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    Resolving Commercial Disputes in a Global Economy

    As Wisconsin's presence in the global economy grows, lawyers representing clients in international commerce, and lawyers involved in resolving international commercial disputes, must be prepared to operate under a body of law that differs from the more familiar Uniform Commercial Code.

    James Dries

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    Wisconsin LawyerWisconsin Lawyer
    Vol. 78, No. 8, August 2005

    Resolving Commercial Disputes in a Global Economy

    As Wisconsin's presence in the global economy grows, lawyers representing clients in international commerce, and lawyers involved in resolving international commercial disputes, must be prepared to operate under a body of law that differs from the more familiar Uniform Commercial Code.

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    by James Dries

    In 1986, the United States Senate ratified the United Nations Convention on Contracts for the International Sale of Goods (the Convention), which became effective on Jan. 1, 1988 as the U.S. body of law to govern contracts within its scope.1 Despite the Convention's broad scope and 17-year existence as U.S. law, an observation made by the Eleventh Circuit Court of Appeals seven years ago remains valid today _ few cases decided in the United States have applied the Convention.2 But the Convention's relative anonymity undoubtedly will diminish soon, given its global reach and the rapid increase in the number of subscribing countries. Currently, 65 countries are signatories to the Convention, which is the domestic law of each of those countries. Given current trends, it is estimated that eventually more than 100 countries will subscribe to the Convention.3 The 65 countries that are parties to the Convention account for more than two-thirds of all world trade and for a significant majority of the world's population.

    James J. DriesJames J. Dries, Marquette 1974, is a partner in the Chicago office of Baker & McKenzie LLP, an international law firm with offices in 69 cities and 38 countries. He is a member of the firm's North American Litigation Practice Group. His litigation practice includes an emphasis in international disputes.

    As the global economy continues its rapid expansion, the Convention will govern an ever-increasing number of contracts and a rising number of commercial disputes will be resolved by applying its principles. Statistics published by the Wisconsin Department of Commerce confirm the state's involvement in the energized global economy. Wisconsin exports alone totaled nearly $13 billion in 2004, an increase of more than 30 percent in just five years. Of the 10 leading importers of Wisconsin goods, eight are Convention signatories. Practitioners unfamiliar with the Convention will be surprised to learn that the Convention applies even in the absence of a choice of law provision designating it as the body of law to govern the parties' agreement. For these reasons, lawyers representing clients in international commerce, and lawyers involved in resolving international commercial disputes, must be intimately familiar with the Convention and how it departs from other established bodies of commercial law, particularly the more familiar Uniform Commercial Code (UCC).

    This article is not intended as an exhaustive analysis of the Convention or its differences from other bodies of commercial law but instead focuses on two specific topics that represent significant departures from the UCC: 1) the Convention's treatment of oral contracts, parol evidence, and subjective intent; and 2) the effect of merger clauses under the Convention.

    The Scope of the Convention

    The Convention applies to contracts for the sale of goods between parties whose places of business are in different countries if the countries are signatories to the Convention (referred to as contracting states).4 If the Convention applies, its provisions operate by default; only a properly worded choice of law provision will enable a party to opt out of the Convention. While the Convention expressly recognizes the right of contracting parties to exclude application of its provisions,5 the Convention generally will control even those contracts that have a choice of law provision if the provision does not affirmatively exclude applying the Convention.6 Thus, a choice of law provision that adopts the law of a contracting state as the contract's governing law will be deemed to adopt the Convention, because the Convention is the law of the contracting state.

