Please recall from the discussion on the origins of the doctrine of good faith in Roman law that its exceptio doli was designed to discourage deceitful pleadings linked with the enforcement of strict compliance (stricti iuris) promises. In German judicial and banking practice, the letter of credit law principle of strict compliance is referred to as Dokumentenstrenge and is applicable to commercial and standby letters of credit as well as to independent bank guarantees. The first two cases of this section involve the application of the strict compliance principle in typical disputes involving letter of credit and independent bank guarantee litigation. German decisional law is the most explicit when applying the good faith and reasonableness principles as well as the defense of abuse of rights against a payment supported by the strict compliance doctrine. You will be able to observe how the key sections of the BGB on good faith and reasonableness discussed in the principal chapter are applied in remedial letter of credit and bank guarantee settings. Prominent among these provisions is § 157, which, as you will recall, states that “contracts are to be interpreted as required by good faith, taking customary practice into consideration.”310 Prominent also is § 242, which obligates the promisor-debtor to perform in accordance with “the requirements of good faith, taking customary practice into consideration.”311
Often, these sections are invoked by a beneficiary whose presentation of documents has been rejected by the bank for spurious or hyper-technical reasons. They are also invoked by a bank’s customer (the party who procured the issuance of a letter of credit or independent bank guarantee) who tries to prevent payment to the beneficiary by alleging that the documents presented by him are fraudulent or are the product of his abuse of the right to claim a payment for the presentation of documents that on their face comply with the strict requirements of the letter of credit, but in fact he has no right to claim such payment.
The summary action whose goal is to protect victims of fraudulent or abuse of right claims relies on an injunctive remedy known as Einstweilige Verfuegung. This action may be brought against the bank that issues the letter of credit or independent bank guarantee or against the so called “counter-guarantor” (Antragsgegnerin). This is the bank in the customer’s place of business that issues the payment or performance guarantee to the guarantor bank in the beneficiary’s place of business. The guarantee issued by the latter bank is known as a direct guarantee. The counter-guarantee issued at the customer’s place of business names as its beneficiary the bank that acts as the direct guarantor at the beneficiary’s place of business. The counter-guarantee promises the direct guarantor that upon his payment of the direct guarantee to the local contracting party, it will reimburse him for that payment.
Often the party that requests the issuance of a direct guarantee is a local government agency. Because of its superior bargaining power in places where the number of hopeful suppliers far exceeds the demand for their goods or services, this agency often stipulates that the direct guarantee will be paid by its presentation of a 1023simple demand of payment, unaccompanied by documents that attest to or certify to the default of the supplier of goods or services. The counter-guarantee, in turn, stipulates that its promise payment will be paid upon the direct guarantor’s presentation of a statement asserting that it has paid the local government agency, the beneficiary of its direct guarantee. To illustrate: “A” is the bank that issues its counter-guarantee on behalf of “S,” a construction company in Tucson, Arizona. It requests bank “B” in Riyadh, Saudi Arabia to issue its guarantee to the city of Riyadh. In the event that S does not perform as promised in its successful bid to build a business facility, the city of Riyadh will present a document stating that the building built by S did not meet the contract specifications and request, upon simple demand, that B, the direct guarantor, pay the city of Riyadh the amount stipulated in the direct guarantee. Once B pays the city of Riyadh on its direct guarantee, it can present a simple demand for reimbursement from the counter-guarantor in Tucson stating that it paid the amount for which it seeks reimbursement.
As will be discussed by the following court decisions, the remedy of Einstweilige Verfuegung requires proof that the beneficiary whose payment is sought to be enjoined has either tendered fraudulent documents or abused his right to demand payment by presenting a document that although facially in compliance with the letter of credit or bank guarantee, in fact it is not. This is particularly the case with bank guarantees that are payable on the basis of the beneficiary or direct guarantor’s simple demand of payment. For even though the required document is a simple statement that payment is due, it presupposes that the customer who procured the issuance of the guarantee failed to perform its part of the bargain. The customer would then argue that the beneficiary, usually a foreign government or contracting party, is acting in bad faith, either fraudulently or abusively, i.e., with no valid or conceivable grounds to make the demand for payment of the direct guarantee.
The following judicial decisions312 illustrate how the overarching principle of good faith and the archetypal behavior of a proper merchant (Ordentlichen Kaufmanns) as well as reasonable and customary conduct among the participants in these transactions are used by German courts in conjunction with claims of bad faith or abuse of rights by bank customers against the beneficiaries of standby letters of credit, direct guarantees or counter-guarantees.
Facts:
The plaintiff, a Lebanese company, sued an issuing bank and demands payment of the performance guarantee shortly after it expired. The plaintiff argues that it is entitled to payment in accordance with the principle of good faith (Treu und Glauben) of BGB Section 242 since it was prevented from requesting payment in a timely fashion because of a force majeur (hoehere Gewalt, i.e., the war going on in Beirut and the closing of all banks for several days). The court of first instance (Landgericht) of Stuttgart ruled for the defendant and stated that the doctrine of Treu und Glauben cannot be used to extend the deadline set forth in a letter of credit. It added that if the 1024plaintiff wanted a more flexible deadline he could have negotiated it when entering into the contract.
Decision:
The doctrine of Dokumentenstrenge applies to both letters of credit and performance guarantees. In conformity with that doctrine, banks may only accept documents if they clearly comply with the requirements stated in the letter of credit. Thus, all the documents have to be presented within the time periods stated in the letter of credit. The purpose of the doctrine of Dokumentenstrenge is to protect the customer (Auftraggeber). Only in cases where the bank has reason to believe that the customer approves of the intended deviations from the letter of credit requirements is the bank allowed to not comply strictly with the letter of credit. As stated by a commercial code commentary, the bank is only entitled to deviate from the letter of credit if it is able to determine beyond a reasonable doubt (voellig einwandfrei) and without the help of experts that the deviation: 1) is unimportant (unerheblich) and 2) does not hurt the interests of the bank’s customer. If the bank is acting against the customer’s directions, the customer can prevent the bank from seeking reimbursement against him for wrongful payment.
Accordingly, after the date of expiration of the letter of credit, the bank is entitled to refuse to honor the beneficiary’s request for payment, especially since the bank would be entitled to such refusal according to the terms of the letter of credit…. Articles 11 and 37 of the Uniform Customs and Practices for Documentary Credits (UCP 290) provide that letters of credit cannot be extended beyond their original expiration date even in the event of war, strike, etc. The above mentioned provisions also apply to performance guarantees.
Facts:
In October 1981, the Antragstellerin (applicant for a temporary injunction), who had its principal place of business in Germany, entered into a contract with Company A in Saudi Arabia and agreed to deliver equipment in the amount of 1,150,000.00 marks. Company A opened a documentary letter of credit with the Antragsgegnerin (counter-guarantor bank against whom the temporary injunction is sought). Company A requested a bank guarantee in the amount of ten percent of the contract value. The applicant obtained a performance bond and the counter-guarantor bank at the customer’s place of business issued a bank guarantee in which it agreed to pay to Bank B in Saudi Arabia (that was also the direct guarantor for the Saudi contractor) that was payable upon first demand. Bank B sent a telex on behalf of Company A to the counter-guarantor bank on April 25, 1982 and requested payment of its counter-guarantee.
Meanwhile, the customer who procured the issuance of the counter-guarantee successfully obtained a temporary injunction in Germany on April 28, 1982. The Landgericht reversed and set aside the temporary injunction. The appellate court 1025(OLG Frankfurt) affirmed the decision of the Landgericht and refused to reinstate the temporary injunction.
Holding:
1) The doctrine of Treu und Glauben applies to bank guarantees. Therefore, the bank customer (Garantieauftraggeber) who requested the bank to issue it can generally procure a temporary injunction and prevent the bank from paying the beneficiary the guaranteed amount, if the demand for payment is legally abusive or fraudulent.
2) If the bank’s customer provides the cash [or equivalent bond] to the guaranteeing bank after the beneficiary requests payment, a temporary injunction is generally available to prevent such payment rather than to prevent the debiting of the bank accounts of the customer through the guaranteeing bank after payment was made.
