(By Sieg Eiselen B Juris)

1 Introduction

It is a common feature of the modern mass production economy that contracts for the manufacturing, distribution and delivery of products and services are governed by the standard terms and conditions of one of the parties. It is usually the standard contract of the party who is in a stronger bargaining position that will govern the situation. One of the perennial problems in respect of standard terms in most legal systems is whether the terms which are usually not the object of specific bargaining has been included in the agreement between the parties or not. It is unsurprisingly also a problem which has been encountered in the interpretation and application of the United Nations Convention on Contracts for the International Sale of Goods, Vienna 1980 (CISG).

The CISG is generally recognised as one of the most successful instruments for the harmonization and unification of international trade law. It has been adopted in 76 countries worldwide, representing about 80% of world trade. It therefore potentially applies to a very great number of international transactions. One of the main problems of legal unification instruments, irrespective of how successful they are, is that the apparent unification achieved by uniform law, is endangered by divergent interpretations and application in the various jurisdictions where the uniform law applies. Although it is also fairly generally recognized that the uniformity of the CISG has been preserved in its interpretation and application, there are a few areas where court’s have interpreted and applied the convention in divergent manners. The inclusion of standard terms is one such area.

Where the incorporation of standard terms have been expressly agreed upon by the parties no problem arises, but quite often the incorporation of the standard terms takes place by a mere reference in an oral communication or written communication  to the inclusion of such terms. Sometimes the text of the standard terms will accompany the main agreement, for instance being printed on the back of an order form, but quite often the contract merely contains an incorporation clause without any accompanying text. The question then arises whether there has been a valid incorporation or not.

The CISG does not expressly deal with requirements for the inclusion of standard terms and court’s must therefore rely on the interpretation of the articles dealing with the formation of the contract in general, as well as the provisions of article 7. Based on an interpretation of these articles and the general principles underlying the CISG, court’s have developed three distinct but divergent approaches:

- a strict approach which has been developed mainly in the German courts which requires that the standard terms be made available to the other party at the time of contracting;

- a moderate approach which only requires a clear reference to the inclusion of the standard terms; and

- a lenient approach which allows the standard terms to be included even after the conclusion of the contract.

The object of this article is firstly to critically examine the different approaches found in the case law against the back-drop of the provisions of the CISG in order to establish the most appropriate approach to the inclusion of standard terms under the CISG. The solution to this problem is of practical importance for international traders who make use of standard terms in their everyday dealings.

2 Basic principles of the CISG

The CISG deals with the formation of the contract in Part II, and more specifically for our purposes in articles 14, 18, 19 and 23. However, it is also necessary to consider article 8 which deals with the interpretation of any statements made by the parties, as the statements and conduct of the parties form the basis for the offer and acceptance. Although some earlier decisions held that whether standard terms have been validly incorporated or not fell outside the scope of the CISG in terms of article 4, it is now generally accepted that the issue falls squarely within the ambit of the Convention and need to be decided according to its provisions and not the provisions of the applicable domestic contract law. It is only the substantive validity of standard terms, for example, whether their provisions are unconscionable or unfair in terms of domestic legislation that falls outside the scope of the CISG in terms of article 4.

The statements and conduct of the parties leading up to and including the conclusion of the contract must be interpreted in the light of article 8. Article 8 therefore must also be applied to the interpretation of the offer made by the offeror in terms of article 14 and the acceptance of the offer by the offeree in terms of articles 18 and 19 as the statements and conduct of the parties underlie the offer and the acceptance. Also relevant is article 23 which deals with the time that the contract is deemed to have come into existence.

The CISG uses the usual approach found in most legal systems to the analysis of the conclusion of the contract, namely distinguishing between an offer and an acceptance bringing the contract into existence. Article 14 states:

(1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.

Article 14 states the minimum requirements for a valid offer, namely identification of the goods and a definite price and made with the intention of being bound if the other party accepts that offer. As is clear from this article there is no provision dealing specifically with the incorporation of standard terms.

