Clayton P. Gillette

The Political Economy of International Sales Law

The United Nations Convention on Contracts for the International Sale of Goods, or CISG, purports to harmonize the law that applies to international sales contracts. In this paper, we argue that the effort to create uniform international sales law (ISL) fails to supply contracting parties with the default terms they prefer, thus violating the normative criterion that justifies the law-making process for commercial actors in the first instance. Our argument rests on three claims. First, we contend that the process by which uniform ISL is drafted will dictate the form that many provisions take. Second, we contend that the legal form dictated by the drafting process has significant substantive consequences, particularly for the policy objectives of uniform ISL. Third, we predict that in order to achieve uniform ISL that is widely adopted, those involved in the drafting process will systematically promulgate many vague standards that contracting parties would not choose for themselves. These defaults cannot be justified as the inevitable cost of achieving an optimal level of uniformity. If the products of a uniform ISL are default terms that parties do not want, then the underlying justification for the law-making function – reduction of contracting costs – vanishes. We find significant correspondence between our predictions about the drafting of uniform international sales law and the CISG. The CISG was drafted by parties whose objectives did not necessarily coincide with those of the commercial actors whose conduct the treaty was intended to regulate. The result is a variety of vague standards and compromises that appear inconsistent with commercial interests. We conclude by suggesting that commercial actors involved in international sales would prefer to choose governing law from among legal regimes that compete to supply parties with more desirable substantive terms.

Political Will and Fiscal Federalism in Municipal Bankruptcy

Municipalities in fiscal distress may seek to adjust debts under Chapter 9 of the Bankruptcy Code either because they are truly destitute or because they lack the political will to adopt affordable tax increases. Local officials of municipalities that enter bankruptcy proceedings nevertheless retain political authority over municipal fiscal affairs. The decision to enter bankruptcy, however, may have significant financial consequences for other municipalities or for more centralized levels of government. Those externalities induce central governments to consider bailouts for distressed municipalities. In order to avoid moral hazard problems, central governments typically impose harsh restrictions on local officials as a condition of bailout. This dual system of rescue for distressed municipalities - bailouts and bankruptcy - permits local officials to threaten to file under Chapter 9, and thus to impose costs on central governments, unless the latter modify the conditions of bailouts. In this article, I suggest that allowing bankruptcy courts to impose tax increases serves to neutralize the strategic behavior of local officials, and thus encourages localities to internalize the costs of their activities in a manner more consistent with the tenets of fiscal federalism.

Standard Form Contracts

The literature on standard form contracts has increased dramatically in recent years, as lawyers and economists have debated their desirability in both business and consumer settings. The development of novel forms of contracting, such as telephonic and Internet-based contracting, as well as the application of interdisciplinary approaches to legal issues have raised questions concerning the meaning of assent to terms that are presented with little practical opportunity for negotiation. Many of the arguments for or against the enforcement of standard form contracts rely on assumptions concerning the extent to which some buyers can serve as surrogates for others and the presence or absence in standard forms of terms that reflect what would emerge in a competitive environment. Recently, some empirical literature has appeared on these questions as well. Finally, some commentators have suggested additional administrative regulation of contracts to reduce exploitation of those presented with unalterable standard forms. This review of the literature, prepared for the forthcoming Encyclopedia of Law and Economics (2d edition), discusses the current state of the theoretical and empirical literature on these issues.

Funding Versus Control in Intergovernmental Relations

Governmental programs are occasionally required by one level of government in a federal system, but funded through taxes or fees raised at another level. This arrangement creates opportunities for one government to exploit the fund-raising capabilities of another. But separating the functions of mandating and funding the program may, in some instances, generate a more efficient allocation of collective goods. A review of mechanisms that might be used to restrict this arrangement to situations in which efficient collective goods provision can be assured reveals that the relationship between central and decentralized governments provides the best protection against exploitation.

