California Western School of Law CWSL Scholarly Commons Faculty Scholarship 2016 Reasonable Standards for Contract Interpretations under the CISG Donald J. Smythe California Western School of Law, [email protected] Follow this and additional works at: https://scholarlycommons.law.cwsl.edu/fs Part of the Contracts Commons, and the International Trade Law Commons Recommended Citation 25 Cardozo Journal of International and Comparative Law 1 (2016) This Article is brought to you for free and open access by CWSL Scholarly Commons. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of CWSL Scholarly Commons. For more information, please contact [email protected]. ARTICLE REASONABLE STANDARDS FOR CONTRACT INTERPRETATIONS UNDER THE CISG DonaldJ.Smythe* A B STRA C T ................................................................................................ 2 1. INTRODUCTION ........................................................................... 2 II. T HE CISG ................................................................................. 4 III. CONTRACT INTERPRETATION UNDER THE CISG .......................... 7 A. The CISG's Express Contract Interpretation Provisions ...... 10 B. Ambiguities Under the CISG's Express Contract Interpretation Provisions ................................................... 12 C . Som e Exam ples ................................................................ 15 1. No Mutually Reasonable Interpretation ...................... 15 2. Multiple Mutually Reasonable Interpretations ............... 15 D. Ambiguities Open the Door to the Homeward Trend B ias .................................................................................. 16 1. The Validity of the Contract ...................................... 16 2. The Scope of the CISG's Governance of Contract Interpretations .............................................................. 18 3. The Challenge ............................................................ 19 E. Using the CISG's General Principles to Resolve A m biguities ...................................................................... 20 F. Reasonable Commercial Standards of Fair Dealing in the T rade ........................................................................... 23 IV . C ONCLUSION .............................................................................25 Donald J. Smythe, B.A., M.A., Carleton University; M.Phil., Ph.D., Yale University; J.D., University of Virginia. Professor of Law, California Western School of Law. 1 2 CARDOZO J. OF INT'L & COMP. LA W [Vol. 25:1 ABSTRACT The United Nations ("UN") Convention on Contracts for the International Sale of Good ("CISG") offers the promise of harmonizing international sales law and facilitating international trade and global commerce. But there is a "homeward trend bias" that may encourage domestic courts to construe the gaps in the CISG broadly and fill them with non-uniform domestic legal rules. Questions about contract interpretation under the CISG raise the same concerns about a homeward trend bias as questions about the interpretation of express CISG provisions. The CISG has express provisions governing contract interpretation but their application may not provide an unambiguous interpretation. This presents two risks. One is that courts might reinterpret questions to be about the validity of contracts rather than their interpretation; in that case the CISG will not apply and courts will therefore apply domestic legal rules to answer the questions. The other possibility is that courts might rule that the interpretive questions are not governed by the CISG and might therefore use private choice of law rules to identify domestic legal rules to answer the questions. Neither of these possibilities should be welcomed. Courts that use non-uniform domestic laws to answer questions about the interpretation of CISG contracts will undermine the intent and purpose of the CISG no less than courts that answer other questions about matters that should be governed by the CISG using non-uniform domestic laws. All questions about contract interpretation under CISG contracts should therefore be governed either by the CISG's explicit provisions or by the CISG's general principles. This essay provides an analysis of the CISG's express contract interpretation provisions and illustrates how they can result in ambiguities. It argues that when there are ambiguities, the general principles on which the CISG is based imply that courts should interpret the contracts to promote reasonable commercial standards of fair dealing in the trade. I. INTRODUCTION The United Nations ("UN") Convention on Contracts for the International Sale of Good ("CISG" or "the Convention") offers the promise of harmonizing international sales law and facilitating international trade and global commerce. But it is a promise that appears elusive because of a "homeward trend bias" that may encourage domestic courts to construe the gaps in the CISG broadly and fill them with non-uniform domestic legal rules. Scholars have not surprisingly, therefore, devoted considerable thought to the appropriate interpretation 2016] STANDARDS FOR CONTRA CTINTERPRETATION 3 of the CISG's provisions and principles. They have, however, devoted considerably less thought to a closely related problem: how to interpret the terms of a contract to which the CISG applies. Questions about contract interpretation under the CISG raise some of the same problems as questions about the interpretation of express CISG provisions. Courts that use non-uniform domestic laws to answer interpretive questions under CISG contracts will undermine the intent and purpose of the CISG no less than courts that answer other questions about matters that should be governed by the CISG using non-uniform domestic laws. This essay offers an analysis of contract interpretation under the CISG and argues that all questions about contract interpretation under CISG contracts should be governed either by the CISG's explicit provisions or by the CISG's general principles. The CISG thus should have a broad preclusive effect on domestic legal rules of contract interpretation. Since the CISG's express provisions governing contract interpretation create some significant ambiguities, this will place a considerable burden on the CISG's general principles in interpreting ambiguous contract terms. This essay argues, however, that the CISG's general principles and are robust enough to bear that burden and, in fact, imply that when the CISG's express provisions result in ambiguities courts should interpret ambiguous contract terms to promote "reasonable commercial standards of fair dealing in the trade." Thus, the CISG's general principles imply standards for contract interpretation that are similar to the commercial standards for contract interpretation that are typically applied in most well-developed domestic legal systems. Nonetheless, it is important for the coherence and unification of international sales law that the rules of contract interpretation be developed and applied under the CISG and not under non-uniform domestic legal systems. The next section of this essay provides some background on the CISG. Section III analyzes the CISG's express rules governing contract interpretation and explains how they may create important and confounding ambiguities. It also analyzes the general principles governing contract interpretation under the CISG, and argues that, if the application of the CISG's express rules results in ambiguities, the CISG's general principles require ambiguous contract terms to be interpreted in a manner that promotes reasonable commercial standards of fair dealing in the trade. The last section summarizes and offers some concluding comments. CARDOZO J. OF INT'L & COMP. LAW [Vol. 25:1 II. THE CISG The CISG is the most important body of law governing international sales. As of December 15, 2015, it has been adopted by 84 nation states, including the United States and most of the world's major trading nations.1 In the United States, the CISG applies to most 2 international sales transactions with the full force of federal law whenever a court determines that United States law applies to a contract for the sale of non-household 3 goods between parties with places of business in different "Contracting States," meaning nation states that have adopted the CISG.4 The CISG was the product of negotiations between representatives from many nations with diverse legal systems and traditions, not to mention different languages. 5 Since it was difficult for the representatives to make compromises on some issues, they chose to leave some important gaps in the CISG rather than fail to agree on a final draft.6 Moreover, because they needed to reach compromises in all six working languages of the United Nations, in some cases the CISG's provisions can seem particularly terse. As a consequence, the CISG's rules are quite spare by comparison to the Uniform Commercial Code ("UCC") or other nations' domestic sales 7 laws and it generally does not use the same commercial law terms. 1 See United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S. Treaty Doc. No. 98-9 (1983), 1489 U.N.T.S. 3 [hereinafter "CISG"], available at http://www.cisg.law.pace.edu/cisg/text/treaty.html. The United States Senate ratified the CISG in 1986 giving it the force of federal law when the Convention came into effect on January 1, 1988. See CISG: Table of Contracting States, PACE L.