Misrepresentation – More than an Issue of Validity Under CISG

[By Prathamesh N Bhutada]

The author is a student of Maharashtra National Law University, Mumbai.

 

Introduction

The United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG) is a uniform contract law that was brought in place to harmonize the differences in governance by domestic law.[1] However, the convention is not all-encompassing. Scope of the application of CISG has been given under Articles 1-6 of the convention.[2] The convention covers the majority of the aspects of international commercial disputes, however, certain issues are out of the scope of CISG and have to be settled using the private international law or the domestic law applicable to the contract.[3] However, CISG leave one major aspect of contracts unaddressed, the matter of validity of contract.[4] Since the fact that the CISG generally does not address validity, the majority of issues that fall within the validity category, such as fraud, duress, or the unreasonableness of contract conditions, must be decided by domestic (non-CISG) principles of law.[5] Additionally, the Convention does not specify any particular guidelines for the pre-contractual stage[6] which includes concepts of misrepresentation, fraud, non-disclosure, etc. These pre-contractual complications can affect the validity of the contract. Therefore, because CISG does not define what is an issue of validity it is pertinent to establish a boundary for it to understand how misrepresentation is more than just an issue of validity.

Defining Validity

Validity in a general sense is determining whether all the prerequisites of an enforceable contract have been satisfied. If all the prerequisites are not satisfied then it cannot be classified as a ‘valid’ contract and, hence, can be void, void ab initio, or unenforceable. Art. 4 of CISG states that the convention is not concerned with the issues of validity unless expressly provided by the convention,[7] however, the CISG does not define the term ‘matter of validity’.

The wording of Art. 4 leaves a huge scope for interpretation as the CISG does not define the term ‘validity of the contract’.[8]  Art. 4 reads that CISG governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer.[9] However, the phrase “governs only” is considered to be misleading and should be read as “governs without a doubt” by many scholars.[10] Therefore, CISG does not explain what is the matter of validity the majority today is of the opinion that Art. 7(1) has to be relied upon to autonomously determine whether an issue is of validity or not.[11] While others maintain that it should be resolved using domestic law.[12]

One of the situations which can render the contract void is the case of misrepresentation. Misrepresentation in a contract can render it voidable if it induces a party to enter the agreement based on false information, impacting the contract’s validity and enforceability. However, left the issue of misrepresentation completely unaddressed.

Misrepresentation and validity

Misrepresentation is viewed differently in different legal systems. This is the reason why conventions like CISG were brought in place, to bring uniformity. In US Law, misrepresentation is defined as misrepresentation of a material fact to induce the other party to act or to refrain from acting in reliance upon it.[13] Under English law, a false statement of material fact that at least in part induces entry into a contract with the maker of the statement.[14] Both the definitions have the main ingredients of misrepresentation in common, “Conduct”, “intention (inducing other party)” and “the casual connection” between the statements made by a party and it influencing the other into entering the contract.

Misrepresentation raises a unique issue in the context of the CISG’s autonomous interpretation. There is quite a lot of debate as to whether the claims of misrepresentation under domestic laws are displaced by the CISG. The answer to this question varies from misrepresentation being displaced by CISG[15] to the complete opposite of it being governed by domestic laws.[16]

Although there are such polar opposite opinions there are some authors who take a middle ground and are of the opinion that misrepresentation is partly governed by CISG. To understand this, we need to first understand the types of misrepresentation. Misrepresentation can be broadly categorised into 3 types: Innocent Misrepresentation, Negligent Misrepresentation and Fraudulent misrepresentation.[17] Some scholars are of the opinion that only Fraudulent misrepresentation is an issue not governed by CISG, however, in cases of Innocent misrepresentation and Negligent misrepresentation the remedies under Art. 35 of CISG et. seqq. prevails.[18]

