Case Study - Interpretation of Contract
Case Study Key Information
Date: 1994.02.22
Court/Tribunal: Appeal court, Germany
Goods Involved: Rare hard wood
Citation: http://www.cisg.law.pace.edu
Key Article(s): Arts 8, 18 CISG
Summary
In an oral negotiation, S, a Nigerian seller, agreed to sell to B, a German buyer, rare hard wood two months later. Failing to receive the goods on the agreed delivery date, B threatened to cancel the contract. S delivered the goods after B had reconfirmed the contract. B complained to S of the material defects found in the goods. S told B he would come to Germany to market the goods himself. 19 days later, S informed B that he would not come because he found an agent to market the goods for him. B did not respond and had remained silent. After one year, S sued B to claim for the unpaid purchase price. The key issue here was whether S had made an offer to B to cancel the contract, which was then validly accepted by B.
Facts
A chronological course of the relevant events was as follows:
1992
01.28 B sent S a written confirmation in the form of purchase order.
03.25 B wrote to complain on S’s non-delivery and expressed his wish to cancel the contract.
04.27 S asked B to reconfirm the contract.
05.05 B wrote to reject S’s request for an increase in the purchase price.
07.00 At the beginning of July, S delivered the goods to the inspection company designated by B for their examination.
07.08 On or before this date, B notified S of the material defects found in the goods.
07.08 S wrote to B saying that he would come to market the goods himself.
07.27 S faxed to inform B that he would not come to Germany because he had found a Dutch company to market the goods for him. He also said that the quality of the goods was not as bad as B alleged.
After a lapse of one year, S sued B to recover the purchase price alleging that he had not made an offer to cancel the contract, just intending to assist B in the marketing of the delivered goods. B argued that the contract either had never been formed or had been cancelled. The trial court rejected B’s argument. On appeal, S claimed both for the payment of the purchase price and for damages on the ground of B’s unjust enrichment. Up to the time of the lawsuit, the goods had been kept at the inspection company.
Judgment
Art 29(1) provides that a contract may be terminated by the mere agreement of the parties. Rules on offer and acceptance apply to such an agreement. Art 18(1) states that silence or inactivity does not in itself amounts to an acceptance of an offer. Accordingly, B’s offer to cancel the contract on 03.25 could not be accepted by silence or inactivity. However, the Court considered that, together with other circumstances, silence can be important and may be interpreted as the acceptance of an offer. Judging from the following behaviours of S and B, the Court ruled that such circumstances existed in the present case:
· In response to B’s defect notice, S sent B two correspondence, dated 07.08 and 07.27 respectively, indicating that he did not want to be bound by the contract any longer.
· B neither raised any objection to them nor demanded a replacement of goods free of defects.
· Not only remained silent, B also refrained from further fulfilment of the contract, for example from asserting other warranty claims.
· B’s conduct could be inferred by S that B acquiesced in the cancellation of the contract.
The Court held that the contract had been cancelled by mutual agreement of the parties pursuant to Art 29(1) and S lost his claim to recover the purchase price.
Comment/Discussion Points
1. Validity of an offer
The Court did not apply Art 8 to interpret the two ambiguous statements S made in early July 1992 to determine whether S had made an offer to B to cancel the contract. Pursuant to Art 8(1), the interpreter is required to look into the real intent of the statement maker when that was known or could not be ignored by the recipient. If the statement maker has not clearly expressed his real intent, or even disguised it in the statement, two interpretations would come up: First, his real intent prevails if the recipient knew of it, and Secondly, if not, his subjective intent which was manifested by the literal meaning of the statement prevails. B might argue that he knew S’s real intent was to offer to cancel the contract because from the beginning S had shown his readiness to rescind the contract. According to Art 8(3), S’s subsequent conduct could evidence this readiness, which included refusal to deliver on the agreed date, demand for a reconfirmation of the contract, and request for an increase in contract price.
