Example Of Critical Thinking On Does The Eight Percent Discount Apply To All Future Orders?

Business Law

One of the central issues that must be resolved by the court or arbitration tribunal is whether eight percent discount offered by the Seller to the Buyer in the initial agreement applies to all future contracts. It is clear that the parties have different views on this matter. The Seller intended that it was a one-time discount; it was not supposed to apply to the future orders, and it was intended to encourage the Buyer to enter into a long term contractual relations with the Seller. The Buyer, on the other hand, thought that the Seller was willing to give a permanent eight percent discount for all future payments. Obviously, it was a misunderstanding which, unfortunately, led to this dispute. The following issue must be decided with regard to the provisions of Article 8 of GISG. The following article provides that statements or party`s conduct is to be interpreted according to his intent, provided that the other party knew or could not have known about this intent. If, however, this rule cannot be applied, then the intent must be interpreted according to the understanding of a reasonable person of the same kind as the opposing party, provided that such person would be placed in the same circumstances. Thus, the primary issue to be resolved is what was the Seller`s intent when he offered a Buyer an eight percent discount? Was it supposed to be a one-time favor or a long-term obligation?
The language of the first letter from the Seller (Claimant's Exhibit No.1) is equivocal and does not clearly express the Seller`s intention. The Seller assured the Buyer that he would “always receive the best price”. Further in the letter the Seller specified that the Buyer would receive an eight percent discount, which is the “best price” they have ever given to their customer so far, and that the “usual price” for the favored customers is based on a four percent discount. Such wording convinced the Buyer that he, unlike the usual customers who receive “usual price”, is, on the other hand, is an unusual customer who will “always receive the best price”. Hence comes the Buyer`s claim that the eight percent is to be applied to all future transactions.
At the same time, the expression “best price” can be interpreted differently. What the Seller really meant is that the best price is the price that he can afford, i.e. the ordinary price minus a four percent discount. In this regard, the eight percent discount was just a on-time exclusion from the general, “four percent rule”. On the other hand, it would be unreasonable for the Buyer to assume that the Seller would agree on such disadvantageous terms. The Buyer was obviously aware of the average market price for this type of goods. The Seller indicated that his prices are among the lowest in the market and, added to that, he gave to his loyal customers a permanent four percent discount. Being a reasonable merchant, the Seller should have assumed that giving an eight percent discount in these circumstances on a permanent basis would be highly disadvantageous for the Seller`s business. Instead, by giving an eight percent discount, the Seller simply intended to encourage the Buyer to enter into a long term relationships. Moreover, the nature of contractual relations between the Seller and Buyer implies that every contract should be treated separately and is subject to price change, as well as the change in the amount of goods sold.

Was there a valid contract between the Seller and the Buyer?

Another important issue in this case is whether the parties entered into a contract as a result of the negotiations during 3-6 April, 2013. Pursuant to Article 14, an offer is a proposal that definitely indicates price and the goods, as well as shows the intention of the offeror to be bound by the terms in case of acceptance. A contract is formed once the offeree expressly or by conduct accepts that offer. While the Buyer has agreed to enter into the new contract during telephone conversation with the Seller, the letter confirming the terms of the contract contained different price (as the Buyer had the impression that eight percent discount will be applied to a new contract as well). Naturally, in the reply to the confirmation letter, the Buyer disagreed with the price, assuming that there was a misunderstanding or some kind of mistake. Instead, the Buyer asked that the price be calculated considering the eight percent discount. Such modification constitutes a counter-offer, which in turn, constitutes a rejection of the offer pursuant to Article 19. The negotiations reached a deadlock and ended with a dispute. Therefore, it is fair to state that no formal contract has been concluded between the parties.
On the other hand, a literal interpretation of Article 18 suggests that the contract has been formed as the Buyer agreed to a new contract during a telephone conversation, by accepting an offer. Therefore, all the following disagreements should be treated as a contractual dispute.

What is the applicable law?

