CHAPTER 2 - SECTION 1

A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance.

COMMENT

In defining an offer as distinguished from other communications which a party may make in the course of negotiations initiated with a view to concluding a contract, this Article lays down two requirements: the proposal must (i) be sufficiently definite to permit the conclusion of the contract by mere acceptance and (ii) indicate the intention of the offeror to be bound in case of acceptance.

1. Definiteness of an offer

Since a contract is concluded by the mere acceptance of an offer, the terms of the future agreement must already be indicated with sufficient definiteness in the offer itself. Whether a given offer meets this requirement cannot be established in general terms. Even essential terms, such as the precise description of the goods or the services to be delivered or rendered, the price to be paid for them, the time or place of performance, etc., may be left undetermined in the offer without necessarily rendering it insufficiently definite: all depends on whether or not the offeror by making the offer, and the offeree by accepting it, intend to enter into a binding agreement, and whether or not the missing terms can be determined by interpreting the language of the agreement in accordance with Articles 4.1 et seq., or supplied in accordance with Articles 4.8 or 5.1.2. Indefiniteness may moreover be overcome by reference to practices established between the parties or to usages (see Article 1.9), as well as by reference to specific provisions to be found elsewhere in the Principles (e.g. Articles 5.1.6 (Determination of quality of performance), 5.1.7 (Price determination), 6.1.1 (Time of performance), 6.1.6 (Place of performance) and 6.1.10 (Currency not expressed)).

Illustration

1. A has for a number of years annually renewed a contract with B for technical assistance for A’s computers. A opens a second office with the same type of computers and asks B to provide assistance also for the new computers. B accepts and, despite the fact that A’s offer does not specify all the terms of the agreement, a contract has been concluded since the missing terms can be taken from the previous contracts as constituting a practice established between the parties.

2. Intention to be bound

The second criterion for determining whether a party makes an offer for the conclusion of a contract, or merely opens negotiations, is that party’s intention to be bound in the event of acceptance. Since such an intention will rarely be declared expressly, it often has to be inferred from the circumstances of each individual case. The way in which the proponent presents the proposal (e.g. by expressly defining it as an “offer” or as a mere “declaration of intent”) provides a first, although not a decisive, indication of possible intention. Of even greater importance are the content and the addressees of the proposal. Generally speaking, the more detailed and definite the proposal, the more likely it is to be construed as an offer. A proposal addressed to one or more specific persons is more likely to be intended as an offer than is one made to the public at large.

Illustrations

2. After lengthy negotiations the Executive Directors of two companies, A and B, lay down the conditions on which B will acquire 51% of the shares in company C which is totally owned by A. The “Memorandum of Agreement” signed by the negotiators contains a final clause stating that the agreement is not binding until approved by A’s Board of Directors. There is no contract before such approval is given by them.

3. A, a Government agency, advertises for bids for the setting up of a new telephone network. Such an advertisement is merely an invitation to submit offers, which may or may not be accepted by A. If, however, the advertisement indicates in detail the technical specifications of the project and states that the contract will be awarded to the lowest bid conforming to the specifications, it may amount to an offer with the consequence that the contract will be concluded once the lowest bid has been identified.

A proposal may contain all the essential terms of the contract but nevertheless not bind the proponent in case of acceptance if it makes the conclusion of the contract dependent on the reaching of agreement on some minor points left open in the proposal (see Article 2.1.13).

(1) An offer becomes effective when it reaches the offeree. 

(2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.

COMMENT

1. When an offer becomes effective

Paragraph (1) of this Article, which is taken literally from Article 15 CISG, provides that an offer becomes effective when it reaches the offeree (see Article 1.10(2)). For the definition of “reaches” see Article 1.10(3). The time at which the offer becomes effective is of importance as it indicates the precise moment as from which the offeree can accept it, thus definitely binding the offeror to the proposed contract.

2. Withdrawal of an offer

There is, however, a further reason why it may in practice be important to determine the moment at which the offer becomes effective. Indeed, up to that time the offeror is free to change its mind and to decide not to enter into the agreement at all, or to replace the original offer by a new one, irrespective of whether or not the original offer was intended to be irrevocable. The only condition is that the offeree is informed of the offeror’s altered intentions before or at the same time as the offeree is informed of the original offer. By expressly stating this, paragraph (2) of this Article makes it clear that a distinction is to be drawn between “withdrawal” and “revocation” of an offer: before an offer becomes effective it can always be withdrawn whereas the question of whether or not it may be revoked (see Article 2.1.4) arises only after that moment.

(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before it 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.

COMMENT

The problem of whether an offer is or is not revocable is traditionally one of the most controversial issues in the context of the formation of contracts. Since there is no prospect of reconciling the two basic approaches followed in this respect by the different legal systems, i.e. the common law approach according to which an offer is as a rule revocable, and the opposite approach followed by the majority of civil law systems, the only remaining possibility is that of selecting one approach as the main rule, and the other as the exception.

1. Offers as a rule revocable

Paragraph (1) of this Article, which is taken literally from Article 16 CISG, states that until the contract is concluded offers are as a rule revocable. The same paragraph, however, subjects the revocation of an offer to the condition that it reach the offeree before the offeree has dispatched an acceptance. It is thus only when the offeree orally accepts the offer, or when the offeree may indicate assent by performing an act without giving notice to the offeror (see Article 2.1.6(3)), that the offeror’s right to revoke the offer continues to exist until such time as the contract is concluded. Where, however, the offer is accepted by a written indication of assent, so that the contract is concluded when the acceptance reaches the offeror (see Article 2.1.6(2)), the offeror’s right to revoke the offer terminates earlier, i.e. when the offeree dispatches the acceptance. Such a solution may cause some inconvenience to the offeror who will not always know whether or not it is still possible to revoke the offer. It is, however, justified in view of the legitimate interest of the offeree in the time available for revocation being shortened.

As to the determination of the time of dispatch, see Article 2.1.8 and the Comment thereto.

2. Irrevocable offers

Paragraph (2) provides for two important exceptions to the general rule as to the revocability of offers: (i) where the offer contains an indication that it is irrevocable and (ii) where the offeree, having other good reasons to treat the offer as being irrevocable, has acted in reliance on that offer.

a. Indication of irrevocability contained in the offer

The indication that the offer is irrevocable may be made in different ways, the most direct and clear of which is an express statement to that effect by the offeror (e.g. “This is a firm offer”; “We shall stand by our offer until we receive your answer”). It may, however, simply be inferred from other statements by, or conduct of, the offeror. The indication of a fixed time for acceptance may, but need not necessarily, amount by itself to an implicit indication of an irrevocable offer. The answer must be found in each case through a proper interpretation of the terms of the offer in accordance with the various criteria laid down in the general rules on interpretation in Chapter 4. In general, if the offeror operates within a legal system where the fixing of a time for acceptance is considered to indicate irrevocability, it may be assumed that by specifying such a fixed time the offeror intends to make an irrevocable offer. If, on the other hand, the offeror operates in a legal system where the fixing of a time for acceptance is not sufficient to indicate irrevocability, the offeror will not normally have had such an intention.