The CISG: history, methodology, and construction

THE CISG AS A SET OF COMMERCIAL DEFAULT RULES The United Nations Convention on Contracts for the International Sale of Goods (“the CISG”) is one of the most successful international commercial law treaties ever devised. It has been ratified by most of the worlds important trading countries and become a template for the manner in which commercial law treaties are drafted. As of this writing, the CISG has been adopted by eighty-three countries. These nations are referred to as “Contracting States.” Every major trading nation except India, South Africa, and the United Kingdom has ratified the CISG. Cases interpreting it currently number in the low thousands, and more than 135 United States cases have referred to the CISG. With unreported arbitration awards added, this number must be considerably higher. The effect of the CISG within a Contracting State may vary with domestic law. For example, within the United States, which ratified the CISG in 1986 and where it entered into force in 1988, the CISG is considered a self-executing treaty. The CISG therefore creates a private right of action in federal court under federal law. The CISG provides the default set of rules that govern contracts for the sale of goods between parties located in different Contracting States, and, in some cases, where only one of the parties is located in a Contracting State. Where applicable the CISG preempts contrary provisions of domestic sales law, such as Article 2 of the Uniform Commercial Code (“UCC”) and other state contract law in the United States, and conflicting provisions of the German Civil Code (“BGB”) or the French Civil Code. The CISG is relatively well known and researched in Europe. The academic literature on uniform sales law is dominated by European scholars, and some of the methodological developments in legal analysis that have prevailed in the United States have been applied only sparingly to CISG scholarship. As a result, at least in the United States, the CISG remains an understudied, largely misunderstood, and somewhat esoteric body of law, unfamiliar to many American commercial lawyers. Many of its provisions are reminiscent of the Uniform Commercial Code, and many American attorneys and courts improperly infer that those similarities mean that the UCC and the CISG have identical scope and meaning.

Implied terms and interpretation

Sales contracts do not specify the obligations of the parties for every possible contingency that might arise during the contracts performance. Writing a completely specified contract for even a relatively simple commercial transaction is impossible and, even if feasible, not cost-justified for the parties. Parties prefer to invest only optimally in drafting, because further investment reduces the net value of the contract. Because some contingencies are so remote that dealing with them explicitly is not worthwhile, the contract will necessarily contain gaps. Implied terms that reflect party preferences also reduce transactions costs because their existence avoids the need to supply an express term covering the same matter. Parties may also prefer implied terms to fill gaps that arise when parties believe that an attempt to fill them sends an adverse signal to the counterparty about their own quality as a contracting partner. For example, requesting an explicit damage limitation term may indicate to the counterparty that the requesting party expects to breach. The CISG supplies implied terms, including trade usage, course of dealing, and course of performance, that address some of the contingencies about which the parties leave the contract silent. The circumstances in which the CISG implies a price term and a duty of good faith are less clear and more controversial. Implied terms apply to the contract only if it contains gaps. If the contracts express terms deal with the matter, they govern and there is no gap to be filled by an implied term. Thus, in order to determine whether implied terms apply to the contract, the contracts express terms first must be determined and interpreted. Some domestic rules, such as the parol evidence rule, control the sort of evidence a court can consider in interpreting the terms of the contract. For their part, Articles 8 and 11 prescribe the evidence a tribunal must take into account to interpret the contracts terms. The CISG is unclear as to whether (or the extent to which) the parol evidence rule applies to the interpretation of contracts governed by the CISG, although most courts have concluded that the CISG excludes the rule. This chapter describes the CISGs treatment of important implied terms and interpretation of the contract.

Exemption from performance

INTRODUCTION: LEGAL CONSEQUENCES OF CHANGED CIRCUMSTANCES Virtually all legal systems provide some basis for allowing parties to deviate from contractual performance with impunity when circumstances substantially change between the time the contract was concluded and the time that it is to be performed. The relevant changes usually implicate a significant unanticipated increase in one partys costs of performance or the occurrence of some unanticipated physical or regulatory obstacle that destroys the subject matter of the contract or the rationale for performing it. Legal doctrine recognizes that commercial parties enter into contracts that each believes will be personally profitable to perform, and that those beliefs are based on assumptions made at the time of the conclusion of the contract about the conditions that will exist at the time performance is due. Sellers, for instance, assume that they can procure the goods necessary for performance at a price lower than the contract price, while buyers assume that they can profitably use the goods for which they have contracted. Both parties assume that they will be physically able to perform the contract. Less certain, at least where the contract is silent, is how parties intend to allocate the risk that those assumptions prove incorrect. Different legal systems apply very different default rules that allocate that risk by defining the range of conditions under which nonperformance does not constitute a breach. Some legal systems permit adjustments when the equilibrium of the contract has been disturbed or when performance is possible but unexpectedly burdensome, while others essentially prohibit deviations from the contract unless performance is virtually impossible. These doctrines reflect the attitudes that different legal systems have towards the propriety of enforcing the literal terms of a contract, attitudes that are often summarized as embracing one of two Latin maxims. Doctrines that restrict the adjustment of contractual obligations are often associated with the principle of pacta sunt servanda , or “promises ought to be kept,” while doctrines that permit more liberal adjustment are associated with the principle of rebus sic stantibus , roughly translated to condition performance on circumstances remaining the same over the contractual term. American lawyers will think in terms of Uniform Commercial Code (“UCC”) § 2–615, which excuses the seller from a contract when performance has been rendered “impracticable” by the occurrence of a contingency that the parties assumed would not materialize and the risk of which was not assumed by the seller.