Reasoning:
The doctrine of Treu und Glauben does apply to bank guarantees. Generally, a temporary injunction is available to prevent payments through the guaranteeing bank if the demand for payment is obviously abusive or fraudulent. However, the customer and applicant for the issuance of the injunction in the case at hand did not successfully prove the requirements of a temporary injunction.315 According to the dominant opinion in legal literature,316 those defenses related to the underlying contract(s) cannot be raised by a participant in these contracts who is also a party to the guarantee or letter of credit to prevent the bank from paying on the bank guarantee or letter of credit, unless the request for payment by the beneficiary of the letter of credit or bank guarantee is legally abusive or fraudulent and thus in violation of the doctrine of Treu und Glauben. Another prevailing doctrine in letter of credit and bank guarantee law provides that the promise in the letter of credit or bank guarantee is independent of the defenses or equities that the parties could have raised based upon their underlying contract. This doctrine requires, then, that the [issuing or confirming] bank first pay on the letter of credit and then the parties may litigate their underlying rights and duties based upon the contract. Only in cases of abuse of the principles of strict compliance and independence, where it is either obvious or it can be proven with clear and convincing proof that the letter of credit or the bank guarantee [promises of payment] are being abused,317 can the doctrine of the independence of the underlying transaction from the bank guarantee be set aside.
The request for payment of the bank guarantee in the case at hand is not legally abusive. As required by law, Company A: 1) complained several times by telex that the goods were not fully delivered or were delivered damaged, and 2) set a deadline of one month for corrected redeliveries and repairs. Witness K, who was supervising the installation of the equipment in Saudi Arabia, corroborates these facts. Thus, the demand for payment of the bank guarantee by its Saudi beneficiary was neither legally abusive or fraudulent in light of these facts.
In support of her position, the customer-applicant for the injunction signed an affidavit, alleging compliance with her contractual obligations. Such general allegations are not sufficient to prove that the beneficiary abused his right to demand collection. Instead, the applicant should have confirmed and corroborated her statement with 1) a signed list of those items that had to be delivered to Company A as required by the contract and 2) corresponding bills of lading which would have demonstrated shipment and delivery of these goods.
Rather, the statements of the application were too vague and general, preventing any investigation as to whether or not those statements were truthful and correct. With such statements, the customer cannot obtain an injunction that would prevent bank guarantee payments. Simply put, by merely presenting an affidavit that alleges compliance with contractual obligations and further alleging that the request for payment is not justified, the plaintiff-applicant for the injunction has not met its burden of proof.
Furthermore, the counter-guarantor bank also has a substantial interest in the compliance of her obligations under the bank guarantee. Its reputation is on the line when it refuses to pay with clear and convincing reasons for doing so….
Affirmed.
The first case makes clear the unwillingness of the Stuttgart District Court (Landesgericht) to allow the good faith doctrine to replace a strict rule of expiration of a letter of credit. Apparently, the German fondness for timeliness would not allow good faith to bend an expiry deadline.
The second case acknowledges that the doctrine of good faith in the performance of obligations does apply to letters of credit and bank guarantees. However, it also sets forth the standards of evidence that govern the invocation of a fraudulent or abusive tender. The bank’s invocation of lack of good faith or abuse of rights is limited to instances where the beneficiary was very likely to have perpetrated an egregious fraud, i.e., when the goods represented by the documents were not the same as the goods shipped. Another form of preclusion occurs when, as in the first case, an issuing bank unreasonably delays its examination of the non-complying documents and/or failed to notify the beneficiary or presenting bank in time for them to attempt to cure the defect.
In sum, unlike the French decisions discussed in the principal chapter,318 these decisions view the good faith and reasonableness expected from the archetypal proper merchant as equitable defenses. By identifying the factual patterns that did or did not amount to good faith or reasonable behavior, these decisions provide greater predictability than available in the French decisions. In addition, they show how good 1027faith, reasonableness, waiver and estoppel interact with each other in the practices endorsed by the Uniform Customs and Practices for Documentary Credits (UCP), whose format may well qualify for what the Official Comment to U.C.C. § 1–205(5) refers to as a “Trade Code.”
OPINION:
FRIENDLY, Circuit Judge.
The issue is what is chicken? Plaintiff says “chicken” means a young chicken, suitable for broiling and frying. Defendant says “chicken” means any bird of that genus that meets contract specifications on weight and quality, including what it calls “stewing chicken” and plaintiff pejoratively terms “fowl.” Dictionaries give both meanings, as well as some others not relevant here. To support its [definition], plaintiff sends a number of volleys over the net; defendant essays to return them and adds a few serves of its own. Assuming that both parties were acting in good faith, the case nicely illustrates Holmes’ remark “that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties’ having meant the same thing but on their having said the same thing.” I have concluded that plaintiff has not sustained its burden of persuasion that the contract used “chicken” in the narrower sense.
The action is for breach of the warranty that goods sold shall correspond to the description. Two contracts are in suit. In the first, dated May 2, 1957, defendant, a New York sales corporation, confirmed the sale to plaintiff, a Swiss corporation, of
“US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated 2½–3 lbs. and 1½–2 lbs. each all chicken individually wrapped in cryovac, packed in secured fiber cartons or wooden boxes, suitable for export
75,000 lbs. of 2 ½–3 lb. [chickens] @ $33.00
25,000 lbs. of 1 ½–2 lb. [chickens] @ $36.50
per 100 lbs. FAS New York
scheduled May 10, 1957 pursuant to instructions from Penson & Co., New York.”
The second contract, also dated May 2, 1957, was identical save that only 50,000 lbs. of the heavier “chicken” were called for, the price of the smaller birds was $37 per 100 lbs., and shipment was scheduled for May 30. The initial shipment under the first contract was short but the balance was shipped on May 17. When the initial shipment arrived in Switzerland, plaintiff found, on May 28, that the 2½–3 lbs. birds were not young chicken suitable for broiling and frying but stewing chicken or “fowl”; indeed, many of the cartons and bags plainly so indicated. Protests ensued. Nevertheless, shipment under the second contract was made on May 29, the 2½–3 lbs. birds again being stewing chicken. Defendant stopped the transportation of these at Rotterdam.
…
Since the word “chicken” standing alone is ambiguous, I turn first to see whether the contract itself offers any aid to its interpretation. Plaintiff says the 1½–2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2½–3 lb. birds must likewise be young. This is unpersuasive—a contract for “apples” of two different sizes could be filled with different kinds of apples even though only one species came in both sizes. Defendant notes that the contract called not simply for chicken but for “US Fresh Frozen Chicken, Grade A, Government Inspected.” It says the contract thereby incorporated by reference the Department of Agriculture’s regulations, which favor its interpretation; I shall return to this after reviewing plaintiff’s other contentions.
The first hinges on an exchange of cablegrams which preceded execution of the formal contracts. The negotiations leading up to the contracts were conducted in New York between defendant’s secretary, Ernest R. Bauer, and a Mr. Stovicek, who was in New York for the Czechoslovak government at the World Trade Fair. A few days after meeting Bauer at the fair, Stovicek telephoned and inquired whether defendant would be interested in exporting poultry to Switzerland. Bauer then met with Stovicek, who showed him a cable from plaintiff dated April 26, 1957, announcing that they “are buyer” of 25,000 lbs. of chicken 2½–3 lbs. weight, Cryovac packed, grade A Government inspected, at a price up to 33¢ per pound, for shipment on May 10, to be confirmed by the following morning, and were interested in further offerings. After testing the market for price, Bauer accepted, and Stovicek sent a confirmation that evening. Plaintiff stresses that, although these and subsequent cables between plaintiff and defendant, which laid the basis for the additional quantities under the first and for all of the second contract, were predominantly in German, they used the English word “chicken”; it claims this was done because it understood “chicken” meant young chicken whereas the German word, “Huhn,” included both “Brathuhn” (broilers) and “Suppenhuhn” (stewing chicken), and that defendant, whose officers were thoroughly conversant with German, should have realized this. Whatever force this argument might otherwise have is largely drained away by Bauer’s testimony that he asked Stovicek what kind of chickens were wanted, received the answer “any kind of chickens,” and then, in German, asked whether the cable meant “Huhn” and received an affirmative response. Plaintiff attacks this as contrary to what Bauer testified on his deposition in March, 1959, and also on the ground that Stovicek had no authority to interpret the meaning of the cable. The first contention would be persuasive if sustained by the record, since Bauer was free at the trial from the threat of contradiction by Stovicek as he was not at the time of the deposition; however, review of the deposition does not convince me of the claimed inconsistency….
