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University of Paris 5
April, 2008

Syllabus, Reading Materials,
and Final Exam Instructions

Introduction to Common Law Legal Method, Comparative Contract Law,
International Sales Contracts, and Conflict of Laws

Professor Charles Calleros
Sandra Day O’Connor College of Law
Arizona State University
charles.calleros@asu.edu

Class Schedule and Assignments
Paris V Common Law Program, April 2008
12 hours total, with classes on April 14-17, and 19

Unless we learn of a change, all classes will take place in Classroom D-32. Monday through Thursday, we will begin at 6 pm and will end at approximately 8:30 pm, sometimes staying later (particularly early in the week) or ending earlier (particularly later in the week), for a total of about ten hours that week. That will leave us two hours for the exam on Saturday, which will take place 10 am to noon.

Monday, 14 April, 6 pm to about 8:30 pm (probably more like 9 pm tonight)
Review of Common Law Legal Method – If you wish to reread this material from Prof. O’Grady’s class in September, look to the web site listed below in this book.
Comparing U.S. and French Contract Law – Read Unit 1 of this book, marked as ¶¶ 1-40, and be ready to discuss the questions. In particular, be ready to argue both sides of the case, as stated in ¶ 31.

Tuesday, 15 April, 6 pm to about 8:30 pm.: Comparing the U.S. Uniform Commercial Code with the U.N. Convention on Contracts for the Int’l Sale of Goods (“CISG”) – Read Unit 2 of this book, marked as ¶¶ 41-44.

Wednesday, 16 April, 6 pm to about 8:30 pm.: Conflict of Laws (PIL): Contractual and Judicial Choice of Law – Read Unit 3 of this Book, marked at ¶¶ 45-62.

Thursday, 17 April, 6 pm to about 8:30 pm.: Complete previous assignments, review all classes, and discuss the exam. Read the exam instructions at the end of this book.

Saturday, 19 April, 10:00-Noon (exam)

Brief Review of Common Law Legal Method
If you wish to review the reading on this, from your first common law class with Prof. O’Grady, go to her website, at http://homepage.law.asu.edu/Personal/cathyo/web%5Fhomepage/Paris/
Then click on “reading assignments for first two classes,” and read paragraphs 1-43 from my book on legal method and writing. You might also have this printed this out in September and still have it in hard copy.

I. Cause and Consideration:
A. French Civil Code [As translated for Legifrance by Georges Rouhette, Professor of Law, with the assistance of Anne Berton, Research Assistant in English.]

¶1 Art. 1108
Four requisites are essential for the validity of an agreement:
The consent of the party who binds himself;
His capacity to contract;
A definite object which forms the subject-matter of the undertaking;
A lawful cause in the obligation.

B. U.S. Common Law – The Consideration Requirement
Notes from Professor Calleros on the requirement of "consideration."

¶2 A few centuries ago, common law courts enforced promises that were made with sufficient formality to ensure that the promisor was serious about making the promise. For example, the common law courts enforced a promise set forth in writing and marked in wax or ink with the promisor’s personal seal. This formality showed the promisor’s serious intent, and it also ensured documentary evidence of the promise. One might say that the sealed instrument showed that the promisor had given serious “consideration” to the promise, in the sense that the promisor had considered the merits of the promise before making it.

¶3 Over the last two centuries, common law in the United States has shifted its focus from formality to substance. Subject to some exceptions, the U.S. common law will enforce a promise only if it was exchanged for another promise (such as “I promise to pay you $1,000 on Monday if you agree now to paint my house by Saturday noon.”), or was exchanged for a performance of an act or forbearance (such as “If you manage to paint my house by Saturday noon, you will then have my promise to pay you $1,000 on Monday.”). A modern definition of this “consideration” requirement is “bargained-for exchange.” One notable exception arises from reliance on a promise to make a gift, sometimes leading to liability for breach of the promise under a doctrine call promissory estoppel, even if no exchange took place.

¶4 Under the common law “pre-existing duty rule,” many courts will require consideration (or reliance) even for modification of an existing contract. If the parties agree to a modification that changes only the duties of one party, and not the other, these courts find that the agreement to modify is unenforceable because it is not supported by a new exchange. This rule has been abandoned under the UCC and the CISG for sales of goods, contracts for which can be modified without consideration. UCC § 2-209; CISG art. 29(1). And the pre-existing duty rule has been eroded for other transactions in some states. However, it still has substantial force in the common law.

¶5 What is a bargained-for exchange? In the common law system, courts define legal principles such as this a little at a time, as each case before the court raises a narrow issue on particular facts. If we look at hundreds of cases, we can see patterns emerging, and we can develop some generalized rules about transactions that meet the requirement of consideration (bargained-for exchange). Most fundamentally, the concept of an exchange excludes a one-sided promise by one party to make a future gift to another, without any promise or performance requested in exchange. Except in special circumstances (such as reliance justifying promissory estoppel), United States courts are not inclined to enforce such “gratuitous promises.”