Article 18 deals with the requirements for an acceptance:

(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

(2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror.

The offer can be accepted by a statement, orally or in writing, or by any other conduct which unequivocally indicates the fact that the offeree wants to accept the offer and that it will be bound by the contract. The acceptance may not contain any additional material terms but must be an unconditional acceptance of the offer in terms of article 19. If any additional material terms are added the statement is regarded as a rejection and counter-offer open to acceptance by the original offeror.

The statements of the parties must be interpreted in accordance with the provision of article 8. Article 8(1) first of all states a subjective test to be applied to all statements and conduct made by a contracting party and reads as follows:

For the purposes of this Convention 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.

Where a party makes an offer, the offer must be interpreted according to the subjective intention of that party provided that the other party knew what that intention was or the objective circumstances show that it must have known what that intention was.

Applied to the incorporation of standard terms this would mean that where the offeror as clearly communicated to the offeree that it wanted the agreement to be subject to its standard terms then the standard terms should be applicable where the offeree accepts the offer, unless the offeree clearly indicates that it does not agree to such incorporation. Where the contract is concluded orally and the incorporation of the standard terms specifically mentioned, there should theoretically and in principal be no problem about the applicability of the terms, although a party may have problems in proving such communication.

Most problems about incorporation however arise in the context of written communications where a party relies merely on an incorporation clause in the offer, but where the text of the standard terms are not attached or provided to the offeree simultaneously. Where there is a clear and conspicuous reference to the incorporation of the standard terms in the document provided to the offeree, there should in theory and in principle also be no problem about the incorporation of the terms as acceptance by the offeree of the offer based on such document, creates the reasonable impression in the mind of the offeror that the offer has been accepted without any modification. If the offeree failed to read the incorporation clause, it would not have the subjective intent to accept the standard terms but this is a fact that the offeror cannot be held to be aware of. The conduct of the offeree creates the objective impression that the offer was accepted. In such circumstances the provisions of article 8(2) and (3) become relevant, where a more objective test is applied: Article 8 reads:

(2) If the 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.

(3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

In the circumstances where the written offer contains a clear incorporation clause and is accepted without any further statement or qualification by the offeree, it would be objectively reasonable conduct on the part of the offeror to rely on such unqualified acceptance and to accept that its standard terms will apply. It is the same deduction that a reasonable person of the same kind as the offeror would make in similar circumstances.

These general statements must be qualified in regard to the substantive validity of the standard terms being incorporated. Although the issue on the substantive validity of standard terms is generally regarded as an issue that falls outside the scope of the CISG, this does not hold true in the case of standard terms that are unusual or surprising. In the case of clauses that are unusual or surprising, it cannot be said that the other party could reasonably have expected to find such clauses in the standard terms and a party should therefore not be held bound to such clauses. What qualifies as an unusual or surprising term will depend on the particular circumstances of the parties, the type of trade involved and the dispositive law displaced. Terms that are generally encountered in standard terms in a particular trade cannot qualify as unusual or surprising, even if they are very harsh or one-sided. Surprising or unusual terms can be said to fall outside the consensus or the agreement of the parties, having regard to the principles underlying articles 14, 18 and 8. One could further argue that good faith in terms of article 7 also requires a party to make the other party specifically aware of any unusual or surprising clauses.

This last conclusion is also in line with the solution found in the UNIDROIT Principles of International Commercial Contracts 2004. The commentary to article 2.1.19 states that the general rules to formation should usually also apply to standard terms. Where the standard terms do not form part of the document accepted or signed by a party, such a document must refer to the inclusion of the standard terms. Of particular importance is article 2.1.20 dealing with surprising terms which states:

(1) No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.

(2) In determining whether a term is of such a character regard shall be had to its content, language and presentation.