Plaintiff’s next contention is that there was a definite trade usage that “chicken” meant “young chicken.” Defendant showed that it was only beginning in the poultry trade in 1957, thereby bringing itself within the principle that “when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear” by proving either that he had actual knowledge of the usage or that the usage is “so generally known in the community that his actual individual knowledge of it may be inferred.” Here there was no proof of actual knowledge of the alleged usage; indeed, it is quite plain that defendant’s belief was to the contrary. In order to meet the alternative requirement, the law of New York demands a showing that “the usage is of so long continuance, so well established, so notorious, so universal 1029and so reasonable in itself, as that the presumption is violent that the parties contracted with reference to it, and made it a part of their agreement.” Walls v. Bailey, 49 N.Y. 464, 472–73 (1872).
Plaintiff endeavored to establish such a usage by the testimony of three witnesses and certain other evidence. Strasser, resident buyer in New York for a large chain of Swiss cooperatives, testified that “on chicken I would definitely understand a broiler.” However, the force of this testimony was considerably weakened by the fact that in his own transactions the witness, a careful businessman, protected himself by using “broiler” when that was what he wanted and “fowl” when he wished older birds. Indeed, there are some indications, dating back to a remark of Lord Mansfield [in] Edie v. East India Co. 2 Burr. 1216, 1222 (1761), that no credit should be given “witnesses to usage, who could not adduce instances in verification.” 7 Wigmore, Evidence (3d ed. 1940), § 1954. While Wigmore thinks this goes too far, a witness’ consistent failure to rely on the alleged usage deprives his opinion testimony of much of its effect.
…
Defendant makes a further argument based on the impossibility of its obtaining broilers and fryers at the 33¢ price offered by plaintiff for the 2½–3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price for 2½–3 lbs. broilers was between 35 and 37¢ per pound, and that when defendant entered into the contracts, it was well aware of this and intended to fill them by supplying fowl in these weights. It claims that plaintiff must likewise have known the market since plaintiff had reserved shipping space on April 23, three days before plaintiff’s cable to Stovicek, or, at least, that Stovicek was chargeable with such knowledge. It is scarcely an answer to say, as plaintiff does in its brief, that the 33¢ price offered by the 2½–3 lbs. “chickens” was closer to the prevailing 35¢ price for broilers than to the 30¢ at which defendant procured fowl. Plaintiff must have expected defendant to make some profit—certainly it could not have expected defendant deliberately to incur a loss.320
…
When all the evidence is reviewed, it is clear that defendant believed it could comply with the contracts by delivering stewing chicken in the 2½–3 lbs. size. Defendant’s subjective intent would not be significant if this did not coincide with an objective meaning of “chicken.” Here it did coincide with one of the dictionary meanings, with the definition in the Department of Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the trade, with the realities of the market, and with what plaintiff’s spokesman had said. Plaintiff asserts it to be equally plain that plaintiff’s own subjective intent was to obtain broilers and fryers; the only evidence against this is the material as to market prices and this may not have been sufficiently brought home. In any event it is unnecessary to determine that issue. For plaintiff has the burden of showing that “chicken” was used in the narrower rather than in the broader sense, and this it has not sustained.
This opinion constitutes the Court’s findings of fact and conclusions of law. Judgment shall be entered dismissing the complaint with costs.
Please note the number of sources and possible indicators of contractual intent considered by the court to determine the meaning of “chicken”: 1) English language dictionaries; 2) German language dictionaries; 3) U.S. Department of Agriculture quality manuals; 4) Manuals of the Association of Poultry Industries; 5) Testimony or witness statements regarding the usage and customs of the marketplace; 6) Wholesale price in the New York market during the negotiations; and 7) Timing of the reservation of shipping space by the buyer. All of these sources were supposed to shed light on how other contracting parties in the same trade would characterize what they meant by the term “chicken.”
The comparison with the behavior of others as hopefully found in these sources brings to mind the search for reasonable behavior. Still, this search needs the refinement provided by the trade-sectoral context of the transaction. First of all, who are the relevant others? Clearly, the relevant behavior was not that of the retail purchaser of chicken, who, like my grandmother, eyed and touched each chicken, often to the displeasure of daily or weekly market vendors. Unlike my grandmother, the buyers of chicken in Frigaliment were professional merchants who bought and sold poultry based not upon their “eye and hand” inspection, but upon the types of chicken described in catalogues or other printed descriptions of their key features.
The buyers and sellers of these chickens were keenly aware of the differences among their types and of the prices of each type, as well as the price variations caused by their seasonal availability, cost of warehousing, refrigeration, transportation, inspection and so on. As such, these merchants qualified for the status of regular participants in the trade and sector in question and were expected to behave in accordance with a standard of reasonableness and fairness that I have described earlier in this book (and in other writings) as that of the “market” standard: Treat the other party to the contract in the same manner that a regular participant in that trade would want to be treated when viewing his own advantage.321
Judge Friendly agrees with the application of this standard, but warns against imputation of the knowledge peculiar to the chicken trade to a party (including the meaning of chicken) unless that party (in this case the defendant) was a regular participant in that trade. In Frigaliment, the defendant seemed to have just started doing business in that trade and “when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear” by proving either that he had actual knowledge of the usage or that the usage is “so generally known in the community that his actual individual knowledge of it may be inferred.” How would you prove actual knowledge of the meaning of chicken to Judge Friendly? He would consider the testimony of regular participants in that trade, but would also heed Lord Mansfield’s warning that: “[N]o credit should be given to witnesses to usage, who could not adduce instances in verification.” Thus, depending upon a party’s membership in a trade, not only the meaning of chicken, but also the reasonableness and fairness associated with that meaning, could cause different legal and economic consequences.
Nonetheless, in the final analysis, and regardless of the trade or of the “circle” of merchants involved, the meaning of chicken had, in Judge Friendly’s view, a common commercial denominator. No merchant, regardless of his trade, would agree, save under exceptional and temporary circumstances, to sell chicken (or any other product or service) for a price that would inevitably cause him to lose money with each sale.
__________________________
1 For a thorough description of the statutory and case law evolution from nineteenth-century formalistic interpretation of contracts and its “within the four corners” and plain meaning formalism to the contemporary U.C.C. and Restatement (Second) regime, see Harold Dubroff, The Implied Covenant of Good Faith in Contract Interpretation and Gap Filling: Reviling a Revered Relic, 80 St. John’s L. Rev. 559 (2006).
2 Bürgerliches Gesetzbuch [BGB] [Civil Code], Aug. 18, 1896, Reichsgesetzblatt [RGBl] 195, as amended, § 157 [hereinafter BGB], available at http://www.gesetze-im-internet.de/englisch_bgb/englisch_bgb.html.
3 BGB § 242 (1896). The original version as transcribed in the principal text referred to duties of loyalty and good faith. The present version deleted the reference to loyalty and states: “An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.” BGB § 242.
4 The Commercial Code for the German Empire 146 (Bernard A. Platt trans., 1900) [hereinafter Code for the German Empire]. To establish between traders the extent and importance of the doing and omitting to do certain things, account must be taken of the customs and usage in force in business relations.
5 Code for the German Empire, supra note 4, at 146.
6 See infra ch. 26 (Culpa in Contranendo).
7 See supra § 13:1(C)(2)(c) (customs as a source of law).
8 Id.
9 Id.
10 Id.
11 Int’l Chamber of Commerce (ICC), INCOTERMS 2010 15–21(2010) [hereinafter INCOTERMS 2010].
12 Int’l Chamber of Commerce (ICC), INCOTERMS 2000, available at http://www.tradegoods.com/helper/03rules/rules_101.html. However, please bear in mind that INCOTERMS has a narrow scope and only applies to the the rights and obligations of the parties’ arising from the shipmnent and delivery of the sold goods. Thus it does not concern itself with issues such as who is the owner of the goods or who has better right to their possesson.