¶6 Moreover, to be fully part of an exchange, each promise or performance must be the inducement for the other, in the sense that each part seeks the other’s promise in exchange for her own. This requirement of “reciprocal inducement” was advanced by Oliver Wendell Holmes in the 19th Century and became a cornerstone of the modern "bargained-for exchange" theory of consideration.

¶7 In a private organization’s summary of the common law doctrine of consideration, the concept of an exchange with reciprocal inducement is summarized in the first two paragraphs:
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of [an act, forbearance, or change in legal relations].
Restatement (Second) of Contracts § 71 (1981) (published by the American Law Institute).

¶8 Suppose the following: In a spirit of friendship and generosity, you bake a cake for me on March 25, which I eat and enjoy. On March 26, I promise to pay you 10 euros at noon of the next day, March 27, because you baked and delivered a cake to me on March 25. Did we “exchange” your cake for my promise to pay you 10 euros? In other words, was your cake “consideration” for my promise to pay? If not, my promise to pay generally is not enforceable, and you cannot legally compel me to pay on March 27.

¶9 My promise to pay you 10 euros did not induce you to bake me a cake, because you delivered the cake as a gift before I made my promise; therefore, my promise to pay is not supported by consideration and is not enforceable. I may have been motivated by gratitude to make my promise, but I did not exchange my promise for a performance or a return promise with reciprocal inducement. And my promise could not have induced you to bake a cake for me, because you gave me the cake before I promised to pay for it. (In other words, you gave me a gift, and I later separately promised to give you a gift). So, under a strict application of traditional consideration rules, my promise is “gratuitous” and generally not enforceable. I am legally free to perform my promise or not.

¶10 You can best understand how these concepts operate in practice by applying these legal principles to the facts of various disputes, or “cases,” and by predicting or debating whether a United States court would enforce the promise. In some cases, the outcome will be uncertain, because it is not clear whether the facts satisfy the legal rule for consideration or fail to satisfy it.

¶11 In the next judicial opinion, what does the authoring judge think about the fairness or morality of Seth Wyman’s breach of promise? Does that give rise to a legal obligation on the part of Seth Wyman to perform his promise?

Mills v. Wyman
3 Pick. [20 Mass.] 207 (1825)
Supreme Judicial Court of Massachusetts

¶12 This was [a contract action] brought to recover a compensation for the board, nursing, &c., of Levi Wyman, son of the defendant [Seth Wyman], from the 5th to the 20th of February, 1821. The plaintiff [Mills] then lived at Hartford, in Connecticut; the defendant, at Shrewsbury, in this county. Levi Wyman, at the time when the services were rendered, was about 25 years of age, and had long ceased to be a member of his father's family. He was on his return from a voyage at sea, and being suddenly taken sick at Hartford, and being poor and in distress, was relieved by the plaintiff in the manner and to the extent above stated. On the 24th of February, after all the expense had been incurred, the defendant [Seth Wyman] wrote a letter to the plaintiff [Mills], promising to pay him such expenses. There was no consideration for this promise, except what grew out of the relation which subsisted between Levi Wyman and the defendant, and Howe, J., before whom the cause was tried in the court of common pleas, thinking this not sufficient to support the action, directed a nonsuit. To this direction, the plainitff filed exception.

¶13 General rules of law established for the protection and security of honest and fair-minded men, who may inconsiderately make promises without any equivalent, will sometimes screen men of a different character from engagements which they are bound in foro conscietiæ to perform. This is a defect inherent in all human systems of legislation. The rule that a mere verbal promise, without any consideration, cannot be enforced by action, is universal in its application, and cannot be departed from to suit particular cases in which a refusal to perform such a promise may be disgraceful.

¶14 The promise declared on in this case appears to have been made without any legal consideration. The kindness and services towards the sick son of the defendant were not bestowed at his request. The son was in no respect under the care of the defendant. He was twenty-five years old, and had long left his father's family. On his return from a foreign country, he fell sick among strangers, and the plaintiff acted the part of the good Samaritan, giving him shelter and comfort until he died. The defendant, his father, on being informed of this event, influenced by a transient feeling of gratitude, promises in writing to pay the plaintiff for the expenses he had incurred. But he has determined to break this promise, and is willing to have his case appear on record as a strong example of particular injustice sometimes necessarily resulting from the operation of general rules.

¶15 It is said a moral obligation is a sufficient consideration to support an express promise; and some authorities lay down the rule thus broadly; but upon examination of the cases we are satisfied that the universality of the rule cannot be supported, [except in the case of a promise that revived an obligation under a previous bargain, when the obligation had been extinguished by operation of law, like the running of a statute of limitations].
. . . .
¶16 A deliberate promise, in writing, made freely and without any mistake, one which may lead the party to whom it is made into contracts and expenses, cannot be broken without a violation of moral duty. But if there was nothing paid or promised for it, the law, perhaps wisely, leaves the execution of it to the conscience of him who makes it. It is only when the party making the promise gains something, or he to whom it is made loses something, that the law gives the promise validity. . . . An exact equivalent is not required by the law; for there being a consideration, the parties are left to estimate its value: though here the courts of equity will step in to relieve from gross inadequacy between the consideration and the promise.