Illustrations

1. A, a travel agency, informs a client of a cruise in its brochure for the coming New Year holidays. It urges the client to book within the next three days, adding that after that date there will probably be no more places left. This statement by itself will not be considered to indicate that the offer is irrevocable during the first three days.

2. A invites B to submit a written offer of the terms on which B is prepared to construct a building. B presents a detailed offer containing the statement “Price and other conditions are not good after 1 September”. If A and B operate within a legal system where such a statement is considered to be an indication that the offer is irrevocable until the specified date, B can expect the offer to be understood as being irrevocable. The same may not necessarily be the case if the offeree operates in a legal system where such a statement is not considered as being sufficient to indicate that the offer is irrevocable.

b. Reliance by offeree on irrevocability of offer

The second exception to the general rule regarding the revocability of offers, i.e. where “it was reasonable for the offeree to rely on the offer as being irrevocable”, and “the offeree has acted in reliance on the offer”, is an application of the general principle prohibiting inconsistent behaviour laid down in Article 1.8. The reasonable reliance of the offeree may have been induced either by the conduct of the offeror, or by the nature of the offer itself (e.g. an offer whose acceptance requires extensive and costly investigation on the part of the offeree or an offer made with a view to permitting the offeree in turn to make an offer to a third party). The acts which the offeree must have performed in reliance on the offer may consist in making preparations for production, buying or hiring of materials or equipment, incurring expenses etc., provided that such acts could have been regarded as normal in the trade concerned, or should otherwise have been foreseen by, or known to, the offeror.

Illustrations

3. A, an antique dealer, asks B to restore ten paintings on condition that the work is completed within three months and that the price does not exceed a specific amount. B informs A that, so as to know whether or not to accept the offer, B finds it necessary to begin work on one painting and will then give a definite answer within five days. A agrees, and B, relying on A’s offer, begins work immediately. A may not revoke the offer during those five days.

4. A seeks an offer from B for incorporation in a bid on a project to be assigned within a stated time. B submits an offer on which A relies when calculating the price of the bid. Before the expiry of the date, but after A has made the bid, B informs A that it is no longer willing to stand by its offer. B’s offer is irrevocable until the stated date since in making its bid A relied on B’s offer.

An offer is terminated when a rejection reaches the offeror.

COMMENT

1. Rejection may be express or implied

An offer may be rejected either expressly or impliedly. A frequent case of implied rejection is a reply to an offer which purports to be an acceptance but which contains additions, limitations or other modifications (see Article 2.1.11(1)).

In the absence of an express rejection the statements by, or the conduct of, the offeree must in any event be such as to justify the belief of the offeror that the offeree has no intention of accepting the offer. A reply on the part of the offeree which merely asks whether there would be a possible alternative (e.g. “Is there any chance of the price being reduced?”, or “Could you deliver a couple of days earlier?”) would not normally be sufficient to justify such a conclusion.

It should be recalled that a rejection will bring about the termination of any offer, irrespective of whether it was revocable or irrevocable according to Article 2.1.4.

Illustration

A receives an offer from B stating that the offer will be firm for two weeks. A replies by return of post asking for partially different conditions which B does not accept. A may no longer accept the original offer even though there are still several days left before the expiry of the two week period since by making a counter-offer A implicitly rejected the original offer.

2. Rejection only one cause of termination of an offer

Rejection by the offeree is only one of the causes of termination of an offer. Other causes are dealt with in Articles 2.1.4(1) and 2.1.7.

(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 when the indication of assent reaches the offeror.

(3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, the acceptance is effective when the act is performed.

COMMENT

1. Indication of assent to an offer

For there to be an acceptance the offeree must in one way or another indicate “assent” to the offer. The mere acknowledgement of receipt of the offer, or an expression of interest in it, is not sufficient. Furthermore, the assent must be unconditional, i.e. it cannot be made dependent on some further step to be taken by either the offeror (e.g. “Our acceptance is subject to your final approval”) or the offeree (e.g. “We hereby accept the terms of the contract as set forth in your Memorandum and undertake to submit the contract to our Board for approval within the next two weeks”). Finally, the purported acceptance must contain no variation of the terms of the offer or at least none which materially alters them (see Article 2.1.11).

2. Acceptance by conduct

Provided that the offer does not impose any particular mode of acceptance, the indication of assent may either be made by an express statement or be inferred from the conduct of the offeree. Paragraph (1) of this Article does not specify the form such conduct should assume: most often it will consist in acts of performance, such as the payment of an advance on the price, the shipment of goods or the beginning of work at the site, etc.

3. Silence or inactivity

By stating that “[s]ilence or inactivity does not in itself amount to acceptance”, paragraph (1) makes it clear that as a rule mere silence or inactivity on the part of the offeree does not allow the inference that the offeree assents to the offer. The situation is different if the parties themselves agree that silence shall amount to acceptance, or if there exists a course of dealing or usage to that effect. In no event, however, is it sufficient for the offeror to state unilaterally in its offer that the offer will be deemed to have been accepted in the absence of any reply from the offeree. Since it is the offeror who takes the initiative by proposing the conclusion of the contract, the offeree is free not only to accept or not to accept the offer, but also simply to ignore it.

Illustrations

1. A requests B to set out the conditions for the renewal of a contract for the supply of wine, due to expire on 31 December. In its offer B includes a provision stating that “if we have not heard from you at the latest by the end of November, we will assume that you have agreed to renew the contract on the conditions indicated above”. A finds the proposed conditions totally unacceptable and does not even reply. The former contract expires on the fixed date without a new contract having been agreed between the parties.

2. Under a long-term agreement for the supply of wine B regularly met A’s orders without expressly confirming its acceptance. On 15 November A orders a large stock for New Year. B does not reply, nor does it deliver at the requested time. B is in breach since, in accordance with the practice established between the parties, B’s silence in regard to A’s order amounts to an acceptance.