13 INCOTERMS 2010, supra note 11, at 16, 18.
14 Id. at 20.
15 Id. at 17, 19.
16 These attorneys requested that their names and that of their clients to remain anononymous. For a freight forwarder’s description of the reasons for the addition to Ex Works, A.9 and the “tricky” nature of disputes prompted by the previous silence, see Maria, Incoterms 2010—Ex-Works (EXW), Point to Point Export Services (May 1, 2013, 2:26 PM), http://ptp-maria.blogspot.com/2013/05/incoterms-2010-ex-works-exw.html.
17 Incoterms 2010, supra note 11, at 20.
18 See infra § 23:4(B).
19 See infra § 23:4(C)(2).
20 For a description of a Master agreement, see supra § 22:7(A).
21 Simone Maria Sepe, Good Faith and Contrct Interpretation: A Law and Economics Perspective 48–51 (University of Arizona James E. Rogers College of Law Arizona Legal Studies Discussion Paper No. 10–28, 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1086323.
22 Id. at 50.
23 Id. at 48–49.
24 Id.
25 See infra ch. 26.
26 Id.
27 See Frigaliment Importing Co. v. B.N.S. Int’l Corp., 190 F.Supp. 116, 118 (S.D.N.Y. 1960); see also infra § 23:9(G)(4)(a).
28 See J.H.Rayner & Co v. Hambro’s Bank, Ltd., 1 K.B. 36 (1943).
29 See INCOTERMS 2010, supra note 11, at 15 (reflecting a common dispute respecting who has the obligation to load the goods).
30 See supra ch. 22.
31 U.C.C. § 2–202. If anyone ever doubted Arthur Corbin’s powers as the visionary of the contemporary law of contracts, I recommend reading Arthur L. Corbin, The Interpretation of Words and the Parol Evidence Rule, 50 CORNELL L. Q. 161, 161–70 (1965).
32 U.C.C. § 2–202(a).
33 See, e.g., infra note 165 (discussing the holding in Colombia Nitrogen in the United States).
34 See, e.g., Lucy v. Zehmer, 84 S.E.2d 516, 522 (Va. 1954) (holding that a party’s intention will be held to be what a reasonable person in the position of the other party would conclude his manifestation to mean).
35 See CISG.
36 See infra § 22:3(B) (discussing good father of family and obligations of result).
37 249 N.Y. 458, 464 (1928); infra § 22:9(C)(1).
38 See Franz Wieacker, El Principio General de la Buena Fé 59–85 (Jose Luis Carro trans., 1977) (author’s translation).
39 The Anglo-American equitable estoppel is the counterpart to this Roman doctrine. For example, the definition of estoppel is “a bar which precludes a person from denying the truth of a fact which has in contemplation of law become settled by the acts and proceedings of judicial or legislative officers, or by the act of the party himself….” Lewis v. King, 157 La. 718, 726 (1925).
40 Kozolchyk, El Derecho Comercial, at 263; see also Wieacker, supra note 38, at 60–62.
41 See Justinian, The Institutes, Book 1, Title 1, available at http://www.constitution.org/sps/sps02_j1–1.htm.
42 See infra § 22:9(E)(1) (discussing the Columbia Nitrogen decision).
43 Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (1971).
44 Id. at 9–10.
45 Va. Code Ann. § 8.2–202 cmt. 2 (2012) (emphasis added).
46 U.C.C. § 2–103(b) (1962) (“ ‘Good faith’ in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”). See, e.g., Mich. Comp. Laws Ann. § 440.2103(b) (2013) (the State of Michigan’s version of this provision), available at http://www.michigan.gov/documents/entireuccbook_18831_7.pdf.
47 Cambridge Studies in International and Comparative Law, Good Faith in European Contract Law 16 (Reinhard Zimmerman & Simon Whittaker eds., 2000) [hereinafter Good Faith].
48 See supra § 23:1(C) for a discussion of the Praetorian formulas and equitable clauses.
49 Good Faith, supra note 47, at 16.
50 Id.
51 See, e.g., Berger, Encyclopedic Dictionary, at 440 (the Jurist Labeo defines Dolus as “any cunning, deceit, or contrivance used to defraud, deceive or cheat another.”). Further, Berger translates dolus bonus as simple “shrewdness.” Id.
52 Good Faith, supra note 47, at 16. See also Berger, Encyclopedic Dictionary, at 440. The reader may also recall that the bona fides of consensual agreements was one of the features that Hugo Grotius considered admirable and linked to his natural law ideas. The reader will recall that these were the ideas that influenced Robert Pothier, among other French commentators, whose writings became part of the Code Civil. See supra § 8:2.
53 Good Faith, supra note 47, at 17–18 (citations omitted). See also Baldus de Ubaldis, The Catholic University of America, http://faculty.cua.edu/pennington/baldbio.html (discussing the medieval commentarist Baldus de Ubaldis, also referred to as Baldus de Perugia).
54 See C Civ. (Fr.) art. 1134.
55 See Bonne Foi, lexinter.net, http://www.lexinter.net/JF/bonne_foi.htm (author’s translation). On the Projet Catala on the law of obligations, concluded in 2007, see Cour de Cassation, http://www.courdecassation.fr/jurisprudence_publications_documentation_2/autres_publications_discours_2039/discours_2202/2007_2271/groupe_travail_10699.html.
56 L’obligation d’exécution de bonne foi ne survit pas au contrat, Pierre Fernandez (Jan. 5, 2006), http://aufildudroit.over-blog.com/article-1539846.html.
57 Amandine Assaillit, La bonne foi et la loyaute contractuelle (Oct. 2006) (unpublished thesis), available at http://www.masterdroit.fr/3_Ressources_Fiches_fichiers/FICHES_PDF/FICHES_OBLIG_PDF/1_bonne_foi_et_loyaute.pdf.
58 Id. at 1.
59 Id.
60 See, e.g., Margaret Phillips, The Standard of Bon Père de Famille in French Law; Its Application by the French Courts and a Comparison with the Standard of Reasonableness, 2–3 (Fall 1982) (unpublished paper, University of Arizona) (on file with author).
61 Id. at 7.
62 Berger, Encyclopedic Dictionary, at 419.
63 See supra § 4:2(A)(4) (discussing the Roman jurists’ method of resoning that I refer to as geometric logic).
64 WilliamTetley, Good Faith in Contract: Particularly in the Contracts of Arbitration and Chartering, 35 J. Mar. L. & Com. 561, 577 n.80 (2004). Professor Tetley refers to Art. 1474 of the Québec Civil Code of 1994’s exclusion or limitation of a party’s liability for material injury caused to another through “an intentional or gross fault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence” as an illustration of the reach of Pothier’s definition of faute lourde. Id.
65 Phillips, supra note 60, at 9–10.
66 Id. at 7–8 (citations omitted).
67 Id. at 9 (citations omitted). Phillips attributes the features she listed to the several doctrinal writers, who extracted them from court decisions. See Leobon Larombiere, I Theorie et Pratique des Obligations 491 (1857); Jean Carbonnier, 4 Droit Civil, Les Obligations 251 (1956); Marcel Planiol & Georges Ripert, 6 Traite Pratique de Droit Civil Français no. 834 (2d ed. 1954).
68 Phillips, supra note 60, at 10.
69 Wagons—Lits c. Duchiron, Cour d’appel [CA] [regional court of appeal] Paris, Nov. 25 1955, JCP 1956, II, 9240. For a useful comment on the diligence expected by French courts from travel agents, see Thérèse Rousseau-Houle, La responsabilité des agences de voyages: les tendances de la jurisprudence récente, 24 Les Cahiers de droit 643 (1983), available at http://www.erudit.org/revue/cd/1983/v24/n3/042562ar.pdf.
70 Rousseau-Houle, supra note 69, at 643.
71 Stephanie, La faute contractuelle: une notion hétérogène et imprécise, Legaletic (Nov. 23, 2008) (on file with author).
