Some Thoughts on Firm Offers, Mail Box Rules & Battle of Forms, etc

[hotlip]

Contract Formation

There are at least three issues of contract formation that lend themselves to incorporation of the
CISG: firm offers, the mailbox rule, and the battle of the forms. So far there are no U.S. cases
dealing with firm offers or the mailbox rule under the CISG, so one must simply teach from the
text of the Convention.[page 79] There is a battle-of-the-forms case applying the CISG, however,
which I have assigned and taught for several years.


Firm Offers
Under the common law, an offer is freely revocable, even if the offeror has promised to hold it
open, unless that promise is supported by consideration or reliance. The UCC, of course, changes
this rule, allowing a merchant to make an irrevocable offer -- a "firm offer" -- without the need
for consideration. But the UCC's firm-offer rule contains a number of restrictions: the offeror must
be a merchant; the offer must be in a signed writing; the offer must contain an "assurance that it
will be held open"; and the period of irrevocability may not exceed three months.[40]

CISG Article 16 allows an offeror to make a firm offer without these limitations:


"(1) Until a contract is concluded an offer maybe revoked if the revocation reaches the offeree
before he has dispatched an acceptance.
"(2) However, an offer cannot be revoked:

(a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable;
or
(b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has
acted in reliance on the offer."
As one can see, Article 16 does not require that the offeror be a merchant [41] or that the offer be
in a signed writing, and there is no limit on the period of irrevocability. Article 16 does not even
require an express assurance that the offer will be held open. It requires only that the offer
"indicate that it is irrevocable" and it makes clear that an offer may do this "by stating a fixed
time for acceptance." If an offer simply stated that it would expire after thirty days, the UCC would
not treat the offer as "firm" and would allow the offeror to revoke before the thirty days were up.
The CISG, on the other hand, would treat the offer as being irrevocable during the thirty-day
period.[42] Article 16(2)(b), like Restatement (Second) ?87(2), provides for an offer to become
irrevocable because of the offeree's reliance.[43]

Article 16 reflects a compromise between the civil law tradition, which presumes that offers are
irrevocable, and the common law tradition, which presumes the opposite. Article 16(1) provides that
offers are revocable, as under the common law, but Article 16(2) creates broad exceptions that will
lead many offers to be irrevocable in practice. A Contracts teacher can make [page 80] good use of
Article 16 in at least three ways. First, it can be used to question the common law rule that offers
are freely revocable. Second, it can be used to question the rather substantial limitations that the
UCC puts on its firm-offer rule. Finally, using the example of an offer that states a fixed time for
acceptance but does not assure the offeror that it will be held open, one can examine how different
legal rules may work differently on the same language, with the UCC holding that such an offer is
revocable and the CISG that it is not.


The Mailbox Rule
Under the common law, acceptances are effective upon dispatch, even if they never reach the
offeror. This rule performs two functions: it protects the offeree against the possibility of revocation
once the acceptance is dispatched, and it places the risk of a lost communication on the offeror. In
contrast to the common law mailbox rule, Article 18(2) of the CISG adopts a receipt rule: "An
acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror."
But this provision must be read in conjunction with Article 16(1), which says that "an offer may be
revoked if the revocation reaches the offeree before he has dispatched an acceptance" (emphasis
added). In other words, once the offeree has dispatched an acceptance, the offeror may no longer
revoke, but if the acceptance is lost in the mail there is no contract. So the CISG and the common
law both protect the offeree against the possibility of revocation once the acceptance is dispatched,
but the CISG places the risk of a lost communication on the offeree rather than the offeror.

I use the CISG in this context to distinguish the two different functions that the common law
mailbox rule plays by showing that we can still protect the offeree against revocation without
making the offeror suffer if the acceptance is lost. I think there is a good case to be made that the
CISG's rule is an improvement over the common law, because it places the risk of a lost
communication on the party who is in the best position to prevent that loss by choosing a more
reliable means of communication.[44] This is one way of introducing students to the idea that a risk
should typically be placed on the party best able to prevent the loss or to insure against it -- an
idea one encounters in other areas of contract law like mistake and impossibility.[45][page 8l]


The Battle of the Forms
Teaching the CISG in the contexts of firm offers and the mailbox rule can be fun, but the CISG
rules that I enjoy teaching the most are those that relate to the battle of the forms.[46] Moreover,
there is an interesting case that one can use to illustrate the operation of these rules.