4. When acceptance becomes effective

According to paragraph (2), an acceptance becomes effective at the moment the indication of assent reaches the offeror (see Article 1.10(2)). For the definition of “reaches” see Article 1.10(3). The reason for the adoption of the “receipt” principle in preference to the “dispatch” principle is that the risk of transmission is better placed on the offeree than on the offeror, since it is the former who chooses the means of communication, who knows whether the chosen means of communication is subject to special risks or delay, and who is consequently best able to take measures to ensure that the acceptance reaches its destination.

As a rule, an acceptance by means of mere conduct likewise becomes effective only when notice thereof reaches the offeror. It should be noted, however, that special notice to this effect by the offeree will be necessary only in cases where the conduct will not of itself give notice of acceptance to the offeror within a reasonable period of time. In all other cases, e.g. where the conduct consists in the payment of the price, or the shipment of the goods by air or by some other rapid mode of transportation, the same effect may well be achieved simply by the bank or the carrier informing the offeror of the funds transfer or of the consignment of the goods.

An exception to the general rule of paragraph (2) is to be found in the cases envisaged in paragraph (3), i.e. where “by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror”. In such cases the acceptance is effective at the moment the act is performed, irrespective of whether or not the offeror is promptly informed thereof.

Illustrations

3. A asks B to write a special program for the setting up of a data bank. Without giving A notice of acceptance, B begins to write the program and, after its completion, insists on payment in accordance with the terms set out in A’s offer. B is not entitled to payment since B’s purported acceptance of A’s offer never became effective as B never notified A of it.

4. The facts are the same as in Illustration 3, except that in the offer B is informed of A’s absence for the following two weeks, and that if B intends to accept the offer B should begin writing the program immediately so as to save time. The contract is concluded once B begins to perform, even if B fails to inform A thereof either immediately or at a later stage.

This Article corresponds to paragraphs (1), (2) first part and (3) of Article 18 CISG.

An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.

COMMENT

With respect to the time within which an offer must be accepted, this Article, which corresponds to the second part of paragraph (2) of Article 18 CISG, distinguishes between written and oral offers.

As concerns written offers, all depends upon whether or not the offer indicated a specific time for acceptance: if it did, the offer must be accepted within that time, while in all other cases the indication of assent must reach the offeror “within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror”.

Illustrations

1. A sends B an offer on Monday indicating that if B intends to accept, it must do so by Friday at the latest. B’s acceptance reaches A on the Monday of the following week. A may reject B’s acceptance as being too late.

2. A sends B an offer on Monday morning by e-mail, urging B to reply “as soon as possible”. Although on previous occasions A and B had already communicated by e-mail, B accepts A’s offer by letter which reaches A on Thursday. B’s acceptance is too late since under the circumstances an acceptance by a letter which reaches A three days after its e-mail was not made “as soon as possible”.

Oral offers must be accepted immediately unless the circumstances indicate otherwise. An offer is to be considered oral not only when made in the presence of the offeree, but whenever the offeree can respond immediately. This is the case of an offer made over the phone or communicated electronically in real time.

It is important to note that the rules laid down in this Article also apply to situations where, in accordance with Article 2.1.6(3), the offeree may indicate assent by performing an act without notice to the offeror: in these cases it is the act of performance which has to be accomplished within the respective periods of time.

For the determination of the precise starting point of the period of time fixed by the offeror, see Article 2.1.8; as to the calculation of holidays falling within that period of time, see Article 1.12; as to cases of late acceptance and of delay in transmission, see Article 2.1.9.

A period of time for acceptance fixed by the offeror begins to run from the time that the offer is dispatched. A time indicated in the offer is deemed to be the time of dispatch unless the circumstances indicate otherwise.

COMMENT

Whenever an offeror fixes a period of time for acceptance the question arises of when the period begins to run. According to this Article it begins to run from the moment the offer is dispatched, i.e. has left the sphere of control of the offeror. As to when this occurs there is a presumption that the time of dispatch is the time indicated in the offer. For instance, in the case of a letter, the date of despatch will be the date shown on the letter; in the case of an e-mail, it will be the time indicated as the sending time by the offeror’s server; etc. However, the presumption may be rebutted if in a given case the circumstances indicate otherwise. Thus, if the date shown on a fax letter is prior to the sending date printed by the fax machine, the latter date should prevail. Likewise, if the date shown on a letter is later than the delivery date of the letter, it is clear that the latter was written in by mistake and should therefore be disregarded.

(1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect. 

(2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed.

COMMENT

1. Late acceptance normally ineffective

According to the principle laid down in Article 2.1.7, for an acceptance to be effective it must reach the offeror within the time fixed by the latter or, if no time is fixed, within a reasonable time. This means that as a rule an acceptance which reaches the offeror thereafter is without effect and may be disregarded by the offeror.

2. Offeror may nevertheless “accept” late acceptance

Paragraph (1) of this Article, which corresponds to Article 21 CISG, states that the offeror may nevertheless consider a late acceptance as having arrived in time and thus render it effective, provided that the offeror “without undue delay […] so informs the offeree or gives notice to that effect”. If the offeror takes advantage of this possibility, the contract is to be considered as having been concluded as soon as the late acceptance reaches the offeror and not when the offeror informs the offeree of its intention to consider the late acceptance effective.

Illustration

1. A indicates 31 March as the deadline for acceptance of its offer. B’s acceptance reaches A on 3 April. A, who is still interested in the contract, intends to “accept” B’s late acceptance, and immediately informs B of its intention. Notwithstanding the fact that this notice only reaches B on 5 April the contract is concluded on 3 April.

3. Acceptance late because of delay in transmission

As long as the acceptance is late because the offeree did not send it in time, it is natural to consider it as having no effect unless the offeror expressly indicates otherwise. The situation is different when the offeree has replied in time, but the acceptance reaches the offeror late because of an unexpected delay in transmission. In such a case the reliance of the offeree on the acceptance having arrived in time deserves protection, with the consequence that the late acceptance is considered to be effective unless the offeror objects without undue delay. The only condition required by paragraph (2) is that the communication containing the late acceptance show that it was sent in such circumstances that, had its transmission been normal, it would have reached the offeror in due time.

Illustration

2. The facts are the same as in Illustration 1, except that B, knowing that the normal time for transmission of letters by mail to A is three days, sends its letter of acceptance on 25 March. Owing to a strike of the postal service in A’s country the letter, which shows the date of its mailing on the envelope, only arrives on 3 April. B’s acceptance, though late, is nevertheless effective unless A objects without undue delay.