Innocent Misrepresentation

In general, innocent misrepresentation is defined negatively.[19] An innocent misrepresentation is a misrepresentation that is neither fraudulent nor negligent.[20] Thus, more often than not it is considered to be a case of strict liability when rights and obligations arise due to honest misstatement of the parties. There are many domestic laws which govern the issues. However, the prevailing view is that innocent misrepresentation is also governed by the CISG, therefore, it displaces the application of the domestic laws.[21] Additionally, they also believe that Art. 35 of CISG not only displaces the contractual obligations (culpa in contrahendo) and claims, but also the tortious claims under the domestic law.[22] The reasoning behind the above-mentioned stance is that, firstly, CISG contains the rules regarding the two parties’ declarations—offer and acceptance—through which a contract is established. Secondly, Article 8(3) mentions the parties’ pre-contractual discussions as a consideration to take into account when interpreting their declarations and actions.[23]

Both domestic law on innocent misrepresentation and the CISG apply to factual situations when parties negotiating a sales contract share information about important facts. Upon close analysis, innocent misrepresentation is clearly based on the pre-contractual obligations of the parties. The prevailing opinion among commentators holds that the CISG does not impose pre-contractual duties on the parties.[24] Hence, even though there is a prevailing opinion amongst the scholars that innocent misrepresentation is governed by CISG it cannot be settled as there exists a conflict related to governing of pre-contractual liabilities.

Negligent misrepresentation

Under both English and US law negligent misrepresentation is broadly defined as when a person makes a statement without reasonable case which results induces the other party into entering the contract.[25] “Lack of reasonable care” can be said to be the core ingredient of negligent misrepresentation. CISG governs the claims of misrepresentation as the Secretariat’s commentary on the CISG, which states – “In order to claim damages it is not necessary to prove fault or a lack of good faith or the breach of an express promise, as is true in some legal systems. Damages are available for the loss resulting from any objective failure by the seller to fulfil his obligations.”[26] Therefore, CISG expresses the conscious choice that the customer has no right to sue the seller for damages brought on by non-conforming goods regardless of whether the seller was negligent.

CISG governs the claims of negligent misrepresentation as long as they relate to the quality of the goods sold, however, they cannot be applied and domestic remedy has to sought in cases where misrepresentation has been caused in with relation to other parts of the contracts like – incorrect information about a third party’s willingness to guarantee performance of the contract.[27]

Fraudulent misrepresentation

Fraudulent misrepresentation is considered to be a matter not governed by CISG. In cases of fraudulent misrepresentation, domestic laws have to be resorted to.[28] The remedies of domestic remedies are concurrently applicable alongside CISG in cases of fraudulent misrepresentation.[29] This follows from an interpretation of the CISG. Regardless of whether the conclusion of this contract was initially fraudulently induced, the goal of the CISG’s remedies is to compensate parties who have suffered a breach of contract. A different reading would be incompatible with the promotion of good faith required by CISG Article 7(1) and would deprive parties who experienced fraud in addition to a breach of contract of their rights under the convention. Fraudulent misrepresentation is an issue which is governed by CISG however, not settled.

Fallacies in the interpretation

The prevailing opinion is that innocent misrepresentation and negligent misrepresentation are governed by CISG, however, fraudulent misrepresentation is not. The Scholars are of the opinion that innocent misrepresentation is governed by CISG as the Art. 8(3) mentions that the pre-contractual actions of the parties should be taken into consideration. This reasoning is flawed as firstly it merely mentions that while interpreting the conduct of the parties the pre-contractual actions should be taken into consideration, it doesn’t mention what impact it will have on the parties’ contract. Additionally, if it is possible to determine the intention of the parties from actions in the pre-contractual stage by using Art. 8(3), then the same should would also be possible in cases of misrepresentation. However, it is not accepted that it is a valid practice to use Art. 8(3) to determine intention of parties in cases of misrepresentation. This selective application of interpretation of intention from the precontractual actions of the parties clearly contradicts the principle of uniformity in the application of CISG as provided in Art. 7(1).

The term “misrepresentation” has not been mentioned in the CISG, and if it has to be governed by CISG it has to be interpreted in accordance with CISG. Since misrepresentation can raise the remedy of avoidance of the contract, or it might render the contract voidable it can be classified as an issue of validity under CISG. Art.4 CISG only governs the matters expressly governed by CISG and not the matters settled by the convention in accordance with Art.7(2) CISG. Therefore, if the misrepresentation is classified as an issue of validity under CISG it cannot be interpreted using Art. 7(2) to bring it under the purview of CISG.