Under the common law's mirror-image rule, an acceptance that added to or changed the terms of
the offer was deemed to be a rejection and a counter-offer. In practice this resulted in a last-shot
rule, with each new form constituting a counter-offer until the last one was accepted by conduct.
The UCC, of course, changed this rule, providing that "[a] definite and seasonable expression‎ of
acceptance . . . operates as an acceptance even though it states terms additional to or different from
those offered . . . ."[47] The additional terms in the acceptance may become part of the contract if
expressly accepted by the offeror or (so long as both parties are merchants) automatically so long
as the offer does not expressly limit acceptance to the terms of the offer, the additional terms do
not materially alter the contract, and the offeror does not object to the additional terms.[48] Finally,
if the parties act as though there is a contract although their writings fail to establish one (for
example, because the acceptance was expressly conditional on the offeror's assent to the additional
or different terms), the UCC employs a strike-out rule so that the terms of the contract are those
on which the parties' writings agree, supplemented by the UCC's gap fillers.[49]

The CISG, by contrast, adopts what is essentially a mirror-image rule.[50] Article 19(1) provides:
"A reply to an offer which purports to be an acceptance [page 82] but contains additions, limitations
or other modifications is a rejection of the offer and constitutes a counter-offer." Article 19(2)
attempts to soften this rule a little by providing that if the additional or different terms are not
material and the offeror does not object to them, then the purported acceptance is an acceptance and
the additional or different terms become part of the contract. But Article 19(3) defines materiality so
broadly that it is hard to imagine a change that the CISG would not consider material.[51] This
means that, in almost every case, an acceptance that varies the terms of the offer will be a
counter-offer which will be accepted by the other party's conduct.[52]

To teach the CISG's rules for the battle of the forms, I use Filanto, S.p.A. v. Chilewich
International Corp.,[53] which applied those rules to determine whether an arbitration clause was
part of a contract. One of the things that make Filanto an interesting case, however, is that the
district court misapplied the CISG's rules in order to make the case come out the way the court
thought it would under the UCC. Although the result in the case is (as I shall explain) defensible
on other grounds, its application of the CISG is wrong, and this requires the instructor to be willing
to teach against the case.

The defendant Chilewich International, a New York export-import company, had entered a contract
through its U.K. agent to supply footwear to Razno-export, a buyer in the Soviet Union.
Chilewich's contract with Razno-export, which the court referred to as the "Russian Contract,"
included an arbitration clause requiring that all disputes be submitted to arbitration before the
U.S.S.R. Chamber of Commerce and Industry. To fulfil its obligations under the Russian Contract,
Chilewich entered a series of contracts with the plaintiff Filanto, an Italian footwear manufacturer.
Chilewich's previous orders had attempted to incorporate by reference the terms of the Russian
Contract, including the arbitration clause, into its contracts with Filanto, but Filanto had attempted
to exclude all the terms of the Russian Contract except those related to packing, shipment, and
delivery.

On March 13, 1990, Chilewich sent Filanto a Memorandum Agreement ordering 250,000 pairs of
boots to be shipped in two installments. The Memorandum Agreement again attempted to
incorporate by reference the terms of the Russian Contract, including the arbitration clause. On May
7, 1990, Chilewich opened a letter of credit in favor of Filanto. On August 7, 1990, Filanto returned
a signed copy of the Memorandum Agreement, but with a [page 83] cover letter that purported to
exclude all terms of the Russian Contract except those related to packing, shipment, and delivery.
Chilewich took delivery of the first shipment of 100,000 pairs of boots on September 15, 1990, but
accepted only 60,000 of the remaining 150,000 pairs of boots in January 1991. Filanto brought suit in
U.S. district court for breach of contract, and Chilewich moved to dismiss based on the arbitration
clause.

In order to determine whether the arbitration clause was part of the contract, the district court
applied the CISG, which both the United States and Italy had ratified. The court noted that CISG
Article 19 had rejected the UCC's solution to the battle of the forms and had reverted to a
mirror-image rule. The court also correctly noted that the exception for non-material terms would
not apply because arbitration clauses are considered material under the CISG.[54] One would have
guessed, therefore, that the district court would have found Filanto's reply of August 7, 1990, to be
a counter-offer, which Chilewich accepted by conduct when it took delivery of the first shipment of
boots in September 1990, and that the resulting contract did not include the arbitration clause. But
the court sided with Chilewich and dismissed the case. It held that Filanto accepted the terms of
the March 13, 1990, Memorandum Agreement by failing to object to them in a timely fashion.[55]
The problem with this reasoning is that the CISG explicitly states that "[s]ilence or inactivity does
not in itself amount to acceptance."[56] To get around this, the district court referred to the parties'
prior course of dealing, which the court reasoned had established an obligation on Filanto's part to
alert Chilewich quickly to any objections it might have.[57] It is true that on at least one prior
occasion Filanto had objected to incorporation of the Russian Contract's terms within a month.[58]
But that is all the more reason that Chilewich should not have been surprised when Filanto objected
to these terms on August 7, 1990. The more reasonable interpretation of the parties' course of
dealing was not that Filanto's silence constituted an acceptance of the terms of the Russian
Contract, which would have been a change in its position, but rather that Filanto continued to
object to those terms.