3. The facts are the same as in Illustration 1, except that B, after receiving A’s offer, accepts it on 30 March by e-mail. Due to technical problems at A’s server, the e-mail reaches A only on 1 April. B’s acceptance, though late, is nevertheless effective unless A objects without undue delay.

An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.

COMMENT

With respect to the withdrawal of an acceptance this Article lays down the same principle as that contained in Article 2.1.3 concerning the withdrawal of an offer, i.e. that the offeree may change its mind and withdraw the acceptance provided that the withdrawal reaches the offeror before or at the same time as the acceptance.

It should be noted that while the offeror is bound by the offer and may no longer change its mind once the offeree has dispatched the acceptance (see Article 2.1.4(1)), the offeree looses its freedom of choice only at a later stage, i.e. when the notice of acceptance reaches the offeror.

This Article corresponds to Article 22 CISG.

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. 

(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

COMMENT

1. Acceptance with modifications normally to be considered a counter-offer

In commercial dealings it often happens that the offeree, while signifying to the offeror its intention to accept the offer (“acknowledgement of order”), nevertheless includes in its declaration terms additional to or different from those of the offer. Paragraph (1) of this Article provides that such a purported acceptance is as a rule to be considered a rejection of the offer and that it amounts to a counter-offer by the offeree, which the offeror may or may not accept either expressly or impliedly, e.g. by an act of performance.

2. Modifications which do not alter the nature of the acceptance

The principle according to which the acceptance must be the mirror image of the offer implies that even unimportant differences between the offer and the acceptance permit either party at a later stage to question the existence of the contract. In order to avoid such a result, which a party may well seek merely because market conditions have changed unfavourably, paragraph (2) provides for an exception to the general rule laid down in paragraph (1) by stating that if the additional or modified terms contained in the acceptance do not “materially” alter the terms of the offer, the contract is concluded with those modifications unless the offeror objects without undue delay.

What amounts to a “material” modification cannot be determined in the abstract but will depend on the circumstances of each case. Additional or different terms relating to the price or mode of payment, place and time of performance of a non-monetary obligation, the extent of one party’s liability to the other or the settlement of disputes, will normally, but need not necessarily, constitute a material modification of the offer. An important factor to be taken into account in this respect is whether the additional or different terms are commonly used in the trade sector concerned and therefore do not come as a surprise to the offeror.

Illustrations

1. A orders a machine from B to be tested on A’s premises. In its acknowledgement of order B declares that it accepts the terms of the offer, but adds that it wishes to be present at the testing of the machine. The additional term is not a “material” modification of the offer and will therefore become part of the contract unless A objects without undue delay.

2. The facts are the same as in Illustration 1, except that in its acknowledgement of order B adds an arbitration clause. Unless the circumstances indicate otherwise, such a clause amounts to a “material” modification of the terms of the offer, with the result that B’s purported acceptance would constitute a counter-offer.

3. A orders a stated quantity of wheat from B. In its acknowledgement of order B adds an arbitration clause which is standard practice in the commodity sector concerned. Since A cannot be surprised by such a clause, it is not a “material” modification of the terms of the offer and, unless A objects without undue delay, the arbitration clause becomes part of the contract.

If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy.

COMMENT

1. “Writings in confirmation”

This Article deals with the situation where a contract has already been concluded either orally or by the exchange of written communications limited to the essential terms of the agreement, and one party subsequently sends the other a document intended simply to confirm what has already been agreed upon, but which in fact contains terms which are additional to or different from those previously agreed by the parties. In theory, this situation clearly differs from that envisaged in Article 2.1.11, where a contract has not yet been concluded and the modifying terms are contained in the offeree’s purported acceptance. Yet, since in practice it may be very difficult if not impossible to distinguish between the two situations, this Article adopts with respect to modifying terms contained in a writing in confirmation the same solution as that envisaged in Article 2.1.11. In other words, just as for the modifications contained in an acknowledgement of order, it is provided that terms additional to or different from those previously agreed by the parties contained in a writing in confirmation become part of the contract, provided that they do not “materially” alter the agreement and that the recipient of the document does not object to them without undue delay.

It goes without saying that also in the context of writings in confirmation the question of which of the new terms “materially” alter the terms of the previous agreement can be answered definitely only in the light of the circumstances of each individual case. On the other hand, this Article clearly does not apply to cases where the party sending the writing in confirmation expressly invites the other party to return it duly counter-signed for acceptance. In such circumstances it is irrelevant whether the writing contains modifications, and if so whether or not these modifications are “material” since the writing must in any case be expressly accepted by the addressee if there is to be a contract.

Illustrations

1. A orders by telephone a machine from B, who accepts the order. The following day A receives a letter from B confirming the terms of their oral agreement but adding that B wishes to be present at the testing of the machine on A’s premises. The additional term is not a “material” modification of the terms previously agreed between the parties and will therefore become part of the contract unless A objects without undue delay.

2. The facts are the same as in Illustration 1, except that the modification contained in B’s writing in confirmation consists in the addition of an arbitration clause. Unless the circumstances indicate otherwise such a clause amounts to a “material” modification of the terms previously agreed between the parties with the result that it will not become part of the contract.

3. A orders by e-mail a stated quantity of wheat and B accepts immediately by e-mail. Later on the same day B sends a letter to A confirming the terms of their agreement but adding an arbitration clause which is standard practice in the commodity sector concerned. Since A cannot be surprised by such a clause, it is not a “material” modification of the terms previously agreed and, unless A objects without undue delay, the arbitration clause becomes part of the contract.

2. Writing in confirmation to be sent within a reasonable time after conclusion of the contract

The rule according to which silence on the part of the recipient amounts to acceptance of the content of the writing in confirmation, including any non-material modifications of the terms previously agreed, presupposes that the writing is sent “within a reasonable time after the conclusion of the contract”. Any writing of this kind sent after a period of time which, in the circumstances, appears to be unreasonably long, loses any significance, and silence on the part of the recipient may therefore no longer be interpreted as acceptance of its content.

3. Invoices

For the purposes of this Article, the term “writing in confirmation” is to be understood in a broad sense, i.e. as covering also those cases where a party uses the invoice or another similar document relating to performance to specify the conditions of the contract concluded either orally or by informal correspondence, provided that such use is customary in the trade sector and/or country concerned.

Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form.

COMMENT

1. Conclusion of contract dependent on agreement on specific matters

As a rule, a contract is concluded if the parties reach agreement on the terms which are essential to the type of transaction involved, while minor terms which the parties have not settled may subsequently be implied either in fact or by law (see Comment 1 on Article 2.1.2 and also Articles 4.8 and 5.1.2).

