Court Decisions Reveals The Dangers of Haggling Over International Sales Contracts
The Federal District Court, Southern District of New York, just decided a lawsuit called
Hanwha Corp. v. Cedar Petrochemicals (January 18, 2011) by applying the U.N. Convention on Contracts for the International Sale of Goods ("CISG"). This case reveals the dangers to parties of a contract when they fail to agree on terms, especially when the court relies on the CIGS. Often a court will look to industry standards or how the parties reached a meeting of the minds in the past in order to achieve a reasonable resolution in the present, to fill in the blanks, if you will. But sometimes, the court will find that the parties did not even have a contract and, of course, if there is no contract, the parties cannot sue, and certainly cannot collect, for breach of contract.
Before this lawsuit, Hanwha had ordered and purchased twenty shipments of petroleum products from Cedar Petrochemicals, and all these transactions went off without a hitch. On the twenty-first shipment, Hanwha ordered 1,000 metric tons of Toluene at $640 a ton. The parties, as was their practice, offered and countered offer regarding the applicable law even as they proceeded to finalize the letter of credit. Hanwa wanted Singapore law to determine any disputes between the parties, and Cedar Petrochemicals wanted New York law. Hanwha emailed Cedar Petrochemicals saying that there would be no contract unless Singapore law controlled. Cedar Petrochemicals then informed Hanwha that the deal was off and proceeded to sell the shipment to another party for $790.50 a ton, considerably more than Cedar Petrochemicals was going to pay.
The court decided that CISG must determine the outcome because the parties never agreed which law to apply. This, by itself, is significant because US courts tend to shy away from the CISG when given the chance. Then the court reviewed Article 19(1) of the CISG which reads "[a] reply to an offer which purports to be an acceptance, but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer." Parties and courts can easily use 19(1) to kill contracts when the parties are dithering. The court granted summary judgment in Cedar Petrochemical's favor and dismissed the lawsuit, concluding that the parties' inability to agree on the choice of law meant there was no contract. The court concluded that choice of law was material or essential to the parties. This decision could have easily gone the other way. The parties had agreed on price, produce, and delivery, as they had done twenty times before. That is usually sufficient to get you into court and keep you there (assuming there is sufficient evidence) on a breach of contract theory. When parties do not clearly set out the choice of law, courts usually resort to canons of construction and other means to apply the correct law. In fact, the court in this lawsuit did that when it concluded that CISG would control the outcome of the lawsuit.
Although the court does not say this, Hanwha's "no deal" email was what probably torpedoed its chances of recovery.
The lawsuit offers some valuable lessons. First, a working, consister history between buyer and seller is no substitute for making sure that your contracts are ironclad. Contracts become issues only when a party breaches, and if you have not protected yourself properly in a final, written form, you risk losing the deal and paying court costs. Second, if you are still negotiating and haggling, then you probably don't have a contract. Proceeding as if you do have a contract only invites tragedy. Finally, US courts are increasingly applying the CISG to international commercial disputes. If you do not know how the CISG works and you buy or sell over national borders, now is time to find out.
Principal and a founding member of GRVR Attorneys.