¶17 These principles are deduced from the general current of decided cases upon the subject, as well as from the known maxims of the common law. The general position, that moral obligation is a sufficient consideration for an express promise, is to be limited in its application, to cases where at some time or other a good or valuable consideration has existed.

¶18 For the foregoing reasons we are all of opinion that the nonsuit directed by tbe Court of Common Pleas was right, and that judgment be entered thereon for costs for the defendant.

¶19 Question: Would a French court find Seth Wyman’s promise to be enforceable, on the ground that the gratitude felt by Seth Wyman for Mills’s services constituted a sufficient cause for the promise? Is the consideration requirement, as defined in Mills v. Wyman, overly restrictive? Or does it make sense to leave some kinds of promises to individual choice, and not subject to legal enforcement?

¶20 Note: Within the U.S., each state is free to its own rules about consideration, and the states are split on whether to enforce a promise made in recognition of a moral obligation arising out of a past service. Mills v. Wyman, from the state of Massachusetts, sets forth the traditional U.S. approach. Some other states, however, have enforced a promise based on a “moral obligation,” especially if the previous service provided a great benefit directly to the person of the promisor (such as saving his life) and especially if the service came at great cost to the promise (such as causing the promisee permanent injury). Would those states enforce Seth Wyman’s promise on the facts of Mills v. Wyman? A claim of consideration based on such moral obligation is not often litigated, however, because a person can more often recover compensation for unsolicited services under the doctrine of quasi-contract (which we will not study).

¶21 In the following nineteenth-century case, it is uncertain whether the facts satisfy the consideration requirement of reciprocal inducement. Indeed, the jury at trial and one appellate judge thought that the facts did satisfy that requirement, but the other appellate judges found no consideration. Can you see justifications both for Judge Ormond’s finding of consideration and for his fellow judges’ opposite conclusion? Prepare argue to use the facts in class to argue either side, so that you would be ready to represent either Antillico or her brother-in-law in court.

¶22 . . . The question is presented in this Court, upon a case agreed, which shows the following facts:

¶23 The plaintiff [Antillico] was the wife of defendant's brother, but had for some time been a widow, and had several children. In 1840, the plaintiff resided on public land, under a contract of lease, she had held over, and was comfortably settled, and would have attempted to secure the land she lived on. The defendant [Bradley] resided in Talladega county, some sixty, or seventy miles off. On the 10th October, 1840, he [Bradley] wrote to her [Antillico] the following letter:

¶24 "Dear sister Antillico--Much to my mortification, I heard, that brother Henry was dead, and one of his children. I know that your situation is one of grief, and difficulty. You had a bad chance before, but a great deal worse now. I should like to come and see you, but cannot with convenience at present. . . . I do not know whether you have a preference [an option to buy the rented land at a low price] on the place you live on, or not. If you had, I would advise you to obtain your preference, and sell the land and quit the country, as I understand it is very unhealthy, and I know society is very bad. If you will come down and see me, I will let you have a place to raise your family, and I have more open land than I can tend; and on the account of your situation, and that of your family, I feel like I want you and the children to do well."

¶25 Within a month or two after the receipt of this letter, the plaintiff [Antillico] abandoned her possession, without disposing of it, and removed with her family, to the residence of the defendant [Bradley], who put her in comfortable houses, and gave her land to cultivate for two years, at the end of which time he notified her to remove, and put her in a house, not comfortable, in the woods, which he afterwards required her to leave. [You can assume that Bradley’s letter contains a promise to provide a comfortable house for Antillico’s family until the children all reached the age of majority, and you can therefore assume that Bradley did not completely perform his promise when he removed them well before that time.]

¶26 A verdict being found for the plaintiff, for two hundred dollars, the above facts were agreed, and if they will sustain the action, the judgment is to be affirmed, otherwise it is to be reversed. . . .

¶27 Ormond, J.: The inclination of my mind, is, that the loss and inconvenience, which the plaintiff sustained in breaking up, and moving to the defendant's, a distance of sixty miles, is a sufficient consideration to support the promise, to furnish her with a house, and land to cultivate, until she could raise her family. My brothers, however think, that the promise on the part of the defendant, was a mere gratuity, and that an action will not lie for its breach. The judgment of the Court below must therefore be reversed, [and therefore, Bradley’s promise to Antillico will not be enforced].

¶28 The court’s recitation of facts is typical, because judicial opinions purport to develop the common law incrementally by resolving disputes in the context of the facts of particular “cases.” The court’s statement of its decision in the final paragraph, however, is not typical, at least not typical of modern published U.S. opinions, because it does not explain the judges’ reasoning. Indeed, at this early date, the facts were probably stated not by the judges but by a “reporter” who attended the proceedings on behalf of the publisher of the opinion. Judge Ormond probably stated his decision orally, from the bench. Notice also that Judge Ormond was outvoted by the other judges, who found no consideration and whose views determined the decision of the court.