Illustration

1. A agrees with B on all the terms which are essential to their intended contract for the distribution of A’s goods. When the question subsequently arises of who should bear the costs of the publicity campaign, neither party may claim that no contract has come into existence by reason of the silence of the contract on this point, as the missing term is not essential to the type of transaction in question and will be implied in fact or by law.

Parties may, however, in a given case consider specific matters to be of such importance that they do not intend to enter into a binding agreement unless these matters are settled in a satisfactory manner. If the parties, or one only of them, make such an intention explicit, the contract as such does not come into existence without agreement on those matters. By using the word “insists”, this Article makes it clear that it is not sufficient for the parties to manifest their intention to this effect simply in passing, but that it must be done unequivocally.

Illustration

2. The facts are the same as in Illustration 1, except that during the negotiations B repeatedly declares that the question of who should bear the cost of the publicity campaign must be settled expressly. Notwithstanding their agreement on all the essential terms of the contract, no contract has come into existence between A and B since B had insisted that the conclusion of the contract was dependent on agreement regarding that specific term.

2. Conclusion of contract dependent on agreement in a particular form

In commercial practice, particularly when transactions of considerable complexity are involved, it is quite frequent that after prolonged negotiations the parties sign an informal document called “Preliminary Agreement”, “Memorandum of Understanding”, “Letter of Intent” or the like, containing the terms of the agreement so far reached, but at the same time state their intention to provide for the execution of a formal document at a later stage (“Subject to Contract”, “Formal Agreement to follow”). In some cases the parties consider their contract as already being concluded and the execution of the formal document only as confirmation of the already complete agreement. If, however, both parties, or only one of them, make it clear that they do not intend to be bound unless the formal document has been drawn up, there will be no contract until that time even if the parties have agreed on all the relevant aspects of their transaction.

Illustrations

3. After prolonged negotiations A and B sign a “Memorandum of Understanding” containing the terms of an agreement for a joint venture for the exploration and exploitation of the continental shelf of country X. The parties agree that they will at a later stage draw up the agreement in formal documents to be signed and exchanged at a public ceremony. If the “Memorandum” already contains all the relevant terms of the agreement and the subsequent documents are intended merely to permit the agreement to be properly presented to the public, it may be taken that the contract was already concluded when the first written document was signed.

4. The facts are the same as in Illustration 3, except that the “Memorandum of Understanding” contains a clause such as “Not binding until final agreement is executed” or the like. Until the signing and the exchange of the formal documents there is no binding contract.

(1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence. 

(2) The existence of the contract is not affected by the fact that subsequently

(a) the parties reach no agreement on the term; or

(b) the third person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.

COMMENT

1. Contract with terms deliberately left open

A contract may be silent on one or more issues because the parties simply did not think of them during the negotiations. Provided that the parties have agreed on the terms essential to the type of transaction concerned, a contract will nonetheless have been concluded and the missing terms will be supplied on the basis of Articles 4.8 or 5.1.2 (see Comment 1 on Article 2.1.2). Quite different is the case dealt with in this Article: here the parties intentionally leave open one or more terms because they are unable or unwilling to determine them at the time of the conclusion of the contract, and refer for their determination to an agreement to be made by them at a later stage, or to a third person.

This latter situation, which is especially frequent in, although not confined to, long-term transactions, gives rise in essence to two problems: first, whether the fact that the parties have intentionally left terms open prevents a contract from coming into existence and second, if this is not the case, what will happen to the contract if the parties subsequently fail to reach agreement or the third person fails to make the determination.

2. Open terms not in themselves an impediment to valid conclusion of contract

Paragraph (1) states that if the parties intended to conclude a contract, the fact that they have intentionally left a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence.

In cases where it is not expressly stated, the parties’ intention to conclude a contract notwithstanding the terms left open may be inferred from other circumstances, such as the non-essential character of the terms in question, the degree of definiteness of the agreement as a whole, the fact that the open terms relate to items which by their very nature can be determined only at a later stage, the fact that the agreement has already been partially executed, etc.

Illustration

1. A, a shipping line, enters into a detailed agreement with B, a terminal operator, for the use of B’s container terminal. The agreement fixes the minimum volume of containers to be discharged or loaded annually and the fees payable, while the fees for additional containers are left to be determined if and when the minimum volume is reached. Two months later A learns that B’s competitor would offer better conditions and refuses to perform, claiming that the agreement with B never resulted in a binding contract because the question of the fees had not been settled. A is liable for non-performance because the detailed character of the agreement as well as the fact that both A and B began performance immediately indicate clearly that their intention was to enter into a binding agreement.

3. Failure of mechanism provided for by parties for determination of open terms

If the parties are unable to reach agreement on the open terms or the third person does not determine them, the question arises as to whether or not the contract comes to an end. According to paragraph (2) of this Article the existence of the contract is not affected “provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties”. A first alternative exists whenever the missing term can be supplied on the basis of Article 5.1.2; if the parties have deferred the determination of the missing term to a third person to be nominated by an instance such as the President of the Tribunal, or of the Chamber of Commerce, etc., it may also consist in the appointment of a new third person. The cases in which a given contract may be upheld by resorting to such alternative means will, however, be quite rare in practice. Few problems should arise as long as the term to be implemented is of minor importance. If, on the other hand, the term in question is essential to the type of transaction concerned, there must be clear evidence of the intention of the parties to uphold the contract: among the factors to be taken into account in this connection are whether the term in question relates to items which by their very nature can be determined only at a later stage, whether the agreement has already been partially executed, etc.

Illustration

2. The facts are the same as in Illustration 1, except that when the minimum volume of containers to be loaded or unloaded is reached the parties fail to agree on the fees payable in respect of the additional containers. A stops performing, claiming that the contract has come to an end. A is liable for non-performance, since the fact that the parties have started performing without making future agreement on the missing term a condition for the continuation of their business relationship is sufficient evidence of their intention to uphold the contract even in the absence of such agreement. The fees for the additional containers will be determined according to the criteria laid down in Article 5.1.7.

(1) A party is free to negotiate and is not liable for failure to reach an agreement.

(2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party.

(3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.

COMMENT

1. Freedom of negotiation

As a rule, parties are not only free to decide when and with whom to enter into negotiations with a view to concluding a contract, but also if, how and for how long to proceed with their efforts to reach an agreement. This follows from the basic principle of freedom of contract enunciated in Article 1.1, and is essential in order to guarantee healthy competition among business people engaged in international trade.