72 See René Demogue, 5 Traité des obligations en général § 1237 (1923). See also James Gordley, Impossibility and Changed and Unforeseen Circumstances, 52 Am. J. Comp. L. 513, 518–19 (2004). Although not in the same league as Professors Demogue and Gordley, Stephanie concludes, validly in my opinion, that the liability in the case of the obligation de résultat is strict or “objective.” Stephanie, supra note 71. This viewpoint is confirmed by one among many decisions by France’s Cour de Cassation. As stated by the Cour: “The obligation to produce a certain result entails both a presumption of fault and of cause and effect between the promisor’s performance and the damages claimed.” (L’obligation de résultat emporte à la fois présomption de faute et présomption de causalité entre la prestation fournie et le dommage invoqué). Cass. civ 1ère., 16 février 1988, Bull civ. I, nË 42, p. 27, RTD civ. 1988.767, obs. P. Jourdain. Stephanie added that “[t]he promisor-debtor will not be freed from liability unless he can prove an Act of God, acts by a third party or an extraneous cause.” (Le débiteur ne pourra se libérer que par la preuve d’un cas de force majeure, fait dutiers ou d’une cause étrangère.) Stephanie, supra note 71, at n.17 and accompanying text (citing other Cour de Cassation decisions).
73 See supra chs. 8 & 10 (on French codification).
74 See Eric Descheemaeker, The Roman Division of Wrongs: A New Hypothesis, 5 Roman Legal Trad. 1, 12 (2009), available at http://www.romanlegaltradition.org/contents/2009/RLT5–DESCHEEMAEKER.PDF (attributing to the Roman jurist Gaius (G.3.88) the expression “summa divisio” of obligations).
75 C. Civ. (Fr.) art. 1147. Unless otherwise indicated, all the English translations of the Code Civil provisions belong to Legifrance (see Frequently Cited).
76 Section 161(b) states the non-disclosure of a fact known is the equivalent to an assertion that thte fact does not exist:
[W]here [the contracting party] knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
Restatement (Second) of Contracts § 161(b) (1981).
77 See supra note 53 and accompanying text.
78 Good Faith, supra note 47, at 18.
79 Treu is translated into English as loyal, and the synonyms referred to are those of the word loyal. reu, Reverso.net, http://www.reverso.net/translationresults.aspx?lang=EN&direction=german-english.
80 BGB § 157.
81 BGB § 242 (1896); supra note 3 and accompanying text.
82 Id. § 138(1).
83 Good Faith, supra note 47, at 20 (citations omitted).
84 See infra § 23:5(A)(1).
85 See Code for the German Empire, supra note 4, at 146.
86 See supra § 23:1(A).
87 Code for the German Empire, supra note 4, at 146.
88 See HGB §§ 130(a), 347, 497 (Goren, 1998).
89 Introduction to German Law 130 (Joachim Zekoll & Mathias Reimann eds., 2005).
90 See infra note 152 and accompanying text.
91 Good Faith, supra note 47, at 20–21.
92 Id.
93 Id. at 21.
94 Id.
95 Id.
96 See generally John P. Dawson, Effects of Inflation on Private Contracts: Germany, 1914–1924, 33 Mich. L. Rev. 171 (1934); James J. White & David A. Peters, A Footnote for Jack Dawson, 100 Mich. L. Rev. 1954, 1959 (2002).
97 White & Peters, supra note 96, at 1959.
98 See generally John P. Dawson & Frank E. Cooper, The Effect of Inflation on Private Contracts: United States 1861–1879 (pts. 1 & 2), 33 Mich. L. Rev. 706, 852 (1935); see also White & Peters, supra note 96, at 1959.
99 Nathalie Hofmann, Interpretation Rules and Good Faith as Obstacles to the UK’s Ratification of the CISG and to the Harmonization of Contract Law in Europe, 22 Pace Int’l L. Rev. 145, 160 n.88 (2010) (citing German case law discussing the obligation to refrain from acts that could harm the purpose of the contract).
100 Id. at 160–61.
101 BGB § 311:
(1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute.
(2) An obligation with duties under section 241(2) also comes into existence by
1. the commencement of contract negotiations
2. he initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting his rights, legal interests and other interests, or entrusts these to him, or
3. similar business contacts.
102 Rudolf B. Schlesinger et al., Comparative Law 574–75 (5th ed. 1988).
103 Id.
104 Shael Herman, Classical Social Theories and the Doctrine of “Abuse of Right”, 37 La. L. Rev. 747, 747 (1977). “Planiol, who opposed the doctrine, called the formula ‘abusive use of rights’ a logomachy, ‘for if I use my right, my act is licit; and when it is illicit it is because I exceed my right….’ ” Id. The Merriam Webster online dictionary defines a logomachy as a “dispute over or about words”. Logomachy, Merriam-Webster.com, http://www.merriam-webster.com/dictionary/logomachy.
105 William Twining, Karl Llewellyn and the Realist Movement 197 (1973). While discussing Llewellyn’s perception of the beauty of legal accomplishments (Legal Aesthetics), Twining states: “The great monument to this esthetic ideal is the German Civil Code, read not as it stands on the page, merely, but read also against the rigorous, almost rigid German theories of construction and dogmatics which were in vogue for a decade after its adoption.” Id.
106 See e.g., infra § 23:4(D)(2) (Lord Mansfield’s decisions).
107 Goode on Commercial Law 105 (Ewan McKendrick ed., 4th ed. 2009) (citations omitted).
108 Id. at 105–106.
109 Id. at 106 (emphasis added).
110 Friedrich Kessler, Contracts of Adhesion—Some Thoughts About Freedom of Contract, 43 Colum. L. Rev. 629, 630 n.3 (1943) (discussing L’Estrange v. F. Graucob Ltd., 2 K.B. 394 (1934)).
111 Unfair Contract Terms Act, 1977, c. 50 (Eng.):
An Act to impose further limits on the extent to which under the law of England and Wales and Northern Ireland civil liability for breach of contract, or for negligence or other breach of duty, can be avoided by means of contract terms and otherwise, and under the law of Scotland civil liability can be avoided by means of contract terms….
Id. See also Goode, supra note 107, at 108–112.
112 Id. at 108.
113 Aluminum Co. of America v. Essex Group, Inc., 499 F. Supp. 53, 56–57 (W.D. Penn. 1980).
114 While visiting Mexico City’s famous “Lagunilla” flea market I discovered a wordier but ingenious version of caveat emptor: Beware, purchaser: You are the one who purchases and I am only who sells you what you want to purchase (Atencion, Comprador: Usted es quien compra y yo solo quien le vende lo que usted quiere comprar).
115 See ch. 22 (describing the various types of “dynamic” commercial contracts and the role of usage of trade in the formation of these agreements).
116 For a preliminary dicussion of the importance of these practices in the formation of commercial contract law, see supra § 1:2(B). For a full discussion of the compilation and drafting of these practices, see infra ch. 24.
117 See supra § 6:2(A).
118 C.H.S. Fifoot, Lord Mansfield 143 (1936).
119 James Oldham, Reinterpretations of 18th-Century English Contract Theory: The View from Lord Mansfield’s Trial Notes, 76 Geo. L.J. 1949 (1988).
120 The study of Mansfield’s trial notes was first done by Emery W. Anderson, a student of Karl Llewellyn.Mr. Anderson’s study resulted in an LL.M. Thesis. Emery W. Anderson, New Light on Warranty of Quality 1350 to 1800, (undated, circa 1940) (unpublished Master of Laws Thesis, Columbia University).
121 See U.C.C. §§ 2–314, 2–315.
122 Oldham, supra note 119, at 1970 (citation omitted).
123 Id. at 1971.
124 Id.
125 See supra § 20:4(A).
126 Learned Hand, Historical and Practical Considerations Regarding Expert Testimony, 15 Harv. L. Rev. 40, 41–42 (1901–1902).
127 See supra § 20:4(A).
128 Thomas Curry, XV Reports of Cases Argued and Determined in the Supreme Court of the State of Louisiana 332 (1841).
129 Oldham, supra note 119, at 1971.
130 Id.
131 Id.
132 99 Eng. Rep. 15 (1778); see also Oldham, supra note 119, at 1972.
133 Oldham, supra note 119, at 1972.
134 Id. at 1974. According to Oldham, this case was recounted in the Morning Chronicle on December 8, 1781. Id. at 1974 n.159.
135 Id. at 1974 (citation omitted).
136 97 E.R. 1162 [1966].