¶29 Judge Ormond’s brief opinion leaves us much room to speculate on the court’s reasoning. Indeed, it permits us to don judicial robes, to debate the case, and to express our own reasoning. We know that Antillico sued her late husband’s brother for breach of contract and that the jury awarded her $200 in damages. We also know that the defendant appealed to this court, that the parties agreed to the facts stated in the opinion, and that the judges disagreed whether the defendant’s promise was legally enforceable on those facts. This appellate court reversed the judgment for Antillico, because the majority of the appellate judges found that the defendant’s promise lacked consideration and therefore was not enforceable. But Judge Ormond (implicitly dissenting) would have found consideration, and either result was plausible on the facts.

¶30 Why is consideration arguably lacking in this case? What facts are important to this inquiry? Does the Brother-in-law’s letter provide useful facts to support arguments for either or both sides of the dispute? If you were hired by the brother-in-law to argue that the promise lacked consideration, could you do it? If you were hired by Antillico to argue that the promise is supported by consideration, could you do that? Could you argue either side equally well?

¶31 Hint: Antillico’s moving her household 60-70 miles, particularly in 1845, was a substantial act. It could easily have qualified as a performance that could be exchanged for the defendant’s promise. However, is the element of reciprocal inducement arguably missing? If so, which party arguably was lacking inducement from the other party’s promise or performance? How can Antillico argue on the facts that the Brother-in-law was induced to make his promise by some performance on Antillico’s part? How can the Brother-in-law argue on the facts that he was not so induced and that he was simply promising to make a gift?

II.        Penalty Clauses
            A.       U.S. Common Law and U.C.C.
¶32      In the U.S., juries are permitted to award punitive damages for reckless or intentional torts. As in France, however, courts in the U.S. will not award punitive damages for breach of contract. Moreover, U.S. courts will refuse to enforce the parties’ agreement in their contract to impose a penalty for a breach of contract. In general, courts in the United States will enforce a damages clause only if it is designed to compensate for actual injury. Such a clause is called a valid “liquidated damages” clause, rather than an invalid penalty clause.

¶33 The traditional common law test in the U.S. is a prospective one: courts will enforce a liquidated damages clause if, at the time of contracting, the liquidated damages represent a reasonable estimate of the damages that would flow from a breach, taking into consideration the difficulty in calculating damages in the event of a breach or the difficulty of estimating the damages in advance. If the liquidated damages represent a reasonable estimate of actual injury in light of information available at the time of contracting, they will be upheld by most courts even if the actual injury caused by breach turns out to be unexpectedly low or even non-existent.

¶34 The common law test is largely retained in the UCC, art. 2, which applies to sales of goods:
§ 2-718. Liquidation or Limitation of Damages
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

¶35 B. French Code Civil [English translations are from Legifrance by Georges Rouhette, Professor of Law, with the assistance of Anne Berton]
As originally enacted in 1804, article 1152, read: "Lorsque la convention porte que celui qui manquera de l’exécuter payera une certaine somme à titre de dommages-intérêts, il ne peut être alloué à l’autre partie une somme plus forte, ni moindre. C. civ. art. 1152 (Dalloz 101st ed. 2002)." As translated for Legifrance: "Where an agreement provides that he who fails to perform it will pay a certain sum as damages, the other party may not be awarded a greater or lesser sum."

¶36 As amended in 1975 and 1985, article 1152 now includes the following clauses, inserted as a new paragraph immediately after the language in the original 1804 provision: "Néanmoins, le juge peut, même d’office, modérer ou augmenter la peine qui avait été convenue si elle est manifestement excessive ou dérisoire. Toute stipulation contraire sera réputée non écrite.” C. civ. art. 1152 (Dalloz 101st ed. 2002). As translated for Legifrance: "Nevertheless, the judge may, even of his own motion, moderate or increase the agreed penalty, where it is obviously excessive or ridiculously low. Any stipulation to the contrary shall be deemed unwritten."

¶37 The amended article 1152 speaks not of moderating the total damages referred to in the first sentence, but of moderating the penalty when it is manifestly excessive, suggesting that the penalty portion of the total sum of damages will not be eliminated, but only moderated if it is excessive, thus leaving compensation plus a smaller penalty.

¶38 In practice, the courts have indeed retained the discretion to reduce a manifestly excessive clause pénale to a higher point that still exacts a penalty, albeit a reduced one. Indeed, all members of two small groups of French magistrates that I interviewed in 2005 stated that they would normally retain an extra-compensatory element in a clause pénale, even after moderating it to avoid a manifestly excessive penalty, in keeping with the parties’ intent to discourage breach. Authority for retaining such a punitive element arguably lies in article 1226, which defines, without condemning, a clause pénale as one designed to ensure performance, and thus to deter further breach of that particular contract by compelling performance.