2. Liability for negotiating in bad faith

A party’s right freely to enter into negotiations and to decide on the terms to be negotiated is, however, not unlimited, and must not conflict with the principle of good faith and fair dealing laid down in Article 1.7. One particular instance of negotiating in bad faith which is expressly indicated in paragraph (3) of this Article is that where a party enters into negotiations or continues to negotiate without any intention of concluding an agreement with the other party. Other instances are where one party has deliberately or by negligence misled the other party as to the nature or terms of the proposed contract, either by actually misrepresenting facts, or by not disclosing facts which, given the nature of the parties and/or the contract, should have been disclosed. As to the duty of confidentiality, see Article 2.1.16.

A party’s liability for negotiating in bad faith is limited to the losses caused to the other party (paragraph (2)). In other words, the aggrieved party may recover the expenses incurred in the negotiations and may also be compensated for the lost opportunity to conclude another contract with a third person (so-called reliance or negative interest), but may generally not recover the profit which would have resulted had the original contract been concluded (so-called expectation or positive interest).

Only if the parties have expressly agreed on a duty to negotiate in good faith, will all the remedies for breach of contract be available to them, including the remedy of the right to performance.

Illustrations

1. A learns of B’s intention to sell its restaurant. A, who has no intention whatsoever of buying the restaurant, nevertheless enters into lengthy negotiations with B for the sole purpose of preventing B from selling the restaurant to C, a competitor of A’s. A, who breaks off negotiations when C has bought another restaurant, is liable to B, who ultimately succeeds in selling the restaurant at a lower price than that offered by C, for the difference in price.

2. A, who is negotiating with B for the promotion of the purchase of military equipment by the armed forces of B’s country, learns that B will not receive the necessary import licence from its own governmental authorities, a pre-requisite for permission to pay B’s fees. A does not reveal this fact to B and finally concludes the contract, which, however, cannot be enforced by reason of the missing licences. A is liable to B for the costs incurred after A had learned of the impossibility of obtaining the required licence.

3. A enters into lengthy negotiations for a bank loan from B’s branch office. At the last minute the branch office discloses that it had no authority to sign and that its head office has decided not to approve the draft agreement. A, who could in the meantime have obtained the loan from another bank, is entitled to recover the expenses entailed by the negotiations and the profits it would have made during the delay before obtaining the loan from the other bank.

4. Contractor A and supplier B enter into a pre-bid agreement whereby they undertake to negotiate in good faith for the supply of equipment in the event that A succeeds in becoming prime contractor for a major construction project. A is awarded the construction contract, but after preliminary contacts with B refuses to continue the negotiations. B may request enforcement of the duty to negotiate in good faith.

3. Liability for breaking off negotiations in bad faith

The right to break off negotiations also is subject to the principle of good faith and fair dealing. Once an offer has been made, it may be revoked only within the limits provided for in Article 2.1.4. Yet even before this stage is reached, or in a negotiation process with no ascertainable sequence of offer and acceptance, a party may no longer be free to break off negotiations abruptly and without justification. When such a point of no return is reached depends on the circumstances of the case, in particular the extent to which the other party, as a result of the conduct of the first party, had reason to rely on the positive outcome of the negotiations, and on the number of issues relating to the future contract on which the parties have already reached agreement.

Illustration

5. A assures B of the grant of a franchise if B takes steps to gain experience and is prepared to invest USD 300,000. During the next two years B makes extensive preparations with a view to concluding the contract, always with A’s assurance that B will be granted the franchise. When all is ready for the signing of the agreement, A informs B that the latter must invest a substantially higher sum. B, who refuses, is entitled to recover from A the expenses incurred with a view to the conclusion of the contract.

Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.

COMMENT

1. Parties in general not under a duty of confidentiality

Just as there exists no general duty of disclosure, so parties, when entering into negotiations for the conclusion of a contract, are normally under no obligation to treat the information they have exchanged as confidential. In other words, since a party is normally free to decide which facts relevant to the transaction under negotiation to disclose, such information is as a rule to be considered non-confidential, i.e. information which the other party may either disclose to third persons or use for purposes of its own should no contract be concluded.

Illustration

1. A invites B and C, producers of air-conditioning systems, to submit offers for the installation of such a system. In their offers B and C also provide some technical details regarding the functioning of their respective systems, with a view to enhancing the merits of their products. A decides to reject B’s offer and to continue negotiations only with C. A is free to use the information contained in B’s offer in order to induce C to propose more favourable conditions.

2. Confidential information

A party may have an interest in certain information given to the other party not being divulged or used for purposes other than those for which it was given. As long as that party expressly declares that such information is to be considered confidential, the situation is clear, for by receiving the information the other party implicitly agrees to treat it as confidential. The only problem which may arise is that if the period during which the other party is not to disclose the information is too long, this might contravene the applicable laws prohibiting restrictive trade practices. Yet even in the absence of such an express declaration the receiving party may be under a duty of confidentiality. This is the case where, in view of the particular nature of the information or the professional qualifications of the parties, it would be contrary to the general principle of good faith and fair dealing for the receiving party to disclose it, or to use it for its own purposes after the breaking off of negotiations.

Illustrations

2. The facts are the same as in Illustration 1, except that in its offer B expressly requests A not to divulge certain technical specifications contained therein. A may not use this information in its negotiations with C.

3. A is interested in entering into a joint venture agreement with B or C, the two leading car manufacturers in country X. Negotiations progress with B in particular, and A receives fairly detailed information relating to B’s plans for a new car design. Although B does not expressly request A to treat this information as confidential, because it is for a new car design. A may be under a duty not to disclose it to C, nor is A allowed to use those plans for its own production process should the negotiations not result in the conclusion of a contract.

3. Damages recoverable

The breach of confidentiality implies first liability in damages. The amount of damages recoverable may vary, depending on whether or not the parties entered into a special agreement for the non-disclosure of the information. Even if the injured party has not suffered any loss, it may be entitled to recover from the non-performing party the benefit the latter received by disclosing the information to third persons or by using it for its own purposes. If necessary, for example when the information has not yet been disclosed or has been disclosed only partially, the injured party may also seek an injunction in accordance with the applicable law.

A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.

COMMENT

If the conclusion of a contract is preceded by more or less extended negotiations, the parties may wish to put their agreement in writing and declare that document to constitute their final agreement. This can be achieved by an appropriately drafted “merger” or “integration” clause (e.g. “This contract contains the entire agreement between the parties”). However, the effect of such a clause is not to deprive prior statements or agreements of any relevance: they may still be used as a means of interpreting the written document (see also Article 4.3(a)).