I suspect that the district court was trying to reach the same result it thought the UCC would. At
one point, the court expresses some hostility towards the CISG, saying that "the State Department
undertook to fix something that was not broken by helping to create the Sale of Goods Convention
which varies from the Uniform Commercial Code in many significant ways."[59] But although [page
84] the court's battle-of-the-forms analysis goes astray, the result it reaches is defensible on two
other possible grounds. First, shortly after Filanto sued Chilewich for breach of contract, Chilewich's
agent complained that some of the boots were defective. In response to this complaint, Filanto relied
on a provision of the Russian Contract that it had purported to exclude. The district court viewed
this reliance as "an admission in law by Filanto" that it was bound by the terms of the Russian
Contract,[60] and it is at least evidence of the parties' course of performance which may be used to
determine the intents of the parties under CISG Article 8(3).[61] The second (and more doubtful)
ground on which the result in Filanto may be justifiable is that arbitration clauses are different --
specifically, that under the Prima Paint doctrine a court should not entertain arguments about the
existence or validity of the contract as a whole, but should limit itself to determining whether the
arbitration clause is valid.[62] As the district court recognized, however, it is sometimes necessary
for a court to consider issues related to the formation of the contract in order to determine whether
the parties have agreed to arbitrate, and Filanto would appear to be just such a case.[63]

If you do not feel compelled to teach only from cases that get the law right, Filanto provides an
excellent vehicle for covering the battle of the forms under the CISG. It is a challenging case for
students, but certainly within their abilities, and it can be fun to watch them realize how badly the
court mixed up its application of the CISG rules.[page 85]


Writings
Two other important issues on which the CISG differs from the common law and the UCC concern
the need for and the effect of reducing a contract to writing, for the CISG has neither a statute of
frauds nor a parol evidence rule.


Statute of Frauds
Both the common law and the UCC require that certain contracts be in writing in order to be
enforceable. CISG Article 11, by contrast, provides: "A contract of sale need not be concluded in or
evidenced by writing and is not subject to any other requirement as to form. It may be proved by
any means, including witnesses." Other provisions of the CISG, however, allow a country to opt out
of Article 11 and apply its domestic legislation requiring a writing when everyone of the parties to
the contract has its place of business in such a country. The United States has not opted out of
Article 11, which means that contracts between U.S. and foreign parties will not be subject to the
statute of frauds unless the non-U.S. party has its place of business in a country that has opted
out of Article 11.[64] As the earlier discussion of GPL Treatment indicates, the CISG's lack of a
statute of frauds can make a big difference in litigation.

I use the absence of a statute of frauds in the CISG chiefly to question whether it should be
retained in the UCC for sale-of-goods transactions. I point out that the UCC included a statute of
frauds chiefly because Karl Llewellyn was enamored of it,[65] that England has abolished the
statute of frauds for all but land and guarantee contracts,[66] and that the revisers of Article 2
seriously considered dropping the statute of frauds entirely.[67]


Parol Evidence Rule
Although the CISG does not require the parties to put their contract in writing, they will frequently
choose to do so anyway, and so a court may have to decide whether to allow one of the parties to
argue that their actual agreement differed from the written terms. Under the parol evidence rule
found in both the common law and the UCC, the parties may not contradict the terms of a final
written agreement with evidence of prior or contemporaneous negotiations or agreements. CISG
Article 8(3), by contrast, directs a court interpreting a contract to give "due consideration . . . to all
relevant circumstances of the case including the negotiations, any practices which the parties [page
86] have established between themselves, usages and any subsequent conduct of the parties." In
other words, the CISG lacks a parol evidence rule and allows a court interpreting a written contract
to consider not just trade usage, course of dealing, and course of performance, but even the parties'
prior negotiations.