¶40      C.        Questions and Problems
                        1.        If the French Civil Code does not allow a court to award punitive damages for breach of contract in the absence of a penalty clause, why would it enforce a penalty agreed to by the parties? Why should not an American court enforce a penalty clause, so long as the parties agree to it?
                        2.        American Economic Justification for its rule: Imagine that a Contractor has agreed to work in the month of May for Owner, using Contractor’s full capacity and expecting to make $20,000 profit. In early April, however, Contractor is offered to work fulltime on Developer’s exciting, innovative, and profitable new project, using the contractor’s full capacity and earning it an expected $50,000 in profit. If Contractor repudiates its contract with Owner, Owner will suffer $10,000 in damages in the higher costs of hiring a substitute contractor on short notice. Should the Contractor keep its promise to Owner, or should the Contractor breach its contract with Owner, shift its resources to Developer, and pay compensatory damages to Owner? What would Contractor do if a U.S. court would permit the jury to award punitive damages of $30,000-$60,000 for intentional breach, or if the court would enforce a penalty clause that would impose total damages of $40,000 for such a breach by Contractor?
                        2.         A contractor agreed to complete an office building by June 1. At the time of contracting, the parties estimated that the owner would suffer damages of $10,000 per week in lost rents for delay in completion of the building. In the written construction contract, the parties agreed that the contractor would be liable to the owner for $100,000 for any delay in completion (even one day of delay), plus $10,000 per week for any delay of at least one week. Would this damages clause be enforceable under the French Civil Code or the UNIDROIT Principles? Would it be enforceable under the general U.S. rule in most states?

¶41 U.S. Uniform Commercial Code (sales of goods)
UCC § 1-203. Obligation of Good Faith
Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.
UCC § 2-102. Scope
. . . this article applies to transactions in goods; . . ..
UCC § 2-508. Cure by Seller of Improper Tender or Delivery; Replacement
(1) Where any . . . delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
UCC § 2-601. Buyer’s Rights on Improper Delivery
[Subject to some exceptions], if the goods . . . fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest. [italics added by Professor Calleros]
UCC § 2-711. Buyer’s Remedies in General; . . .
(1) Where . . . the buyer rightfully rejects . . . then with respect to any goods involved, the buyer may cancel and [may recover damages as defined by the Act].

¶42 U.N. Convention on Contracts for the Int’l Sale of Goods (“CISG”) (Source: http://cisgw3.law.pace.edu/)

(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States:
(a) when the States are Contracting States; or
(b) when the rules of private international law lead to the application of the law of a Contracting State.*
(2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract.
(3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.
[*China, the Czech Republic, Singapore, Slovakia and the United States have adopted a reservation pursuant to Article 95, which provides that “Any State may declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph (1)(b) of article 1 of this Convention.”]

Article 2
This Convention does not apply to sales:
(a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;
. . . .

This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:
(a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold.

This Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person.

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.

(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

(2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

Article 25
A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.

Article 46
. . . .
(2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter. . . .

Article 49
(1) The buyer may declare the contract avoided:
(a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or . . . .

Article 74
Damages for breach of contract . . . consist of a sum equal to the [foreseeable loss] suffered . . . as a consequence of the breach.

¶43 Questions
1. In an international sales transaction, assume that the seller’s delivery deviated from the contract in a minor way. The buyer is consulting its legal counsel to determine whether to reject the shipment and cancel the contract. The seller is demanding that the buyer accept delivery and retain a claim for damages for the minor breach. Would the seller prefer the UCC or the CISG to apply to the issue?

            2.        Applicability of the CISG:
                        a.        England is not a signatory to the CISG. In a dispute over a sales transaction between a seller with its place of business (POB) in France and a buyer with its POB in England, suit is brought in France. The French court applies its choice-of-law rule, and it selects the contract law of France as the applicable law.   Does that law include the CISG?
                        b.        As permitted by CISG art. 95, the U.S. adopted the CISG without article 1.1(b). Assume the same facts as in problem a. above, except substitute Arizona for France. Will the selected contract law of Arizona include the CISG?

3. An Italian manufacturer of bicycles enters into an agreement to sell 20 bicycles to a retail store in France. Both parties know that the retail store will resell the bicycles to individuals for personal recreational use. Is the contract between the Italian manufacturer and the French retailer governed by, or excluded from, the CISG?

4. In a commercial sales contract between a seller from France and a buyer from California, a clause states: “The parties agree that the laws of California apply to disputes arising out of this contract.” Did the parties effectively opt out of the CISG and choose the California Commercial Code (its enactment of the UCC) as the applicable law?

5. Assume that the contract in the previous question includes a clause fixing damages of $50,000 for any defective delivery by the seller, regardless how minor. The Buyer sues the Seller in a California court, seeking to enforce the clause. The actual damages for the imperfect delivery in fact are only $10,000. What are the buyer’s best arguments for enforcing the clause? What are the seller’s best arguments for avoiding the clause and being liable only for actual damages suffered by the buyer? [The CISG contains a clause allowing a court to award compensatory damages for actual losses, but it does not address contractual damages clauses.]