    Statute of Frauds, Parol Evidence, and Subjective Intent Under the Convention

    The Convention's treatment of oral agreements marks an important departure from the UCC. Unlike the UCC, which proscribes enforcing oral contracts for the sale of goods having a price of $500 or more,7 the Convention contains no statute of frauds and expressly embraces oral contracts: "A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses."8

    The Convention also differs from the UCC in its approach to the enforcement of written contracts. The UCC affirmatively adopts a form of the parol evidence rule, which precludes evidence of a prior understanding or a contemporaneous oral agreement if the parties intend the written instrument as a final expression of their agreement.9 The Convention does not include any variation of the parol evidence rule, nor does it expressly permit the introduction of parol evidence. Nevertheless, various Convention provisions combine to leave little doubt concerning the admissibility of parol evidence, as the Eleventh Circuit noted in MCC-Marble Ceramic Center Inc. v. Ceramica Nuova D'Agostino.10

    In that case, the court had to decide whether it could accept evidence of a party's subjective intent not to be bound by the unambiguous terms of the parties' written agreement. The court concluded that, notwithstanding the Convention's failure to expressly address the role of parol evidence, various provisions of the Convention permitted, indeed required, that the court consider evidence of the parties' subjective intent, even if the evidence conflicted with the written agreement's terms. First, the court noted that, since representatives of both parties acknowledged that they did not intend to be bound by certain written provisions, the court was required to examine the parties' subjective intent under Article 8(1) of the Convention, which provides:

    "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."

    Next, the court commented that the Convention specifically permits the enforcement of oral contracts.11 Finally, the court observed that Article 8(3) requires courts to give "due consideration ... to all relevant circumstances of the case, including the negotiations" in determining the parties' intent.12 Read in concert, these provisions prompted the court to conclude that it could consider parol evidence to determine the parties' subjective intent, even if the evidence contradicts the written terms of the parties' purported agreement.

    The approach to parol evidence and subjective intent taken by the MCC court has been followed by several other courts, leaving little doubt that written agreements governed by the Convention will be subject to far greater scrutiny than the same agreements would be if governed by the UCC.13

    If, as the MCC court concluded, a party's subjective intent is a relevant inquiry even in the face of contrary written terms, then is it not plausible that a party could defeat a dispositive motion simply by submitting an affidavit, in which the party asserted that it was not the party's intention to be bound by the contract terms at issue? Concerned over such an interpretation of its opinion, the MCC court addressed this issue, noting that its decision was based in large measure on the unique circumstance in this case that both parties acknowledged "a subjective intent not to be bound by the terms of a prenprinted writing."14 Because, in the vernacular of Article 8, the defendant "knew or could not have been unaware" what the plaintiff's intent was, the court was compelled to examine the plaintiff's subjective intent. When a party does not know or could not have been aware of the other party's intent, the court must abandon the subjective intent inquiry of Article 8(1) in favor of the objective "reasonable person" standard of Article 8(2), which provides:

    "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."

    Most courts that have addressed the role of parol evidence in the context of a written contract governed by the Convention have agreed with the MCC court's conclusion that parol evidence is appropriately considered in determining the parties' intent.15 One court, however, reached a contrary result. Responding to a parol evidence rule issue raised in the broader context of a choice of law question in Beijing Metals & Minerals Imports/Exports Corp. v. American Business Center Inc., the Fifth Circuit decided that it was unnecessary to resolve the choice of law issue "because our discussion is limited to application of the Parol Evidence Rule ... which applies regardless" of whether the Convention or another body of law applies.16

    The MCC court roundly criticized the Beijing Metals opinion, noting that the opinion failed to include "any analysis of the Convention," and concluded that the opinion was "not particularly persuasive."17 Beijing Metals represents a distinct minority view and, in light of a recently issued advisory opinion regarding parol evidence, is unlikely to carry any weight in future decisions.

    The Advisory Council on the United Nations Conventions on Contracts for the International Sale of Goods (the Council) was formed in 2001 to provide interpretive guidance on unresolved issues relating to the Convention.18 The Council's principal purpose "is to issue opinions relating to the interpretation and application of the Convention on request or on its own initiative."19

    In its Opinion No. 3, the Council specifically addressed the parol evidence rule under the Convention.20 The Council initially noted that the Convention does not include any version of the parol evidence rule. Consistent with the MCCnMarble case (which the opinion cites), the Council emphasized that several Convention provisions _ notably Articles 8 and 11 _ require courts to consider statements and other relevant evidence when determining the effect of a contract's terms.21 The opinion did not dismiss the importance of a written agreement but noted that "a writing is one, but only one, of many circumstances to be considered when establishing and interpreting the terms of a contract."22 Accordingly, the Council concluded that the parol evidence rule has no application to a contract governed by the Convention.

    The Council drew support for its opinion from the Convention's legislative history. It noted that the Canadian delegation had proposed including a version of the parol evidence rule, but the proposal garnered little support and eventually was rejected. The Council also suggested that the parol evidence rule is at odds with most of the world's legal systems, which "admit all relevant evidence in contract litigation."23 Finally, the Council observed that where the parol evidence rule does prevail, notably in the United States, it is marked by considerable variation and extreme complexity and is the subject of considerable criticism.24

    Given the Council's opinion and the sound reasoning of both the opinion and MCC-Marble, the parol evidence rule is unlikely to find support in future commercial disputes litigated in the United States when the Convention governs the parties' agreement.

    Merger Clauses Under the Convention

    The Convention's acceptance of subjective intent to determine the party's agreement begs the question of whether a merger clause that extinguishes prior agreements not expressed in the writing will eliminate parol evidence problems. While a merger clause will provide some measure of protection against consideration of parol evidence, it is doubtful that such a clause will be a panacea to the parol evidence problem. In this regard, there is no reason to believe that a merger clause will be treated any differently from any other provision of a contract the Convention governs. Consistency demands that a merger clause be subjected to the same examination of facts and circumstances required by Article 8 to determine a party's intent as any other contractual provision. In fact, merger clauses appear to be uniquely prone to attack by parol evidence, since the parties' intent not to be bound by the merger clause could be demonstrated by the very evidence that the merger clause seeks to exclude _ prior understandings not expressed in the written agreement.

    The Fifth Circuit addressed this question in its MCCnMarble opinion, concluding that a merger clause is the solution to parol evidence problems:

    "[T]o the extent parties wish to avoid parol evidence problems they can do so by including a merger clause in their agreement that extinguishes any and all prior agreements and understandings not expressed in the writing."25

    The court's comments (in dicta) on the effect of a merger clause are difficult to reconcile with the rest of its opinion. Indeed, given the unique circumstances of the case, in which there was evidence that neither side intended to be bound by certain terms of the written agreement, it is unimaginable that a merger clause would have altered the outcome.

    In its Opinion No. 3, the Council also weighed in on the impact of a merger clause in a contract governed by the Convention. The Council began by noting that Article 6 of the Convention expressly permits parties to opt out of the Convention, in whole or in part: "The parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions." The Council next observed that a merger clause operates under Article 6 in derogation of Articles 8 and 11.26 A merger clause attempts to escape the impact of Article 8 by preventing "recourse to extrinsic evidence for the purposes of contract interpretation."27 Moreover, a merger clause attempts "to bar extrinsic evidence that would otherwise supplement or contradict the terms of the writing in derogation of Article 11, which provides that a sales contract may be proved by any means, including witnesses."28 Referring to the Fifth Circuit's opinion in MCCnMarble as authority for the proposition that a properly worded merger clause prevents the introduction of extrinsic evidence, the Council nevertheless refused to endorse a merger clause as a bulletproof shield against extrinsic evidence. Consistent with Article 8, the effect of a merger clause will ultimately depend on the parties' intent:

    "[E]xtrinsic evidence should not be excluded, unless the parties actually intended the Merger Clause to have this effect. The question is to be resolved by reference to the criteria enunciated in Article 8, without reference to national law. Article 8 requires an examination of all relevant facts and circumstances when deciding whether the Merger Clause represents the parties' intent."29

    Like a written agreement itself, a merger clause is only one of potentially many factors that must be considered to discern the parties' intent:

    "Under the CISG, a Merger Clause does not generally have the effect of excluding extrinsic evidence for purposes of contract interpretation. However, the merger clause may prevent recourse to extrinsic evidence for this purpose if specific wording, together with all other relevant factors, make clear the parties' intent to derogate from Article 8 for purposes of contract interpretation."30

    If, as Article 8 of the Convention prescribes, contract interpretation under the Convention is a matter of understanding the parties' intent, then a party to a contract governed by the Convention relies on a merger clause to preclude the introduction of extrinsic evidence at its peril. In light of the Council's opinion and its persuasive reasoning, it is unlikely that the dictum of MCCnMarble will find support in future opinions.

    Conclusion

    In a world that is rapidly losing its commercial boundaries, the Convention will continue to grow in prominence and play an increasingly important role in resolving commercial disputes. As a result, lawyers representing clients involved in international commerce and the resolution of international commercial disputes must be prepared to operate under a body of law that adopts concepts not recognized by the UCC (such as oral contracts) while eschewing other principles (such as the parol evidence rule) embodied in the UCC.

    Endnotes

    1The United Nations certified text is published at 52 Fed. Reg. 6262 (March 2, 1987).

    2MCC-Marble Ceramic Ctr. Inc. v. Ceramica Nuova D'Agostino S.P.A., 144 F.3d 1384, 1389 (11th Cir. 1998).

    3Pace Law School, CISG Database.

    4United Nations Convention on Contracts for the International Sale of Goods [hereinafter Convention], at Art. 1(1)(a).

    5Convention, supra note 4, at Art. 6.

    6BP Oil Int'l Ltd. v. Empresa Estatal Petroleos de Ecuador, 332 F.3d 333, 337 (5th Cir. 2003); Asante Techs. Inc. v. PMC-Sierra Inc., 164 F. Supp. 2d 1142, 1150 (N.D. Cal. 2001).

    7U.C.C. § 2-201.

    8Convention, supra note 4, at Art. 11.

    9U.C.C. § 2-202.

    10MCC-Marble, 144 F.3d 1384.

    11Id. at 1389.

    12Id.

    13See, e.g., Supermicro Computer Inc. v. Digitechnic, 145 F. Supp. 2d 1147 (N.D. Cal. 2001); Shuttle Packaging Sys. L.L.C. v. Tsonakis, No. 1:01-CV-691, 2001 U.S. Dist. LEXIS 21630 (W.D. Mich. Dec. 17, 2001); Fercus S.R.L. v. Palazzo, No. 98 Civ. 7728 (NRB), 2000 U.S. Dist. Lexis 11086 (S.D.N.Y. Aug. 8, 2000).

    14MCC-Marble, 144 F.3d at 1391.

    15Calzaturificio Claudia s.n.c. v. Olivieri Footwear Ltd., No. 96 Civ. 8052(HBYTHK), 1998 U.S. Dist. LEXIS 4586 (S.D.N.Y. April 7, 1998); Mitchell Aircraft Spares Inc. v. European Aircraft Serv. A.B., 23 F. Supp. 2d 915 (N.D. Ill. 1998).

    16993 F.2d 1178, 1183 n.9 (5th Cir. 1993).

    17MCC-Marble, 144 F.3d at 1390.

    18Dr. Loukas Mistelis, Council Publishes First Opinions.

    19Id.

    20CISG-AC Opinion No. 3,PDF 72 KB Parol Evidence Rule, Plain Meaning Rule, Contractual Merger Clause and the CISG, 23 Oct. 2004. Rapporteur: Prof. Richard Hyland, Rutgers Law School, Camden, N.J., USA [hereinafter Council Op. No. 3].

    21Id. at § 2.1.

    22Id. at § 2.2.

    23Id. at § 2.4.

    24Id.

    25MCC-Marble, 144 F.3d at 1391.

    26Council Op. No. 3, supra note 20, at § 4.1

    27Id.

    28Id.

    29Id. at § 4.5.

    30Id. at § 4.6.




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