The Commentary to article 2.1.20 goes on to state that a party who accepts the other party’s standard terms will be bound to those terms “irrespective of whether or not it actually knows their content in detail or fully understands their implications”. However, a party will not be bound to terms that can be qualified as surprising terms as defined in article 2.1.20. This provision reflects the principle of good faith and fair dealing required by article 1.7 of the Principles.

The relevant case law will now be analysed against the background of the general provisions as set out above.

3 Analysis of the case law

The problems in regard to the incorporation of standard terms manifest in four different typical scenarios:

-          where the contract document contains an incorporation clause or reference to the standard terms, but without actually attaching or providing the standard terms at the same time;

-          where the contract document contains standard terms printed on the back but without a clear incorporation clause on the front side;

-          where the standard terms are set out in a language that is different from the language of the contract or the negotiations between the parties; and

-          where the standard terms are added after the actual conclusion of the contract, for instance in a confirmation letter or printed on the products.

3.1 Incorporation clause without the provision of the standard terms

There are a number of cases, mainly of German origin, where it has been held that standard terms will not be regarded as having been validly incorporated into the contract unless the offeror has provided the offeree with a copy of the standard terms. This represents the very strict approach to the incorporation of standard clauses. The leading case is the German Machinery case35 where the Bundesgerichtshof held as follows:

2. Thus, through an interpretation according to Art. 8 CISG, it must be determined whether the general terms and conditions are part of the offer, which can already follow from the negotiations between the parties, the existing practices between the parties, or international customs (Art. 8(3) CISG). As for the rest, it must be analyzed how a “reasonable person of the same kind as the other party” would have understood the offer (Art. 8(2) CISG).

It is generally required that the recipient of a contract offer that is supposed to be based on general terms and conditions have the possibility to become aware of them in a reasonable manner (Staudinger/Magnus, Art. 14 &p;41; Schlechtriem/Schlechtriem, supra; Soergel/Lüderitz/Fenge, supra; Reithmann/Martiny, International Sales Law, 5th ed., 651). An effective inclusion of general terms and conditions thus first requires that the intention of the offeror that he wants to include his terms and conditions into the contract be apparent to the recipient of the offer. In addition, as the Court of Appeals correctly assumed, the Uniform Sales Law requires the user of general terms and conditions to transmit the text or make it available in another way (see also Piltz, Sales Law, §3 &pp;77 et seq.; Piltz, NJW, supra; Teklote, The Uniform Sales Law and the German Law on General Terms and Conditions, 1994, pp. 112 et seq.; Hennemann, General Terms and Conditions Control and the CISG from the German and French Viewpoints, Ph.D. Thesis 2001, pp. 72 et seq.; similarly, Staudinger/Magnus, supra, with reference to the Supreme Court of Austria, RdW 1996, 203, 204, with an annotation by Karollus RdW 1996, 197 et seq.; different view, Holthausen, RIW 1989, 513, 517).

3. Insofar as the general terms and conditions at issue become a part of the contract under German non-CISG law and/or in commercial relations between merchants where the customer does not know them but has the possibility of reasonable notice - e.g., by requesting them from the user (compare BGHZ 117, 190, 198; Panel Decision of June 30, 1976 - VIII ZR 267/75, NJW 1976, 1886 under II 1, each with further citations), this does not lead to a different result. In the national legal system, the clauses within one industry sector are often similar and usually known to the participating merchants. To the extent that this does not apply to a commercially-active contract party, it can be expected of him, in good faith, that he make the clauses available to the other party, if he wants to close the deal - as offered by the user based on the general terms and conditions. These requirements do not, however, apply to the same extent to international commercial relations, so that, under the principles of good faith of the other party, a duty to inquire cannot be expected of him.