137 Edmund Heward, Lord Mansfield 101–02 (1979).
138 Id. at 102.
139 Id.
140 495 nb 73 [London, May 27, 1782], cited in Oldham, supra note 119, at 1973 n.154; see also James Allan Park, A System of the Law of Marine Insurance 300–01 (6th ed. 1809).
141 Heward, supra note 137, at 102–03.
142 See infra § 24:2.
143 Heward, supra note 137, at 102.
144 Id. at 103.
145 See supra § 2:2.
146 Fifoot, supra note 118, at 131.
147 In a line of credit agreement, the lender, ex ante, agrees to lend a variable amount of money that depends upon the borrower’s ability to repay it and whatever was the initial consideration for that agreement remains supporting future loans for the life of the agreement.
148 For a discussion of the problems posed by the formal requirements of present consideration, see infra §§ 22:5 & 22:6. For a discussion of the non-role of consideration in the issuance of letters of credit, see Boris Kozolchyk, Commercial Letters of Credit in the Americas 575–84 (1966).
149 Other U.C.C. articles, such as Article 5, adopted the standard of “honesty in fact” for letter of credit transactions, while Article 9 adopted the “honesty in fact and the observance of reasonable standards of fair dealing” for secured transactions. Compare U.C.C. § 5–102(a)(7) with U.C.C. § 9–102(a)(43). In principle, there is no reason for adopting different standards. The reasons for the adoption of an honesty in fact standard in a code that relies as much as does the U.C.C. on course of performance, course of dealing and usage of trade as a prime interpretive tools.
150 For the sequence of adoptions and amendments of the provision on good faith in Articles 1 and 2, see Dubroff, supra note 1, at 559 n.2.
151 U.C.C. § 1–203.
152 U.C.C. § 2–103(1)(b) (1951).
153 James Byrne, Publisher’s Note to Restatement 2d of Contracts & UNIDROIT Principles: The Texts, The Comments & The Illustrations v. (Institute of International Banking Law and Practice ed., 2001).
154 Restatement (Second) of Contracts § 202(1) (1981).
155 Id. § 202 (4)–(5).
156 U.C.C. § 1–201(b)(20).
157 Id. § 1–304.
158 Id. § 1–205(1). Henceforward, and unless otherwise noted, course of dealing will include course of performance.
159 Id. § 1–205(2).
160 Id. § 1–205(3) (emphasis added).
161 On the misleading and contextual meaning of the “plain meaning” approach to the interpretation of contract, see the terse but highly insightful Comment b to § 212 of the Restatement (Second): “It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never be plain except in a context.” Restatement (Second) of Contracts § 212 cmt. b (1981).
162 U.C.C. § 1–205 cmt. 4 (emphasis added).
163 Id. § 1–205(4).
164 Id. § 2–202; supra note 31 and accompanying text.
165 See infra § 23:9(E). As reported by my research assistant Brad Terry, Columbia Nitrogen is good law. The only negative treatment it has received was in Southern Concrete Services, Inc. v. Mableton Contractors, Inc., 407 F.Supp. 581, 583 (N.D. Ga. 1975). However, the Mableton case merely distinguished Royster based upon a factual difference. Columbia Nitrogen has been discussed in seventy four subsequent cases and has been favorably cited by courts in nearly all of the U.S. federal circuits.
166 Chief Justice Traynor’s test for the admissibility of extrinsic evidence:
The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.
Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 37 (1968).
167 Restatement (Second) of Contracts § 212 cmt. b; see supra note 161 (referring to this comment).
168 As noted by Professor Roy Goode, the legal criteria that validate custom in English law are “certainty and consistency of practice, reasonableness, notoriety, and conformity with mandatory law. Moreover, in order to constitute a usage the practice must be observed from a sense of legally binding obligation, not as a matter of mere courtesy or convenience or a desire to accommodate a customer’s wishes.” Goode, supra note 107, at 14. The last criterion is also known as the opinio juris sive necessitates, i.e., the conviction that the custom is binding and together with the preceding criteria are also pretty uniform in continental civil law. Some countries continue to insist that for a commercial custom to be valid, it must be “inveterate.” By inveterate, the Spanish Supreme Court at one point meant that it had to be a custom observed widely by merchants for generations, if not centuries, regardless that commercial practices had changed significantly during those intervals. Thus, its reluctance to apply commercial customs as binding sources of commercial law has continued until a decade or so ago. For example, in decisions handed down as recently as 1975 and 1997, Spain’s Supreme Court rejected the binding effect of widely observed international and national banking customs such as the Uniform Customs and Practices for Documentary Credits (UCP).
169 U.C.C. § 1–205 cmt. 5 (emphasis added).
170 See supra note 34 and accompanying text.
171 CISG art. 8(2); see supra note 35 and accompanying text.
172 See HGB §§ 130(a), 347, 497 (Goren, 1998).
173 See, e.g., U.C.C. § 1–205 cmt. 5 (referring to the U.C.C.’s full recognition for new usages and “for usages currently observed by the great majority of decent dealers, even though dissidents ready to cut corners do not agree.”). For another reference to the sharpers, see Zipporah Batshaw Wiseman, The Limits of Vision: Karl Llewellyn and the Merchant Rules, 100 Harv. L. Rev. 465, 515, 518–19, 529 (1987).
174 Karl Llewellyn, Why a Commercial Code?, 22 Tenn. L. Rev. 779, 780–81 (1953).
175 Id. at 782.
176 Id.
177 Id. § 2–103(1)(b); see supra note 46.
178 U.C.C. §§ 1–201(b)(20); 2A–103(3) (financial leases); 3–103(a)(4) (negotiable instruments); 4–104(c) (bank deposits and collections); 4A–105(a)(6) (fund transfer by banks); 8–1029(a)(10) (investment securities); 9–102(43) (secured transactions).
179 See generally Boris Kozolchyk, Strict Compliance and the Reasonable Document Checker, 56 Brook. L. Rev. 45 (1990) [hereinafter Kozolchyk, Strict Compliance]. See also infra ch. 24 (a detailed examination of the letter of credit practices and the governing stamdards).
180 Kozolchyk, Strict Compliance, supra note 179, at 72–80.
181 UCP 500 art. 13(a) (1993).
182 U.C.C. § 5–108(e).
183 For the reasons why standard letter of credit banking practices have an inbuilt component of reasonableness, see infra ch. 24.
184 See, e.g., Voest-Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940, 946–48, (S.D. Tex. 2000); Brenntag Int’l Chemicals, Inc. v. Norddeutsche Landesbank GZ, 9 F. Supp. 2d 331, 342 (S.D.N.Y. 1998).
185 Karl Llewellyn, Cases and Material on the Law of Sales xvi (1930).
186 Wiseman, supra note 173, at 475–76.
187 See supra text accompanying note 53; Wiseman, supra note 173, at 510 (“Llewellyn’s proposal of a substantial performance rule in merchant sales is a clear example of his concern for fairness and good faith in merchant transactions.”).
188 See infra note 200 and acompanying text.
189 U.C.C. § 2–104(1).
190 See supra § 12:3(A)(4) (discussing the Allgemeines Deutsches Handelsgesetzbuch (ADHGB) of 1871); see also Code for the German Empire, supra note 4, at 146.
191 Code for the German Empire, supra note 4, at 1.
192 The German Commercial Code xi (A. F. Schuster trans., 1911), available at http://ia700408.us.archive.org/3/items/cu31924025030150/cu31924025030150.pdf.
193 Id.
194 For the exceptions of the application of the HGB to nonmerchants, see id. §§ 346, 352, 369, 377.
195 See German Commercial Code (Martin Peltzer & Elizabeth A. Voight trans., 5th rev. ed. 2002).
196 Ingrid M. Hillinger, The Article 2 Merchant Rules: Karl Llewellyn’s Attempt to Achieve The Good, The True, The Beautiful in Commercial Law, 73 Geo. L.J. 1141 (1985).