6. Consider the following provisions of the UNIDROIT Principles, which address issues excluded from the CISG under CISG art. 4. Why was it feasible to address these issues in the UNIDROIT Principles, but not in the CISG?

A. United States
¶45 1. Sale of Goods - UCC
UCC § 1-103 – Unless displaced by the particular provisions of this Act, [the common law] and other validating or invalidating cause shall supplement its provisions.
UCC § 1-105 {now § 1-301 in some states}: (1) . . . when a transaction bears a reasonable relation to this state and also to another state or nation, the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.

¶46 2. Non-Sales Transactions
Restatement (Second) of Conflict of Laws
Section 187. LAW OF THE STATE CHOSEN BY THE PARTIES
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
See Swanson v. The Image Bank, Inc., 206 Ariz. 264, 77 P.3d 439 (2003) (adopting and applying section 187).

¶47 B. France – 1955 Hague Convention (Sale of Goods)
Art. 2 - A sale shall be governed by the domestic law of the country designated by the Contracting Parties.
. . . .
Art. 6 - In each of the Contracting States, the application of the law determined by this Convention may be excluded on a ground of public policy.

¶48      C.        France – 1980 Rome Convention
Art. 1. Scope of the Convention – 1. The rules of this Convention shall apply to the contractual obligations in any situation involving a choice between the laws of different countries.
Art. 3. Freedom of Choice -- 1. A contract shall be governed by the law chosen by the parties. . . .
Art. 7. Mandatory Rules –
            1. When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.
            2. Nothing in this Convention shall restrict the application of the rules of the law of the forum in a situation where they are mandatory irrespective of the law otherwise applicable to the contract.
Art. 16. “Ordre Public” -- The application of the law of any country specified by this Convention may be refused only if such application is manifestly incompatible with the public policy (“ordre public”) of the forum.

¶49      D.        Questions
                        1.        A party in France and one from the U.S. enter into a commercial contract that will be performed partly in the U.S. and partly in France. Their contract includes a clause that states that the contract law of England will govern any dispute that arises out of the contract.
                                    a.         Will this contractual choice of law be enforced by a court in the U.S.? In France?
                                    b.         Would a court in the U.S. or France enforce the contractual choice of law if the contract chose the UNIDROIT Principles as the governing law? Would it make a difference if the parties also agreed to submit their dispute to private arbitration and to direct the arbitrator to apply the UNIDROIT Principles?

2. Question – Taking advantage of the weak U.S. dollar and a decline in real estate prices, a French developer purchased land and an old office building in Arizona. It then hired a contractor to renovate the building, so that the offices would be ready for commercial tenants by June 1. The contract was negotiated and signed in Arizona. The French developer had greater bargaining power and was able to persuade the Arizona contractor to agree in two clauses that (1) the French Civil Code and other supplementary French law would apply to any dispute arising out of the contract, and (2) the contractor would be liable to the developer for $100,000 for any delay in completion (even one day of delay), plus $10,000 per week for any delay of at least one week. The contract did not specify the forum of any suit.
At the time of contracting, the parties estimated that the owner would suffer damages of $10,000 per week in lost rents for delay in completion of the building. The Arizona contractor completed the renovation project four weeks late, and the French developer in fact did suffer $40,000 in actual losses due to the delay. The developer withheld $140,000 from its final payment to the contractor. The contractor sued the French developer in Arizona Superior Court for the remaining $140,000 in pay. Develop arguments for both the developer and the contractor.

II.        Choice of Law (PIL) in the Absence of Contractual Choice
            A.        United States
¶50                  1.         Sale of Goods

UCC § 1-105 {now § 1-301 in some states}:
(1) . . . Failing such agreement this Act applies to transactions bearing an appropriate relation to this state.

¶51 2. Non-sales Transactions
Restatement (Second) of Conflict of Laws
Section 6. CHOICE-OF-LAW PRINCIPLES TEXT
(1) A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
. . . .
Section 188. LAW GOVERNING IN ABSENCE OF EFFECTIVE CHOICE BY THE PARTIES
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place of contracting,
(b) the place of negotiation of the contract,
(c) the place of performance,
(d) the location of the subject matter of the contract, and
(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local law of this state will usually be applied, except as otherwise provided in ss 189-199 and 203.
{See Rubin v. Irving Trust Co., 305 N.Y. 288, 305, 113 N.E.2d 424, 431 (1953) (Rubin adopts the “center of gravity” approach, applying “the law of the State which has the most significant contacts with the matter in dispute.”).}

¶52 B. France – 1955 Hague Convention (Sale of Goods)
Art. 3
In default of a law declared applicable by the parties under the conditions provided in the preceding article, a sale shall be governed by the domestic law of the country in which the vendor has his habitual residence at the time when he receives the order. If the order is received by an establishment of the vendor, the sale shall be governed by the domestic law of the country in which the establishment is situated.
Nevertheless, a sale shall be governed by the domestic law of the country in which the purchaser has his habitual residence, or in which he has the establishment that has given the order, if the order has been received in such country, whether by the vendor or by his representative, agent or commercial traveler.
In case of a sale at an exchange or at a public auction, the sale shall be governed by the domestic law of the country in which the exchange is situated or the auction takes place.
. . . .
Art. 6 - In each of the Contracting States, the application of the law determined by this Convention may be excluded on a ground of public policy.
Art. 7 - The Contracting States have agreed to incorporate the provisions of articles 1-6 of this Convention in the national law of their respective countries.