A merger clause of course covers only prior statements or agreements between the parties and does not preclude subsequent informal agreements between them. The parties are, however, free to extend an agreed form even to future amendments (see Article 2.1.18).

This Article indirectly confirms the principle set out in Article 1.2 in the sense that, in the absence of a merger clause, extrinsic evidence supplementing or contradicting a written contract is admissible.

A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has acted in reliance on that conduct.

COMMENT

Parties concluding a written contract may wish to ensure that any modification or termination by agreement will also be in writing or otherwise in a particular form and to this end include a special clause in the contract (e.g. “Any modification of this Contract may be made only by a writing signed by both Parties”; “Alterations to the above-indicated Time-schedule must be confirmed in writing by the Engineer’s representative on site”).

This Article states that as a rule such a clause renders ineffective any modification or termination by agreement not in the particular form required.

Illustration

1. Contractor A contracts with purchaser B for the construction of a building. The contract provides that any modification to the work schedule must be in writing and the document must be signed by both parties. In the course of construction, A sends B an e-mail asking B to agree to the extension of a particular deadline. B accepts by return of e-mail. The modification is ineffective since there is no single document bearing both parties’ signature.

Yet there is an exception to the general rule. In application of the general principle prohibiting inconsistent behaviour (see Article 1.8), this Article specifies that a party may be precluded by its conduct from invoking the clause requiring any modification or termination to be in a particular form to the extent that the other party has reasonably acted in reliance on that conduct.

Illustration

2. A, a contractor, contracts with B, a school board, for the construction of a new school building. The contract provides that the second floor of the building is to have sufficient bearing capacity to support the school library. Notwithstanding a “no oral modification” clause in the same contract, the parties orally agree that the second floor of the building should be of non-bearing construction. A completes construction according to the modification and B, who has observed the progress of the construction without making any objections, only at this point objects to how the second floor has been constructed. A court may decide that B is not entitled to invoke the “no oral modification” clause as A reasonably relied on the oral modification, and is therefore not liable for non-performance.

(1) Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.1.20 – 2.1.22.

(2) Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.

COMMENT

1. Contracting under standard terms

This Article is the first of four articles (Articles 2.1.19 – 2.1.22) which deal with the special situation where one or both parties use standard terms in concluding a contract.

2. Notion of “standard terms”

“Standard terms” are to be understood as those contract provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party (paragraph (2)). What is decisive is not their formal presentation (e.g. whether they are contained in a separate document or in the contract document itself; whether they have been issued on pre-printed forms or are only contained in an electronic file, etc.), nor who prepared them (the party itself, a trade or professional association, etc.), nor their volume (whether they consist of a comprehensive set of provisions covering almost all the relevant aspects of the contract, or of only one or two provisions regarding, for instance, exclusion of liability and arbitration). What is decisive is the fact that they are drafted in advance for general and repeated use and that they are actually used in a given case by one of the parties without negotiation with the other party. This latter requirement obviously relates only to the standard terms as such, which the other party must accept as a whole, while the other terms of the same contract may well be the subject of negotiation between the parties.

3. General rules on formation apply

Usually, the general rules on formation apply irrespective of whether or not one or both parties use standard terms (paragraph (1)). It follows that standard terms proposed by one party bind the other party only on acceptance, and that it depends upon the circumstances of the case whether the two parties must refer to the standard terms expressly or whether the incorporation of such terms may be implied. Thus, standard terms contained in the contract document itself will normally be binding upon the mere signature of the contract document as a whole, at least as long as they are reproduced above that signature and not, for instance, on the reverse side of the document. On the other hand, standard terms contained in a separate document or electronic file will normally have to be referred to expressly by the party intending to use them. Implied incorporation may be admitted only if there exists a practice established between the parties or usage to that effect (see Article 1.9).

Illustrations

1. A intends to conclude an insurance contract with B covering the risk of liability for accidents of A’s employees at work. The parties sign a model contract form presented by B after filling in the blank spaces relating, among other matters, to the premium and to the maximum amount insured. By virtue of its signature, A is bound not only by the terms which it has individually negotiated with B, but also by the General Conditions of the National Insurers’ Association, which are printed on the form.

2. A normally concludes contracts with its customers on the basis of its own standard terms which are printed as a separate document. When making an offer to B, a new customer, A fails to make an express reference to the standard terms. B accepts the offer. The standard terms are not incorporated in the contract unless A can prove that B knew or ought to have known of A’s intention to conclude the contract only on the basis of its own standard terms, e.g. because the same standard terms had regularly been adopted in previous transactions.

3. A intends to buy grain on the commodity exchange in London. In the contract concluded between A and B, a broker on that exchange, no express reference is made to the standard terms which normally govern brokerage contracts concluded at the exchange in question. The standard terms are nevertheless incorporated in the contract because their application to the kind of contract in question amounts to a usage.

(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.

COMMENT

1. Surprising terms in standard terms not effective

A party which accepts the other party’s standard terms is in principle bound by them irrespective of whether or not it actually knows their content in detail or fully understands their implications. An important exception to this rule is, however, laid down in this Article which states that, notwithstanding its acceptance of the standard terms as a whole, the adhering party is not bound by those terms which by virtue of their content, language or presentation are of such a character that it could not reasonably have expected them. The reason for this exception is the desire to avoid a party which uses standard terms taking undue advantage of its position by surreptitiously attempting to impose terms on the other party which that party would scarcely have accepted had it been aware of them. For other articles intended to protect the economically weaker or less experienced party, see Articles 3.2.7 and 4.6.

2. Terms “surprising” by virtue of their content

A particular term contained in standard terms may come as a surprise to the adhering party first by reason of its content. This is the case whenever the content of the term in question is such that a reasonable person of the same kind as the adhering party would not have expected it in the type of standard terms involved. In determining whether or not a term is unusual, regard must be had on the one hand to the terms which are commonly to be found in standard terms generally used in the trade sector concerned, and on the other to the individual negotiations between the parties. Thus, for example, a term excluding or limiting the contractual liability of the proponent may or may not be considered to be “surprising”, and in consequence ineffective in a particular case, its effectiveness depending on whether or not terms of that kind are common in the trade sector concerned, and are consistent with the way in which the parties conducted their negotiations.

Illustration

1. A, a travel agency, offers package tours for business trips. The terms of the advertisement give the impression that A is acting as a tour operator who undertakes full responsibility for the various services comprising the package. B books a tour on the basis of A’s standard terms. Notwithstanding B’s acceptance of the terms as a whole, A may not rely on a term stating that, with respect to the hotel accommodation, it is acting merely as an agent for the hotelkeeper, and therefore declines any liability.