Pursuant to Art 8(2), the interpreter is required to look into the intent of the statement maker through the lens of a reasonable person of the same kind as the recipient. S’ first statement was made almost immediately after receipt of the defect notice. Applying commercial common sense, it could be interpreted by B as just an instant response. S’s second statement was sent 19 days later, in which he mentioned that a Dutch agent could help him sell the goods. A reasonable person would consider that S might have done a market survey during that period of time and then made up his mind to resell the goods to another buyer at a better price. Thereby, the reasonable person could consider the second statement as an offer to cancel the contract.
Thus, by applying Art 8, the Court could safely conclude that S had made a valid offer to B to cancel the contract.
2. Cancellation of contract by mutual agreement
However, B’s acceptance of S’s offer by silence was difficult to establish according to Art 18(1). The circumstances cited by the Court as important for verifying the validity of B’s acceptance by silence was not convincing. Those circumstances could not evidence an unequivocal position of B in response to S’s statements. B’s conduct, including raising no objection, demanding no replacement, and refraining from asserting other warranties, could all be explained as a result of B knowing that his interests were well protected by the defect notice sent to S under Art 39(1). In light of the fact that the transaction was operating between two parties coming from vastly different legal and cultural backgrounds, the rules on acceptance by silence contained in Art 18 should be narrowly interpreted in the present case. Thus, B’s silence was not a valid acceptance.
Art 29(1) states that a contract may be cancelled by the mere agreement of the parties. Such an agreement is not necessarily reached in accordance with the offer and acceptance rules. However, a mutual consent of the parties to the cancellation of contract must be declared. It would be necessary to show that either the cancellation had taken place amicably or there was an unspoken mutual agreement between the parties to abandon the contract. In the present case, neither usages, established practices, nor pre-contractual negotiations could be proved for an existence of this kind of unspoken mutual agreement between the parties. Thus, B’s silence and inactivity should not be interpreted as an assent reaching to S in the sense of Art 18(2).
On the one hand, the CISG does not have any express provisions to deal with this kind of abandonment inferred from uncommunicated inaction. On the other hand, under the favour contractus principle which is an underlying general principle on which the Convention is based, continuation of a CISG contract is favoured whenever it is possible in order to avoid unnecessary and unproductive costs. Therefore, the Court should rule that the contract had not been cancelled, so that S could claim for the purchase price from B.
3. Speculative behaviour
In the present case, it was highly likely that both S and B were speculating on market fluctuation. If the market price was on the rise, S thought he would have no difficulty in finding another buyer; if not, B had to pay him the purchase price. B thought he was in a no-loss position as long as the goods were still in his possession. In a rising market, he might be able to resell the defective goods at a profit; if not, he could ask S to collect the rejected goods and reimburse all the reasonable expenses incurred by him in preserving them.
In a case decided by the German appeal court on 1997.01.31, the court opined that if one party was to unfairly keep to itself all options available to the detriment of the other party, such a strategy must pay a price. Both S and B were speculating on market fluctuation in the present case. Which party ought to pay the price? In other words, which party deserved less protection?
An extensive interpretation of Art 40 may be able to give a guidance in this situation. Art 40, a specific rule derived from the general principle of good faith, provides that the party behaving in a more blameful way deserves less protection. S already fulfilled his primary contractual obligation to deliver the goods. His self-interested behaviour in making the ambiguous statements were indeed blameworthy as a conduct of recklessness or gross negligence. After receipt of S’s statements, B realized that they could be interpreted as containing an offer to cancel the contract which he could accept, even though he knew or could not have been unaware that S’s intent in the statements could be interpreted in a different sense. Yet B did not bother to clarify with S whether their minds had been met towards a mutual consent to cancel the contract. Instead, he chose to remain silent so that he could use the vagueness of silence to manipulate the status quo of their contract. B should be regarded as acting in bad faith because he had unfairly taken advantage of S’s gross negligence to keep to himself all options available. Bad faith is of course a behaviour much more blameful than gross negligence. Accordingly, B should receive less protection. The Court should decide against B and hold that since the contract had not been cancelled, B was liable for paying the purchase price to S.