Art. 1. Scope of the Convention – 1. The rules of this Convention shall apply to the contractual obligations in any situation involving a choice between the laws of different countries.
Art. 2. Application of Law or Non-Contracting States – Any law specified by this Convention shall be applied whether or not it is the law of a Contracting State.
Art. 4. Applicable Law in the Absence of Choice -
            1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.
            2. Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporated, its central administration. However, if the contract is entered into in the course of that party’s trade or profession, that country shall be the country in which the principal place of business is situated or where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.
. . . .
            5. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.

Art. 16. “Ordre Public” - The application of the law of any country specified by this Convention may be refused only if such application is manifestly incompatible with the public policy (“ordre public”) of the forum.

Art. 21. Relationship with Other Conventions – This Convention shall not prejudice the application of international conventions to which a Contracting State is, or becomes, a party.

¶54 D. Rules of Arbitration of the Int’l Chamber of Commerce
Art. XVII. Applicable Rules of Law
1. The parties shall be free to agree upon the rules of law to be applied the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.
. . . .

¶55 E. Int’l Dispute Resolution Rules of the American Arbitration Assoc.
Art. 28
1. The tribunal shall apply the substantive law(s) or rules of law designated the parties as applicable to the dispute. Failing such a designation by the parties, the tribunal shall apply such law(s) or rules of law as it determines to be appropriate.

¶56 Peter Berger Klause, International Arbitral Practice and the UNIDROIT Principles of International Commercial Contracts, 46 Am. J. Comp. L. 129 (1998).
. . . .
I. The Comparative Nature of the International Arbitral Process
. . . .
This natural comparative orientation is caused primarily by the fact that in international arbitration - much more than before domestic courts - cultural and legal diversity is at issue. Comparative law provides the means to do justice to all legal systems involved. This is exemplified, e.g., by the international arbitrators' comparative approach to conflict of laws problems. International arbitrators very often apply the so-called "cumulative approach." Instead of referring to just one conflict of law rule, they justify their choice of law decision with reference to all conflict of laws rules concerned (i.e., that of the seat of the arbitration and of the respective home countries of the parties).

¶57 F. Questions
1. In a sales transaction, in the absence of contractual choice of law, and for issues not governed by the CISG, which state’s or country’s law is usually chosen by (1) the UCC choice of law rule? (2) the 1955 Hague Convention? In a non-sales transaction, in the absence of contractual choice of law, how does the American Restatement choice-of-law rule compare with that of the 1980 Rome Convention?

                        2.        A sales contract between a French seller and a New York buyer is formed when the buyer sends an offer to the seller by Int’l Federal Express, and the seller signs and returns it by Int’l Federal Express. The contract requires the seller to deliver the goods to a shipping company that is hired by the buyer to take the goods from a French port and deliver them to New York. After performance, disputes arise. Some issues, such as ones regarding the quality of the goods and the time for inspection, are governed by the CISG. Some issues, however, are challenges to the validity of certain contract provisions and are excluded from the CISG under CISG art. 4.
                                    a.        If suit has been brought in a New York court, what law will apply to the “validity” issues?                                     b.         If suit is brought in a French court, what law will apply to the validity issues?                                                 (1) Which convention supplies the French choice-of-law rule, the 1955 Hague Convention or the 1980 Rome Convention? (France is a signatory to both, but the U.S. is signatory to neither). {What articles of the convention support an argument for application of each convention?}
                                                (2) Suppose the contract includes a penalty clause, and the breaching party seeks to challenge the validity of the penalty clause? If French contract law applies to that issue, should the French court consider New York’s strong public policy against enforcing penalty clauses for breach of contract?

3. When parties to an arbitration agreement have not agreed on the applicable law, what choice-of-law rule should the arbitrators apply? The rule that would be applied by a court in the country in which the panel sits? A combination of approaches adopted by countries with interests in the transaction?

¶58 A. New York Arbitration Agreement
From: http://www.chamber.se/arbitration/english/laws/newyork_conv_eng.html
Convention on the Recognition and Enforcement of Foreign Arbitral Awards Done at New York, 10 June 1958; entered into force, 7 June 1959 United Nations, Treaty Series, vol. 330, p. 38, No. 4739 (1959)

Article II
1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
. . . .
3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Article III
Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. . . .
. . . .
Article V
. . . .
2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.