The problem of applicable law in the following case seems to be the most complicated. The general rule in similar cases is that the parties to the international sale of goods are free to choose the laws of which jurisdiction are to be applied to their contractual relations. This principle is also known as lex voluntatis. Absent such provision, the law governing the contract will be determined based on choice of law rules or international treaties. It seems that this is an example of such situation. The original contract dated 15 December, 2012 does not contain choice of law provision agreed on by the parties. Garth Film placed such provision on the back of the invoice unilaterally, without informing SafePack, which of course does not make such provision binding for the other party. This situation raises the question: the laws of which jurisdiction are to be applied to the dispute and the contract in general?
However, if NewGarth did not ratify CISG, the applicable law must be determined based on the relevant choice of law rules, in accordance with domestic legislation setting out such rules. On this stage, the following scenarios are possible. If NewGarth choice of law rules state that the contract is to be governed by the laws of the Seller`s jurisdiction, than CISG is to be applied, as pursuant to Article 1, Section 1(b) the Convention applies when the rules of private international law lead to the application of the law of a Contracting State. On the other hand, if the same laws provide that the contract is to be governed by the laws of the Buyer`s jurisdiction and the laws of Garth provide that the Seller`s jurisdiction is prevalent, it creates a genuine “conflict of laws” when two jurisdiction compete for the “honor” to govern contractual relations between the parties. Such conflict can be resolved either by arbitration, when the tribunal decides the applicable law based on the principle ex aequo et bono, or by mutual agreement of parties. In any case, the majority of legislators around the world follow the view that it is the jurisdiction of seller which should govern a sale contract between parties from different countries, so the possibility of such conflict is relatively low.

Is the dispute subject to arbitration?

There is also a controversy between the parties as to the judicial tribunal which is competent to resolve the dispute. The Buyer claims that even if there was a valid contract, the Danubian arbitration tribunal would not have a proper jurisdiction over the dispute on the grounds that the Seller mistranslated the name of the tribunal. As there is no such body as “Danubian Arbitration Institution”, the arbitration clause becomes invalid.
Despite the mistake, it is clear to which tribunal the parties referred to in their arbitration clause. Danubian Institution of Arbitration (correct translation of the name of the tribunal) is the only arbitration tribunal in Danubia so there cannot be any confusion on that part. What is more important is that the Buyer has signed the contract with mistranslated name of the tribunal and did not claim that there was any mistake or inaccuracy in the contract at the time of its formation. The only logical explanation of that fact is that the Buyer agreed to the mistranslated designation, assuming that there was consent between him and the Seller.

How to reduce legal risks in the future?

First of all, the parties should express their intentions with the utmost clarity, particularly if it comes to determining such crucial terms of the contract as price, quantity and transportation. The initial offer must contain sufficiently definite terms and conditions of the proposed contract. While in his initial offer the Seller provided the Buyer with all necessary information as to the terms of the contract, his mistake was that he did not clearly specified the scope of the discount he offered: whether it is a one-time offer or a long-term obligation. What makes this mistake even more serious is that the Seller and Buyer planned to engage into a long term contractual relations. Therefore, the Seller should have clearly indicated whether this generous discount would apply to future contracts as this would directly affect the decision of the Buyer to enter into a contract.
In the future, the parties must always include into their contract the applicable law clause agreed on by both of the parties. As was previously demonstrated, the lack of such provision in the event when the contract is made between parties from different countries creates a sense of uncertainty and makes it extremely difficult to resolve the dispute. Failure to decide on applicable law complicates the situation as the national choice of law rules of respective countries come into force. Those rules may contain different approach to a crucial question; which law should govern given contract. It is highly advisable that the parties choose to govern their contract by international treaties, such as CISG. This would contribute to a sense of fairness and equity between parties as the domestic law may contain rules that are favorable to one party and disadvantageous to another.
Another crucial provision that should be included in every contract, along with the applicable law provision, is the clause specifying the forum that will have a jurisdiction to resolve any contractual dispute between the parties. This is especially important when the parties fail to include the arbitration clause. As was the case with the conflict of laws, the “conflict of forums” may also emerge as the courts of different countries may have a conflicting authority that prescribes them to decide the same dispute.
Finally, the parties must include the definite and clear arbitration clause, specifying which arbitrational tribunal has the authority to resolve the disputes arising out of the contract. As we saw, it is especially important to identify the correct name of the tribunal.