197 Id. at 1184.
198 Id. at 1160.
199 Id.
200 Wiseman, supra note 173, at 503. By “Grand Style,” Llewellyn alluded to many decisional features. Wiseman summarizes them:
Llewellyn’s Grand Style of the common law described a general period of judicial creativity and flexibility. At its best it was an “ongoing renovation of doctrine,” not in a brusque break with tradition, but in a “harmonization of vision with tradition, of continuity with growth, of machinery with purpose, of measure with need.” Llewellyn saw the best courts of this period as seeking justice—a “right and fair solution”—by both “look[ing] back upon the heritage of doctrine and also … look[ing] forward into prospective consequences and prospective further problems. “Precedent,” Llewellyn wrote, “is carefully regarded, but if it does not make sense it is ordinarily re-explored; ‘policy’ is explicitly inquired into; alleged ‘principle’ must make for wisdom as well as for order if it is to qualify as such….” Thus, the Grand Style or the Style of Reason was the very opposite of mechanical jurisprudence. It described a period of decisionmaking and decision-writing that took account of both the heritage of the law and of the social context.
Id. at 496 (citations omitted).
201 Id.
202 Id. at 538.
203 Id. at 504.
204 See Williston on Contracts (Richard E. Lord ed., 4th ed. 2012). For relevant sections of the Uniform Sales Act of 1906, see The Uniform Sales Act of 1906, available at http://www.drbilllong.com/HistSales/USAXI.html.
205 Wiseman, supra note 173, at 510.
206 Id. at 509–10.
207 Id. at 510 (citation omitted).
208 Id.
209 See U.C.C. § 2–201.
210 Hillinger, supra note 196, at 1168.
211 Wiseman, supra note 173, at 511. Professor Wiseman cites to the 1940 Uniform Act § 21(2)(a) (the full text of the provision in question appears in footnote 199 of her article).
212 Id. at 511.
213 U.C.C. § 2–201(1).
214 Id.
215 Id. § 2–201(2).
216 Wiseman, supra note 173, at 530.
217 U.C.C. § 2–104(1).
218 Hillinger, supra note 196, at 1176–77.
219 Id. at 1177.
220 Id. (Referring to a comment to an early draft in which Llewellyn discussed the case of an apple farmer who marketed three to six hundred bushels a year.). Although this farmer would extend the same implied warranty of merchantability associated with merchants or with “goods” merchant, he would not be subject to the rule in U.C.C. § 2–207 that additional minor terms stated in a confirmation became part of the parties’ contract. Id. The reason for this distinction was because the invocation of § 2–207(2) depends upon the established practice of regular merchants to attend and reply promptly to correspondence. Id. And quoting Llewellyn: “No such practice exists among small farmers … his occupation does not hold him out as familiar with any practice ‘of the kind involved’ or as having the general knowledge or skill in that aspect of a person in trade.” Id.
221 Id. at 1178.
222 Wiseman, supra note 173, at 518.
223 Ernst Rabel was one of Europe’s foremost commercial and private international law scholars during the twentieth century. After he fled from Nazi Germany to the United States, he contributed his comparative law skills to conflicts of law and the law of sales. For a discussion of his relationship with Llewellyn and attempts to marry a Rome Institute Project for the Unification of the Law of Sales with the U.C.C., see William Twining, Karl Llewellyn and the Realist Movement 312–13 (1973).
224 Ernst Rabel, The Sales Law in the Proposed Commercial Code, 17 U. Chi. L. Rev. 427, 433 (1950).
225 Id. For a discussion of the informal (“spiritualist”) approach to commercial contracts, see ch. XXI(A)(1) and the Spanish and Mexican Supreme Court decisions in the Appendix to that chapter. Please notice the caution I expressed in the preceding chapter with respect to the purpose of the principle of “spiritualism” in the European and Latin American commercial codes. While there is little evidence on why Article 109 of the French Commercial Code of 1807 adopted this principle and allowed oral evidence to prove the existence of a sale agreement, during a 1959 seminar discussion at the University of Paris presided by Professor Andre Tunc that I attended it was obvious that the two most frequently mentioned reasons by French commercial law specialists were 1) the relatively low value of the average goods as compared with real property (res mobilis, res vilis) and 2) the quickness of these transactions.
226 941 F.2d 588 (7th Cir. 1991).
227 The following is a summary of Judge Posner’s version of facts.
228 941 F.2d at 591.
229 Id.
230 Market Street, http://www.marketstreetservices.com/market-street-report.
231 941 F.2d at 591.
232 Id. (emphasis added).
233 Id.
234 Id. at 592.
235 Id.
236 Id.
237 Id. at 591 (emphasis added).
238 See infra § 23:8 (comments about the case by the author’s cousin, Boris Kozolchyk, an experiencd and well respected Florida Commercial Real Estate Broker).
239 941 F.2d at 592.
240 Id.
241 Id. at 596.
242 Id. at 597.
243 Please note that this bad faith pleading was the same behavior addressed by one of the oldest Roman equitable maxims in Professor Wieacker’s illustrative list discussed in an earlier section and characterized then as a judicial form of bad faith: “No one may set himself in contradiction of his own previous conduct” (Venire contra factum proprium). See supra § 23:3. Please note also that this Roman maxim inspired the procedural version of estoppel in English and common law countries.
244 941 F.2d at 597.
245 Id.
246 Id. at 591.
247 Id. (emphasis added).
248 See AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1041 (7th Cir. 1990) (“The parties to a contract are embarked on a cooperative venture, and a minimum of cooperativeness in the event unforeseen problems arise at the performance stage is required even if not an explicit duty of the contract.”).
249 941 F.2d at 595.
250 Richard Posner, Economic Analysis of Law 103 (5th ed. 1998).
251 See generally Sharon A. Lloyd & Susanne Sreedhar, Hobbes Moral and Political Philosophy, Stanford Encyclopedia of Philosophy (Edward N. Zalta ed., Summer 2013), http://plato.stanford.edu/entries/hobbes-moral/#StaNat.
252 Thomas Hobbes, Leviathan 85 (George Routledge & Sons Ltd. 1907) (1651).
253 O. W. Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 462 (1897).
254 Robert S. Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195, 196 (1968); U.C.C. § 1–201(19) (1962).
255 Restatement (Second) of Contracts § 205(d).
256 William M. Landes and Richard A Posner, Altruism in Law and Economics, 68 Am. Econ. Rev. 417, 418–19 (1978).
257 Boris Kozolchyk, The UNIDROIT Principles as a Model for the Unification of Best Contractual Practices in the Americas, 46 Am. J. Comp. L. 151, 157–58 (1998). The article provides a description of a Mexican customs procedure (circa 2000 A.D.) shaped by an unwritten presumption of bad faith:
If the shipment is large or significantly valuable, it will be inspected by the Mexican customs broker prior to its entry and customs’ inspection in Mexico. Mexican customs brokers have their forwarding agents in the U.S. side of the border inspect many shipments prior to their entry into Mexico because as brokers, they are subject to heavy fines and loss of their professional licenses if the import documents incorrectly describe the goods or their customs status. [Often this inspection requires purchasing or renting expensive inspection facilities on the U.S. side of the border.] Thus the Mexican government suspects the brokers and the brokers suspect the exporters-importers’ description especially if a poor description can save significant custom duties. This costly and time consuming pre-entry inspection practice is therefore driven by an unwritten presumption of bad faith.
Id.
258 Summers, supra note 254, at 197–200.
259 Restatement (Second) of Contracts § 205(a) (emphasis added).
260 Id. § 1–205(3) (emphasis added).
261 E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code, 30 U. Chi. L. Rev. 666, 672 (1963). United States court decisions that confirm Professor Farnsworth’s objective or comunitarian vision abound even at a time when the United States was not the commercial, financial and industrial power it is today. See, e.g., Patterson v. Meyerhofer, 97 N.E. 472 (N.Y. 1912). Judge Posner cites to a more modest version of contractual cooperation: “The parties to a contract are embarked on a cooperative venture, and a minimum of cooperativeness in the event unforeseen problems arise at the performance stage is required even if not an explicit duty of the contract.” Market St. Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 595 (7th Cir. 1991) (citing AMPAT/Midwest, Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1041 (7th Cir. 1990)).
262 941 F.2d at 593.
263 164 N.E. 545 (1928). For an edited and shorter version of this landmark decision, see infra § 23:9(C).