¶59 B. Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters
SUMMARY - The Regulation lays down rules governing the jurisdiction of the courts in civil and commercial matters. A judgment given in a Member State is to be recognized automatically, no special proceedings being necessary unless recognition is actually contested. A declaration that a foreign judgment is enforceable is to be issued after purely formal checks of the documents supplied. The Regulation lists grounds for non-enforcement, but the courts are not to raise these of their own motion.

Article 1     Scope
1. This Convention shall apply in international cases to exclusive choice of court agreements concluded in civil or commercial matters.
. . . .
Article 5    Jurisdiction of the chosen court
1. The court or courts of a Contracting State designated in an exclusive choice of court agreement shall have jurisdiction to decide a dispute to which the agreement applies, unless the agreement is null and void under the law of that State.
2. A court that has jurisdiction under paragraph 1 shall not decline to exercise jurisdiction on the ground that the dispute should be decided in a court of another State.
. . . .
Article 6    Obligations of a court not chosen
A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive choice of court agreement applies unless -
a) the agreement is null and void under the law of the State of the chosen court;
b) a party lacked the capacity to conclude the agreement under the law of the State of the court seised;
c) giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the State of the court seised;
. . . .
Article 8    Recognition and enforcement
1. A judgment given by a court of a Contracting State designated in an exclusive choice of court agreement shall be recognised and enforced in other Contracting States in accordance with this Chapter. Recognition or enforcement may be refused only on the grounds specified in this Convention.
. . . .
Article 11    Damages
1. Recognition or enforcement of a judgment may be refused if, and to the extent that, the judgment awards damages, including exemplary or punitive damages, that do not compensate a party for actual loss or harm suffered.

¶61 The New Hague Convention on Choice of Court Agreements
By Ronald A. Brand (footnotes omitted)
On June 30, 2005, the Final Act of the Twentieth Session of the Hague Conference on Private International Law was signed on behalf of the Member States of the Conference in the Peace Palace at The Hague. The Final Act includes a new multilateral treaty, the Convention on Choice of Court Agreements. This new Hague Convention is perhaps most easily understood as the litigation counterpart to the New York Arbitration Convention. Like the New York Convention, it will establish rules for enforcing private party agreements regarding the forum for the resolution of disputes, and rules for recognizing and enforcing the decisions issued by the chosen forum.
. . . .
The Scope: International Business-to-Business Agreements
Designed to “promote international trade and investment through enhanced judicial co-operation,” the new Convention will govern international business-to-business agreements that designate a single court, or the courts of a single country, for resolution of disputes (“exclusive choice of court agreements”). It will not apply to agreements that include a consumer as a party. Nor will it apply to purely domestic agreements in which “the parties are resident in the same Contracting State and . . . all other elements relevant to the dispute . . . are connected only with that State.”
The Basic Rules
The Convention sets out three basic rules:
1) the court chosen by the parties in an exclusive choice of court agreement has jurisdiction;
2) if an exclusive choice of court agreement exists, a court not chosen by the parties does not have jurisdiction, and must decline to hear the case; and
3) a judgment resulting from jurisdiction exercised in accordance with an exclusive choice of court agreement must be recognized and enforced in the courts of other Contracting States (other countries that are parties to the Convention).

¶62 Question - How does an “exclusive” choice-of-court agreement differ from a permissive one? If the following clause appeared in the contract, would a trial court in the U.S. dismiss the suit, so that it could be refiled in France? “The parties submit to the jurisdiction of the appropriate courts of Paris, France, to hear any dispute relating to this agreement.”

This is an “open book” examination. You may bring to class any course materials distributed by Professor Calleros, and any notes that you have prepared for his course, and you may bring a French-English dictionary. You will probably do best, however, if you know the material so well that you need not take the time to consult these resources. If any exam question is unclear, you may ask me during class.

You will have about 1 hour, 50 minutes (100 minutes) to complete 2 parts: (1) 25 true/false questions; and (2) 1 essay question. I suggest that you spend no more than 50 minutes on the true/false questions (an average of 2 minutes each), and at least 60 minutes on the essay question.

If any of the true/false or multiple choice questions appear flawed to you, you may write a comment or assumption in the margins of the exam or at the bottom of the question. If the essay question has any obvious mistakes in it, you may express your assumption about the facts in your answer. Or you may ask me about these things during the exam if you have a question.

Write your essay answer in English language that I can easily understand, but otherwise do not be concerned about imperfections in your English usage or minor problems with spelling. Please write so that I can easily read your handwriting. Otherwise, however, do not be overly concerned with neatness. For example, if you wish to delete a word, you may simply cross it out; you need not take care to erase it. In fact, I strongly encourage you to use pen, which is easier to read than pencil.

When I instruct you to begin the examination, you may turn the page to begin. When I instruct you that time has expired, please immediately stop writing, even if you are in mid-sentence and even if you have not completed the exam. If you continue to write past the deadline, I must deduct points from your exam. I will assign each exam booklet a number, without looking at the name on the back page, and he will grade it without knowing the identity of the exam-taker.

Wait for further instructions before turning the page and beginning the exam on the reverse side of this page.