3. Terms “surprising” by virtue of their language or presentation

Other reasons for a particular term contained in standard terms being surprising to the adhering party may be the language in which it is couched, which may be obscure, or the way in which it is presented typographically, for instance in minute print. In order to determine whether or not this is the case, regard is to be had not so much to the formulation and presentation commonly used in the type of standard terms involved, but more to the professional skill and experience of persons of the same kind as the adhering party. Thus, a particular wording may be both obscure and clear at the same time, depending on whether or not the adhering party belongs to the same professional category as the party using the standard terms.

The language factor may also play an important role in the context of international transactions. If the standard terms are drafted in a foreign language it cannot be excluded that some of its terms, although fairly clear in themselves, will turn out to be surprising for the adhering party who could not reasonably have been expected fully to appreciate all their implications.

Illustrations

2. A, an insurance company operating in country X, is an affiliate of B, a company incorporated in country Y. A’s standard terms comprise some 50 terms printed in small type. One of the terms designates the law of country Y as the applicable law. Unless this term is presented in bold letters or in any other way apt to attract the attention of the adhering party, it will be without effect since customers in country X would not reasonably expect to find a choice-of-law clause designating a foreign law as the law governing their contracts in the standard terms of a company operating in their own country.

3. A, a commodity dealer operating in Hamburg, uses in its contracts with its customers standard terms containing, among others, a provision stating “Hamburg – Freundschaftliche Arbitrage”. In local business circles this clause is normally understood as meaning that possible disputes are to be submitted to a special arbitration governed by particular rules of procedure of local origin. In contracts with foreign customers this clause may be held to be ineffective, notwithstanding the acceptance of the standard terms as a whole, since a foreign customer cannot reasonably be expected to understand its exact implications, and this irrespective of whether or not the clause has been translated into the foreign customer’s own language.

4. Express acceptance of “surprising” terms

The risk of the adhering party being taken by surprise by the kind of terms so far discussed clearly no longer exists if in a given case the other party draws the adhering party’s attention to them and the adhering party accepts them. This Article therefore provides that a party may no longer rely on the “surprising” nature of a term in order to challenge its effectiveness, once it has expressly accepted the term.

In case of conflict between a standard term and a term which is not a standard term the latter prevails.

COMMENT

Standard terms are by definition prepared in advance by one party or a third person and incorporated in an individual contract without their content being discussed by the parties (see Article 2.1.19(2)). It is therefore logical that whenever the parties specifically negotiate and agree on particular provisions of their contract, such provisions will prevail over conflicting provisions contained in the standard terms since they are more likely to reflect the intention of the parties in the given case.

The individually agreed provisions may appear in the same document as the standard terms, but may also be contained in a separate document. In the first case they may easily be recognised on account of their being written in characters different from those of the standard terms. In the second case it may be more difficult to distinguish between the provisions which are standard terms and those which are not, and to determine their exact position in the hierarchy of the different documents. To this effect the parties often include a contract provision expressly indicating the documents which form part of their contract and their respective weight. Special problems may however arise when the modifications to the standard terms have only been agreed upon orally, without the conflicting provisions contained in the standard terms being struck out, and those standard terms contain a provision stating the exclusive character of the writing signed by the parties, or that any addition to or modification of their content must be in writing. For these cases see Articles 2.1.17 and 2.1.18.

Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

COMMENT

1. Parties using different standard terms

It is quite frequent in commercial transactions for both the offeror when making the offer, and the offeree when accepting it, each to refer to its own standard terms. In the absence of express acceptance by the offeror of the offeree’s standard terms, the problem arises as to whether a contract is concluded at all and if so, which, if either, of the two conflicting sets of standard terms should prevail.

2. “Battle of forms” and general rules on offer and acceptance

If the general rules on offer and acceptance were to be applied, there would either be no contract at all since the purported acceptance by the offeree would, subject to the exception provided for in Article 2.1.11(2), amount to a counter-offer, or if the two parties have started to perform without objecting to each other’s standard terms, a contract would be considered to have been concluded on the basis of those terms which were the last to be sent or to be referred to (the “last shot”).

3. The “knock-out” doctrine

The “last shot” doctrine may be appropriate if the parties clearly indicate that the adoption of their standard terms is an essential condition for the conclusion of the contract. Where, on the other hand, the parties, as is very often the case in practice, refer to their standard terms more or less automatically, for example by exchanging printed order and acknowledgement of order forms with the respective terms on the reverse side, they will normally not even be aware of the conflict between their respective standard terms. There is in such cases no reason to allow the parties subsequently to question the very existence of the contract or, if performance has commenced, to insist on the application of the terms last sent or referred to.

It is for this reason that this Article provides, notwithstanding the general rules on offer and acceptance, that if the parties reach an agreement except on their standard terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance (“knock-out” doctrine).

Illustration

1. A orders a machine from B indicating the type of machine, the price and terms of payment, and the date and place of delivery. A uses an order form with its “General Conditions for Purchase” printed on the reverse side. B accepts by sending an acknowledgement of order form on the reverse side of which appear its own “General Conditions for Sale”. When A subsequently seeks to withdraw from the deal it claims that no contract was ever concluded as there was no agreement as to which set of standard terms should apply. Since, however, the parties have agreed on the essential terms of the contract, a contract has been concluded on those terms and on any standard terms which are common in substance.

A party may, however, always exclude the operation of the “knock-out” doctrine by clearly indicating in advance, or by later and without undue delay informing the other, that it does not intend to be bound by a contract which is not based on its own standard terms. What will in practice amount to such a “clear” indication cannot be stated in absolute terms but the inclusion of a clause of this kind in the standard terms themselves will not normally be sufficient since what is necessary is a specific declaration by the party concerned in its offer or acceptance.

Illustrations

2. The facts are the same as in Illustration 1, except that A claims that the contract was concluded on the basis of its standard terms since they contain a clause which states that “Deviating standard terms of the party accepting the order are not valid if they have not been confirmed in writing by us”. The result will be the same as in Illustration 1, since merely by including such a clause in its standard terms A does not indicate with sufficient clarity its determination to conclude the contract only on its own terms.

3. The facts are the same as in Illustration 1, except that the non-standard terms of A’s offer contain a statement to the effect that A intends to contract only on its own standard terms. The mere fact that B attaches its own standard terms to its acceptance does not prevent the contract from being concluded on the basis of A’s standard terms.