It is most surprising that the court in its analysis and interpretation of article 8(2) CISG comes to a conclusion that sets a stricter requirement than that encountered in domestic German law. Its conclusions are based firstly on the statement that it is generally accepted that the offeree must be in a position to reasonably take notice of the content of the standard terms. The court relies mainly on a number of German authors for this conclusion. It is submitted that it is neither generally the case in domestic German commercial practice as conceded by the court, nor in international commercial practice that it is generally accepted that the text of standard terms will or should be available at the time of contracting. Magnus concedes that the approach is controversial. Schmidt-Kessel states very strongly that this view is not tenable stating that the decision of the Bundesgerichtshof should be rejected and should not even be regarded as persuasive authority. Magnus, however, argues that:

it would be a wrong and unfair risk allocation -- even in commercial transactions -- if a mere reference would suffice and if the other party had an obligation to search the contents of the standard terms before the conclusion of the contract at the peril that they become binding.

Although it could be said that it is desirable that a party should make the standard terms available at the time of the contracting, it goes beyond the clear rules contained in articles 8, 14 and 18 and their underlying principles to require contractual conduct which is not even required in domestic law, especially as these contracts are commercial and not consumer contracts. Proponents of this approach also rely on the principle of good faith contained in article 7 to argue that good faith requires a party to make its standard terms available. However, good faith also requires a party not to create false impressions about its own intentions as embodied in article 8(2). This would entail that the other party should not create an impression that it has accepted the inclusion of the standard terms where there is clear reference to their inclusion.

At least in the common law world, the principle of caveat subscriptor is widely accepted and applied. Especially in commercial transactions English law attaches great importance to the signing of a document. The general rule derived from Parker v South Eastern Railway is that a person is bound by the contents of a contractual document he has signed whether or not he has read it or understood it. If a party therefore signs a document containing a clear and unambiguous incorporation clause, it will be held bound to the standard terms incorporated whether it has read the standard terms or not and whether they were available to it at the time or not. A reasonable common law trader in the position of the offeror would be most surprised if told that the mere incorporation clause as accepted would be insufficient to make its standard terms applicable. It would seem that a German trader would be equally surprised, given the provisions of the domestic German law. One cannot therefore agree with the basic assumption made by the court here.

It would seem that the real reason for the stricter standard set by the Bundesgerichtshof is based on the assumption that there exists a big difference between domestic sales where it is easy to obtain reasonable access to standard terms from the other party by merely requesting them, and international sales where it is allegedly not so easy and therefore not reasonable.

The court goes on to state that under the principle of good faith there is no duty on the offeree to make inquiries about the standard terms. This is an astonishing statement in the light of the impression that the statement or conduct of the offeree must make on the offeror by accepting the reference to the standard terms without question, query or protest. Indeed, one would expect the principle of good faith to prompt the offeree to make enquiry about the standard terms or protest their inclusion at the time of contracting. In the era of modern communications including cellphones, fax and the internet, it is no more difficult for a participant in international trade to make enquiry about or require a copy of the standard terms than it is for participants in domestic transactions. The reasons for setting a stricter standard in respect of international transactions than for those in domestic transactions is neither convincing nor warranted on a proper interpretation of the relevant CISG provisions.

This sets requirements that are more stringent than those set in the decision of the Austrian Supreme Court as it requires the inclusion of the standard terms themselves, whereas the Austrian court merely requires incorporation by a clear reference. The Austrian Supreme Court states:

The CISG does not contain specific requirements for the incorporation of standard business conditions, such as the [sellers’] general conditions of sale, into a contract. Therefore, the necessary requirements for such an inclusion are to be developed from Art. 14 et seq. CISG, which contain the exclusive requirements for the conclusion of a contract (cf. Piltz, Internationales Kaufrecht, Art. 5 n. 75). Consequently, the general conditions of sale have to be part of the offer according to the offerors intent, where the offeree could not have been unaware of that intent, in order to become a part of the contract (Art. 8(1) and (2) CISG). This inclusion into the offer can also be done implicitly or can be inferred from the negotiations between the parties or a practice which has developed between them.

The approach taken by the Austrian court is a commercially more realistic approach and in line with the general requirements of the CISG. This more moderate approach is to be preferred above that of the German Supreme Court.

(Edited by: China West Lawyer)