The scope of the CISG

INTRODUCTION The globalization of trade in goods creates a problem for parties to an international sales contract. Aspects of the contract potentially are subject to the law of more than one jurisdiction, and different applicable laws can give the parties different rights under the contract. Parties typically prefer to know in advance which jurisdictions law governs. Although they might provide in their contract for the applicable law, doing so sometimes is not cost-effective. For one thing, the benefit of selecting law depends on the law that is applicable in the absence of a contractual choice. Selecting law also can involve costly negotiations. Even if cost-effective, the parties have no assurance that their choice of law will be honored should a dispute over the contract later arise. For all these reasons, contracting parties usually like to know the law applicable to the contract when the contract does not select it. The conflict of laws rules adopted by most jurisdictions provide contracting parties only limited help. Because these rules are vague, contracting parties cannot predict with confidence the results of their application. This is true both of American and European conflicts rules, as well as the rules in force elsewhere. More important, conflicts rules are rules of the forum (whether judicial or arbitral) and therefore can vary among fora. The majority of United States jurisdictions adopt the rule of Section 188 of the Restatement (Second) of Conflict of Laws. Under that Section, the law applicable to a contract is the law of the jurisdiction that has the “most significant relationship” to the transaction and the parties. The contacts that the paragraph identifies as relevant to determine that relationship include the place of contracting, negotiation and performance, as well as the place of residence of the parties. These non-exhaustive contacts, which can identify different jurisdictions, make it difficult to predict in advance the law applicable to the issue. The conflicts rule of the Uniform Commercial Code (“UCC”) is similarly vague. Section 1–301(b) makes the UCC as adopted by the forum state applicable to a transaction when it bears an “appropriate relation” to the forum state. European conflicts rules are not much better. Under Article 4(1)(a) of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, the law of the sellers habitual residence governs contracts for the sale of goods.

Advanced introduction to international sales law

Contents: 1. Why Uniform International Commercial Law? 2. The Scope of the CISG 3. Contract Formation and Terms 4. Interpretation 5. Performance 6. Risk of Loss 7. Exemption 8. Remedies for Breach Index

Risk of loss

CONSEQUENCES OF PASSING THE RISK OF LOSS International sales governed by the CISG are likely to involve transport of goods over substantial geographical distances, and frequently involve transportation through multiple carriers and types of carriage, or multimodal transport. Shipping goods from a landlocked seller across water to a distant buyer is likely to comprise on-loading and off-loading from trucks, ships, and railways, each operated by a different entity. The consequences include both increased likelihood of damage or loss for the goods and increased difficulties in identifying the point at which any damage occurred. As a result, the default rules allocating the financial responsibility for loss or damage to the goods take on additional importance in these transactions. They inform buyers and sellers of the effects of damage or loss on their underlying obligations to pay or to deliver conforming goods and determine which of them is entitled to pursue remedies against the carriers involved in the transaction. Legal systems differ in their default rules allocating risk of loss. They tend to allocate risk in three different ways. Some national law based on Roman law passes risk from the seller to the buyer at the conclusion of the contract. A second group of legal systems passes risk with respect to the goods sold when title (property) to them passes. The third group of national laws passes risk of loss on delivery of the goods to the buyer. The CISGs risk of loss rules are closest to the third group. They do not and cannot pass risk based on passage of title, because the CISG does not determine title in the goods, and with a single exception do not pass risk to the buyer at the conclusion of the contract. Instead, under the CISGs basic risk of loss rule risk generally passes when the buyer takes over the goods or is in a position to do so. The details of the CISGs risks of loss rules are described and evaluated in the sections that follow. The CISGs treatment of risk of loss begins with a statement of the consequences of the passage of that risk. The primary consequence results from a negative implication.