A major number of scholars are of the opinion that innocent misrepresentation claims are displaced under domestic law by CISG. These claims include both contractual as well as tortious claims under CISG. This goes against the most fundamental principles of CISG, that CISG cannot interfere with domestic tort laws under the dogmatic approach of domestic laws.

Conclusion

Misrepresentation still remains a question of more than just validity as it challenges all the fundamental concepts of CISG. Misrepresentation can be classified as an obligation on the buyer or the seller, however, at the same time, it can arise before the contract was entered into which is not a matter governed by CISG. There are ingredients of fraudulent misrepresentation in a matter governed by CISG, like, conduct can be governed under Art. 8(3) of the CISG, intention and casualty can be governed under Art. 8(1), Art. 8 (2) of the CISG but it is still not governed as it relates to the matter of “honesty of the parties” a matter not governed by CISG. Even though all the ingredients are covered under CISG, because merely one principle of fraudulent misrepresentation is not governed by CISG, it has to be considered as not governed. This gap cannot be filled by interpreting using Art.4 of CISG as it will still not be allowed according to CISG.

Misrepresentation challenges every aspect, and every principle of CISG. Hence, here it is being referred to as more than just a matter of validity under CISG.

 

[1] Camilla Baasch Andersen, Uniform Application Of The International Sales Law: Understanding Uniformity, The Global Juris Consultorium and Examination And Notification Provisions Of The CISG (2007).

[2] United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG), Art. 1-6; Clayton P. Gillette & Steven D. Walt, The UN Convention on Contracts for the International Sale of Goods – Theory and Practice, §24, et. seqq; Ingeborg Schwenzer & Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) (5th ed. 2022), §18.

[3] Peter Schlechtriem, Ingeborg Schwenzer & Ulrich Schroeter, Commentary on The UN Sales Convention (CISG), Art. 4, §6; Ingeborg Schwenzer & Ulrich G. Schroeter, Commentary on The UN Convention on The International Sale of Goods (CISG) (5th Ed. 2022), §90.

[4] United Nations Convention on Contracts for the International Sale of Goods, Art. 4(b); Ingeborg Schwenzer & Ulrich G. Schroeter, Commentary on the UN Convention on the International Sale of Goods (CISG) (5th ed. 2022), §90.

[5] Joseph Lookofsky, Chapter 2: Field of Application and General Provisions, Understanding the CISG, (6th ed.); Henry Deeb Gabriel, Contracts for The Sale of Goods: A Comparison of Domestic and International Law (2004).

[6] Ingeborg Schwenzer & Peter Schlechtriem, Introduction to Article 14-21, Commentary on the UN Convention on the International Sale of Goods (CISG) (5th ed. 2022), §121.

[7] CISG, Art. 4.

[8] James J. Fawcett, Jonathan M. Harris, & Michael Bridge, International Sale of Goods in the Conflict of Laws, §942 (2005).

[9] CISG, Art. 4.

[10] Von Staudinger & Ulrich Magnus, Wiener UN-Kaufrecht, Art. 4, §14; Peter Schlechtriem, Ulrich G. Schroeter, Internationales UN-Kaufrecht: Ein Studienund Erläuterungsbuch zum Übereinkommen der Vereinten Nationen über Verträge über den internationalen Warenkauf (CISG), §115.

[11] Milena Djordjevic, ‘Article 4’ In Stefan Kröll, Loukas Mistelis and Pilar Perales Viscasillas (Eds), UN Convention on Contracts for The International Sale of Goods (CISG), §14; John O Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, edited by Harry M Flechtner (4th ed.), §§204.2, 234; Peter Winship, ‘Commentary on Professor Kastely’s Rhetorical Analysis’, Northwestern Journal of International Law and Business, §623, 637; Ulrich Magnus, ‘Art 4 CISG’ in Staudinger’s Kommentar zum Bu ̈rgerlichen Gesetzbuch (2013), §20.

