that the seller fufils his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damageto the goods from that point. The FOB term requires the seller to clear the goods for export. This term can only be used for sea or inland waterway transport. When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.

18. © B. Fasterling 2003 Examples for Incoterms n CFR (Cost and Freight): The ICC defines: « Cost and Freight » means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. This term can only be used for sea or inland waterway transport. When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the CPT term is more appropriate to use.

19. © B. Fasterling 2003 Examples for Incoterms n DDP (Delivery Duty Paid): The ICC defines: « Deliver Duty Paid » means that the seller fulfills his obligation to deliver when the goods have been made available at the named place in the country of importation. The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto, cleared for importation. Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation.