The post is authored by Jagrit Verma, a fifth year student of B.A. LL.B (Hons.) at the Himachal Pradesh National Law University, Shimla.
The complexities of international trade law involve various unanswered facets, including what and how trade practices have evolved or are considered by various judicial authorities around the world. The precise definition of trade practices still remains controversial, but the very concept lies at the heart of party autonomy and lex mercatoria (the body of law that deals with international trade, also known as international mercantile law) when it comes to international transactions. Naturally, parties are unlikely to address every possible problem related to the contract in minute detail. Thus, trade practices and usages come as a tool to interpret the terms of a contract.
The United Nations Convention on Contracts for the International Sale of Goods, Vienna (“the CISG”) is one of the most important, if not the primary convention that governs contracts between parties of different nation-states. Bout observes that the CISG provisions refer to usages and/or practices, directly and indirectly.
The most important provision concerning trade usage and practices is Article 9 of the CISG. It states that “the parties are bound by any usage to which they have agreed and by any practices they have established between themselves” and that “the parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known” including those widely recognised in international trade.
The reason why understanding trade practices becomes even more important is because parties are bound by them, and they are an integral part of consideration before the courts. In fact, in Geneva Pharmaceuticals Tech. Corp. v. Barr Labs. Inc., the court observed that “the usages and practices of the parties or the industry are automatically incorporated into any agreement governed by the CISG, unless expressly excluded by the parties.”
2.TRADE PRACTICES AND USAGES UNDER CISG: A CONCEPTUAL FRAMEWORK
According to Article 9(1), the parties are bound by practices established between themselves. Even Two main questions arise in relation to the notion of practices. The jurisprudence is, however, muddled on two questions: first, what is an established practice?; and second, when is a practice established? The second question plagues authorities around the world even more since economic relations between parties vary in terms of duration, inter alia.
Despite asserting that parties are bound by practices established between them as well as usages of the industry, the CISG does not state what practices are. John Honnold remarks that practices are established by a course of conduct that creates an expectation that this conduct will be continued unless expressly excluded.
Simply understood, if the seller (S) and buyer (B) frequently trade with each other and do not use a signed document as a valid contract, this can be interpreted as a practice established between them, and if at any point a dispute arises, the practice allows them to avoid the requirement of signing a contract to make it binding.
Therefore, conceptually, a ‘practice’ comprises usages and rules, which are observed either by the parties in their relation or in the respective branch of activity for a certain period being commonly known.
3. JUDICIAL ANALYSIS OF TRADE PRACTICES
1. What is a Trade Practice?
Practices are deeply intertwined with the specific circumstances of the unique relationship between parties to each specific contract. It is only natural that unspoken practices would take precedence over unspoken usages, as practices are more party-centric.
Several case laws shed light on what constitutes a practice. A Swiss Court in CLOUT Case No. 95 observed that the exchange of correspondence between the parties, which held that the conclusion of a contract through a letter of confirmation constituted a practice established between the parties under Art. 9(1) CISG.
Similarly, in Adamfi Video Production GmbH v. Alkotók Studiósa Kisszövetkezet, the court held that an offer between a seller and a buyer was sufficiently definite as the quality, quantity, and price of the goods were impliedly fixed by the practices established between the parties whereby the seller had repeatedly delivered the same type of goods ordered by the buyer, who had paid the price after delivery.
It is, therefore, derived that a practice is any activity that both contracting parties are observing through a mutual understanding. They usually pertain to terms of the contract such as quantity, quality, nature of goods etc. or to the way a contract and its obligations ought to be performed by both parties.
For instance, if two parties have a contract for ‘coconut oil,’ it is an established practice that the seller will supply coconut oil only whether or not it is mentioned in every fresh purchase order. However, this can be deviated from depending on other terms agreed upon by the parties.
2. When is a Practice established?
The more twisted question lies in the ‘when’ of the practice. Article 9 sets two requirements to identify the intent of the parties to be bound by a trade practice: primarily, if a pattern of conduct is widely known, or secondarily, if it is regularly observed. Naturally, when both parties are aware of a prevalent usage in their industry, it becomes binding on them as per Article 9.
However, while the “widely known” aspect is mostly universally understood in trade jurisprudence, the question of the regularity of a practice has varying interpretations. Regular observance can only be invoked by the parties when “a period of time that would justify the conclusion that the parties ‘knew or ought to have known’ of it” has lapsed.
According to case law, for these practices to be binding on the parties pursuant to Article 9(1), it is necessary that the parties’ relationship must last for some time and that it has led to the conclusion of various contracts. As emphasised in CLOUT Case No. 360, a German court stated practices require “a certain duration and frequency. Such duration and frequency does not exist where only two previous deliveries have been handled in that manner. The absolute number is too low.”
Similarly, in CLOUT Case No. 221, a Swiss court observed that “in order for a practice between the parties to be established, long lasting contractual relationships involving more sale contracts between the parties are required.”
This means that the jurisprudential opinions have ascertained that the business relationship cannot be hanging loose by only a few transactions but there needs to be a significant, long-lasting relationship between the parties to establish a commercial practice.
4.CONCLUDING ANALYSIS AND SUGGESTIONS
The general complexities of the CISG are reflected in the provisions of Article 9 as well. It is imprecise and requires case-to-case interpretation, which cannot be done by an authority not equipped with the intricate details of the industry and precise knowledge of trade law.
This interpretive hurdle can naturally not be resolved by a straight-jacket format of defining the exact time period, which can pinpoint when a practice is established. However, it is necessary to reasonably understand when a practice is established. Articles 7(2) and 8 come as the interpretive aid to the gaps left by the provisions of CISG. Article 7(2) places reliance on general principles of international law and private international law while Article 8 states that interpretation must be made according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.
Each economic relationship varies in various facets. However, the most glaring reasonable interpretation to see if a practice has been established lies in the number of transactions. Now, while courts have interpreted what is not a reasonably long time, it is pertinent to establish what is.
The lack of this definition can be fulfilled with the establishment of a specific criterion which would follow a two-pronged approach: first, the duration of the relationship in terms of time and second, in terms of number of contracts. The fulfilment of at least one of these factors shall amount to a regularly observed practice.
The snag, again, would be how much time or how many transactions. The author suggests that the interpretation of the duration should be made in such a manner that it does not benefit one party at the expense of the other.
Contrary to the requirement of an ‘express exclusion’ of a practice by the parties, tacit exclusion should also be included. In fact, if a party has shown tacit dissent or disapproval of what can be interpreted as a practice by the other party, it should not be considered by the judicial authorities while interpreting Article 9. For instance, if a ‘practice’ of performing the requirements of the contract without signing it is disrupted by signing the contract even once, it should be considered a tacit disapproval.
Lastly, a more resource and effort dense suggestion can be a CISG Advisory Council meeting. The Advisory Council has time and again resolved the gaps that arise from the provisions of CISG. However, there is silence on any opinion with respect to both Article 8 and Article 9. The confused and non-universal jurisprudence on interpreting trade practices can largely be laid to rest by a comprehensive and globally recognised Advisory Council Opinion.
Naturally, all these suggestions still require interpretation on a case-to-case basis. However, they can streamline the interpretations to provide more clarity and protect party autonomy and interests.
Despite its lapses, Article 9 of the CISG still provides for a major principle of international trade law that makes it more party-centric. Contract law around the world has always focused on giving parties the independence to make their own decisions with respect to their economic relationship, and the CISG as a universal document only supports this ethos. More so, Article 9 gives the parties an operational framework within their personal (or objective) practices as well as industrial (or subjective) usages.
In summation, credit must be given to the strength of the CISG for being a comprehensive and party-centric document while leaving scope within its provisions, especially Article 9, to be interpreted by authorities possessing knowledge of trade law to benefit contracting parties.