The Eleventh Circuit's recent decision in MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova
D'Agostino, S.p.A.[68] provides a good vehicle for teaching the CISG's approach to extrinsic
evidence. MCC was a Florida tile retailer, and D'Agostino an Italian tile manufacturer. At a trade
fair in Bologna MCC's president negotiated an agreement to buy ceramic tiles with D'Agostino's
commercial director through a translator. The terms of the parties' oral agreement were recorded on
one of D'Agostino's standard order forms, which MCC's president signed; it contained a number of
boilerplate terms in Italian. The parties subsequently entered a requirements contract for tile,
pursuant to which MCC submitted more orders on D'Agostino's standard order forms. According to
MCC, however, the quality of the tile it received was lower than the quality for which it had
contracted, and MCC reduced its payment because of the nonconformity.[69] When D'Agostino
responded by failing to fill MCC's subsequent orders, MCC sued for breach of the requirements
contract, and D'Agostino counter claimed for the amounts it had not been paid.

D'Agostino relied on two of the boilerplate terms on its standard order form. The first term
required that complaints about defects be made in writing within ten days after the goods had been
received, which MCC had not done and which D'Agostino argued deprived MCC of the right to
reduce payment for alleged defects. The second term gave D'Agostino the right to suspend or
cancel any pending contracts in the event of nonpayment. MCC countered with an affidavit from its
president that he had not intended to be bound by these terms and affidavits from D'Agostino's
commercial director and the translator confirm‎ing that the parties had not intended to be bound by
the boilerplate on D'Agostino's order forms. The magistrate judge and district court granted
summary judgment to D'Agostino on the basis of the written terms, but the Eleventh Circuit
reversed.

The Court of Appeals began its analysis with a discussion of the role that subjective intent plays in
interpreting a contract under the CISG. Article 8(1) says that "statements made by and other
conduct of a party are to be interpreted according to his intent where the other party knew or
could not have been unaware what that intent was." But Article 8(2) continues: "If the [page 87]
preceding paragraph is not applicable, statements made by and other conduct of a party are to be
interpreted according to the understanding that a reasonable person of the same kind as the other
party would have had in the same circumstances." Although the court characterized the CISG's
approach as "[c]ontrary to what is familiar practice in United States courts,"[70] the CISG's
approach is, in fact, barely distinguishable from the modified objective theory of contract
interpretation that one finds in the Restatement (Second).[71] In most cases, CISG Article 8(2)'s
reasonable-person standard applies, and it is only in those rare cases where one party "knew or
could not have been unaware" of the other's subjective intent that this subjective intent controls
under Article 8(1).[72] The Restatement (Second) similarly provides that one party's subjective
intent governs where the other party knew of that subjective intent.[73] The court left no doubt
that under a reasonable-person standard the signature of MCC's president would have manifested
assent to D'Agostino's boilerplate terms even though those terms were in Italian.[74] But the
affidavits of D'Agostino's commercial director and translator confirmed that D'Agostino knew that
MCC's president intended not to be bound by the boilerplate on D'Agostino's form.

This brought the court to the question whether this evidence of prior negotiations could be used to
contradict the terms of the written agreement -- in short, whether the CISG contains a parol
evidence rule like the common law and the UCC. Although U.S. courts always apply their own
rules of procedure and evidence, the court noted helpfully that the parol evidence rule is not really a
rule of evidence but a substantive rule of law.[75] The court read CISG Article 8(3) [76] as
rejecting the parol evidence rule, an interpretation that it noted was in accord with almost all the
academic commentary on the question.[77] Despite its holding, the court expressed some discomfort
with [page 88] allowing oral evidence to undercut the reliability of a written document, and its
discussion can be used to raise or revisit the question of what weight should be given to the
written agreement as opposed to other evidence of the parties' agreement.[78]

Another interesting question is what effect a standard merger clause should have under the CISG.
MCC-Marble suggests in dictum that the parties to a contract could create a private parol evidence
rule by inserting a merger clause in their contract, but it is not clear that this is so.[79] A merger
clause works under the common law and UCC because it states that the writing is a completely
integrated agreement,[80] and the parol evidence rule states that such an agreement should not be
contradicted by extrinsic evidence.[81] Under the CISG, by contrast, there is no parol evidence rule
for a merger clause to invoke, and Article 8(3) states that a court should give "due consideration . .
. to all relevant circumstances of the case including the negotiations," without any apparent
exception for agreements that state they are complete and final.[82] As noted above, CISG Article 6
allows the parties to derogate from (almost) any provision of the CISG, but such derogation may
have to be express rather than implied, and it is not clear that a standard merger clause would do
the trick.[83]

In short, the CISG departs substantially from the common law and the UCC on the need for and
the effect of a writing. Not only are these differences potentially significant to practicing lawyers,
they allow Contracts teachers a wonderful opportunity to question the ways in which writings have
traditionally been treated in American law.