[12] Laura E Longobardi, ‘Disclaimers of Implied Warranties: The 1980 United Nations Convention on Contracts for the International Sale of Goods’, (1985) 53 Fordham Law Review, § 863, 874, 877.

[13] Restatement (Second) of Torts, Sec. 552 c (1) (1977).

[14] Chitty on Contracts § 6-006 (30th ed. 2008)

[15] Joseph Lookofsky, In Dubio Pro Conventione? Some Thoughts About Opt-Outs, Computer Programs and Preëmption under the 1980 Vienna Sales Convention (CISG), §§285-286.

[16]  Michael Bridge, The Draft UNCITRAL Digest and Beyond: Cases, Analysis and Unresolved Issues in The U.N. Sales Convention, §§243-244.

[17] Ulrich G. Schroeter, Defining the Borders of Uniform International Contract Law: The CISG and Remedies for Innocent, Negligent, or Fraudulent Misrepresentation, Villanova Law Review, Vol. 54, Iss. 4, 2013.

[18] Ingeborg Schwenzer & Ulrich G. Schroeter, Commentary on The UN Convention on The International Sale of Goods (CISG) (5th Ed. 2022), Art. 35; Ulrich G. Schroeter, Defining the Borders of Uniform International Contract Law: The CISG and Remedies for Innocent, Negligent, or Fraudulent Misrepresentation, Villanova Law Review, Vol. 54, Iss. 4, 2013.

[19] Ulrich G. Schroeter, Defining the Borders of Uniform International Contract Law: The CISG and Remedies for Innocent, Negligent, or Fraudulent Misrepresentation, Villanova Law Review, Vol. 54, Iss. 4, 2013.

[20] Chitty on Contracts, Supra Note 93, § 6-094; Restatement (Second) of Torts Sec. 552c(1) (1977).

[21] Peter Schlechtriem, Ingeborg Schwenzer, Commentary on The UN Sales Convention (CISG), Art. 35, §50; Ulrich G. Schroeter, Defining the Borders of Uniform International Contract Law: The CISG and Remedies for Innocent, Negligent, or Fraudulent Misrepresentation, Villanova Law Review, Vol. 54, Iss. 4, 2013.

[22] Multi-Member Ct First Instance Athens, 1 January 2009, CISG-online 2228; OLG Koblenz, 24 February 2011, CISG-online 2301.

[23] Diane Madeline Goderre, Note, International Negotiations Gone Sour: Contractual Liability Under the United Nations Sales Convention, Iss. 66 U. Cincinnati Law Review, §§ 287-289.

[24] Michael Bridge, The International Sale of Goods: Law and Practice, (2d Ed. 2007), §12.04; Wolfgang Witz, Articles 14–24, In International Einheitliches Kaufrecht Vor, (2000), §17; Urs Peter Gruber, Article 14, in Munchener Kommentar Zum Burgerlichen Gesetzbuch, (6th ed. 2012), §12.

[25] Restatement (Second) Of Torts § 552(1) (1977); Misrepresentation Act, 1967, § 2(1) (Eng.).

[26] UN Secretariat, Commentary on Art. 41 of the 1978 Draft of the CISG, cmt. 3, UN Doc. A/CONF. 97/5, Official Records 37, 48, 55.

[27] Schroeter, Peter Schlechtriem, Ingeborg Schwenzer, Commentary on The UN Sales Convention (CISG), Introduction to Arts. 14–24, §62.

[28] Ulrich G. Schroeter, Defining the Borders of Uniform International Contract Law: The CISG and Remedies for Innocent, Negligent, or Fraudulent Misrepresentation, Villanova Law Review, Vol. 54, Iss. 4, 2013, §§585,586; Peter Schlechtriem, Ingeborg Schwenzer, Commentary on The UN Sales Convention (CISG), Introduction to Arts. 35, §51.

[29] Cantonal Court St. Gallen, Internationales Handelsrecht [IHR] 2009, 161 (Switz.); Oberlandesgericht [OLG] [Court of Appeals], Cologne, May 21, 1996 (Ger.).

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