264 Judge Posner states:
The particular confusion to which the vaguely moralistic overtones of “good faith” give rise is the belief that every contract establishes a fiduciary relationship. A fiduciary is required to treat his principal as if the principal were he, and therefore he may not take advantage of the principal’s incapacity, ignorance, inexperience, or even naïveté.
941 F.2d at 593.
265 But cf. 941 F.2d at 595 (“It would be quixotic as well as presumptuous for judges to undertake through contract law to raise the ethical standards of the nation’s business people.”).
266 See supra § 9:2(B).
267 In my experience, these drafting skills are equally lacking in law schools in both civil and common law countries. Consequently, law graduates must pursue their post-graduate instruction on the peculiarities of contracting in the various sectors of the economy while practicing law.
268 Richard A. Posner, Rational Choice, Behavioral Economics, and the Law, 50 Stan. L. Rev. 1551, 1552 (1998).
269 Hobbes, supra note 252, at 85.
270 Posner, supra note 268, at 1551.
271 It is true, that contracts of “adhesion” usually reflect the performance preferences of the offeror of goods or services. Nevertheless, unless the “adhesion” seller, lender, exchanger or provider of services is a state agency part of a command economy, he will have take into account seriously the preferences of his consumers, lest he be quickly displaced by others who do so.
272 Jorge Viteri, Suc de., 125 SJF5a 315 (1955), Amparo Civil Directo No. 4215 of 1953, Sec 1a. Summary by the author of a translation kindly made available by the late Professor Woodfin Butte of the University of Texas School of Law. Woodfin Lee.Butte, Selected Mexican Cases 309–12 (1967). Any errors and omissions due to the summarization of Professor Butte’s excellent translation are the sole responsibility of the author. On the procedural aspects of an amparo appeal, see Glossary, “Amparo Appeal.”
273 Article 78 states: “In commercial contracts, each party is bound in the manner and terms in which it appears that it wanted to be bound, without having the validity of the commercial act depend upon the observance of formalities or specified requisites.” Código de Comercio [CCo.] [Commercial Code], as amended, Diario Oficial de la Federación [DO], 7 de octubre de 1889 (Mex.) (author’s translation).
274 Article 1796 states in relevant part:
Contracts are perfected by the mere consent of the parties, except for those that must have the form set forth by law…. they bind the parties not only to the fulfillment of what was expressly agreed upon, but also to the consequences that according to their nature are consistent with good faith, the usages and the law.
Código Civil Federal [CC] [Federal Civil Code], as amended, Diario Oficial de la Federación [DO], 26 de mayo, 14 de julio, 3 y 31 de agosto de 1928 (Mex.) (author’s translation).
275 Article 1858 states:
Contracts that are not expressly regulated by this code shall be governed by the general rules of contracts, by the parties’ stipulations and with respect to those provisions of the contract that were silent on the rules applicable to them, by the rules that are applicable to the most analogous provisions applicable to other contracts regulated in this code.
Id. art. 1858 (author’s translation).
276 Article 1854 states: “Contract clauses must be interpreted jointly by taking into account what each of them states when interpreting the others and by attributing to the doubtful clauses the meaning that emerges from the entire set of clauses.” Id. art. 1854 (author’s translation).
277 See supra note 273.
278 Article 1327 states: “The court decision (sentencia) shall deal exclusively with the actions and exceptions brought respectively before the court by the complaint and answer.” CCo. art. 1327 (Mex.) (author’s translation).
279 These articles address the liquidation of a partnership.
280 In relevant part, Article 1857 states:
When it is absolutely impossible to resolve the doubts on how to interpret a contract by following the rules set forth in the preceding articles … if the contrast was of a gratuitous type, the doubt shall be resolved in favor of the smallest conveyance of rights and interests; if the contract was for profit (oneroso) the doubt shall be resolved in favor of the highest measure of reciprocity (mayor reciprocidad de intereses) [between the parties].
CC art. 1857 (Mex.) (author’s translation).
281 In relevant part, Article 1949 states: “The power to rescind [contractual] obligations is deemed implicit when they are reciprocal when one of the parties does not fufill what he was supposed to.” Id. art. 1949 (author’s translation).
282 CCo. art. 1327 (Mex.) (author’s translation).
283 Article 1856 states: “The custom and usage of the country shall be taken into account when interpreting the ambiguities of contracts.” Id. art. 1856 (Author’s translation).
284 Id. art. 1857 (author’s translation).
285 Berger, Encyclopedic Dictionary, at 633.
286 See supra § 14:6(G).
287 CC art. 1858 (Mex.) (author’s translation).
288 Marcus Tullius Cicero, The Philippic Orations of M. Tullius Cicero 55 (2nd rev. ed. 1878). This saying was attributed to the jursit Lucius Cassius, the proposer of the Lex Tabellaria. Id. at 55 n.6. Cicero argues that after Caesar’s death, Antony had derived more advantage than anyone else from it. Id.
289 See Glossary, “Market Standard of Fairness.” Kozolchyk, Fairness, at 220, 233, 234.
290 See, e.g., supra § 1:2(G).
291 Id.
292 See supra § 5:4 (describing the picaresque form of doing business).
293 249 N.Y. 458 (1928).
294 249 N.Y. at 464.
295 Id. at 464–65.
296 Id. at 465.
297 Id.
298 Id. at 465.
299 Id. at 462.
300 Id. at 463–64.
301 Id. at 464.
302 Id.
303 Teofila Astorga Vda. de Aceves, 125 SJF5a 193 (1955), in Butte, supra note 272, at 293–94.
304 See supra § 5:13(B)(2).
305 451 F.2d 3 (4th Cir. 1971).
306 Va.Code Ann. § 8.2–202 (U.C.C. § 2–202) provides:
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented (a) by course of dealing or usage of trade (8.1–205) or by course of performance. (8.2–208); and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
307 Va. Code Ann. § 8.1–205(4) (U.C.C. § 1–205) states:
The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.
308 Reichsgericht [RG] [Federal Court of Justice] Aug. 6, 1920, RGZ 99, 147 (Ger.).
309 See supra § 4:6(C).
310 BGB § 157.
311 BGB § 242.
312 I am indebted to my former student and research assistant Angela Daniel, who is now a practicing lawyer in Germany, for her English translation of the judicial decisions.
313 Landgericht Stuttgart [OLGZ] [Regional Court], June 15, 1978, Wertpapier-Mitteilungen [wm], 1056, 1978 (Ger.).
314 Oberlandesgericht Frankfurt [OLGZ] [Regional Court], Mar. 3, 1983, Wertpapier-Mitteilungen [wm], 575, 1983 (Ger.).
315 Note by Angela Daniel: The court distinguishes the decision of the OLG Frankfurt, NJW 1981, 1914 and states that the bank in that decision would have been forced to pay the bank guarantee with its own means, while the Antragsteller in the present case provided the cash for the payment. Thus, the court concluded that appropriate relief in the case at hand could have been obtained only by issuance of a temporary injunction.
316 Oberlandesgericht Saarbruecken [OLGZ] [Regional Court], Recht der Internationalen Wirtschaft [RIW] 338, 1981 (Ger.); Oberlandesgericht Hamburg [OLGZ] [Regional Court], Recht der Internationalen Wirtschaft [RIW] 615, 1978 (Ger.); Oberlandesgericht Frankfurt [OLGZ] [Regional Court], BB 954, 1974 (Ger.); Horn, Buergschaften und Garantien zur Zahlung auf erstes Anfordern, Neue Juristishe Wochenschrift [NJW] 2153, 1980 (Ger.); Liesecke, Rechtsfragen der Bankgarantie, Wertpapier-Mitteilungen [WM] 22, 1982 (Ger.); Schuetze, 83, 1981 (Ger.).
317 Oberlandesgericht Saarbruecken [OLGZ] [Regional Court], Recht der Internationalen Wirtschaft [RIW] 338, 1981 (Ger.); Oberlandesgericht Frankfurt [OLGZ] [Regional Court], Neue Juristishe Wochenschrift [NJW] 1914, 1981 (Ger.).
318 See supra § 23:4(B).
319 190 F. Supp. 116 (S.D.N.Y. 1960).
320 Emphasis added.
321 See Glossary, “Market Standard of Fairness.” See also Kozolchyk, Fairness, at 220, 233, 234.