Take It or Leave It “Deal” Enforceable under CISG

January 04, 2011, 07:19 PM

In prior postings, we have reviewed some of the key differences between the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) and the Uniform Commercial Code as in effect throughout the United States (except Louisiana). Of course, all of the muddy theories under CISG hit the judicial road when real cases must be decided under CISG. One recent CISG case highlighted the opportunity and danger in agreeing to contract modifications during the middle of contract performance. In Valero Marketing and Supply Co. v. Greeni Oy, the Third Circuit Court of Appeals reversed a federal district court which had thrown out a contract modification allegedly foisted by Valero, a U.S. refiner, upon Greeni, a Finnish supplier of naphtha (a liquid blended with other ingredients to make finished gasoline). Under the original sales contract, Greeni was required to obtain Valero’s approval of the vessel used to deliver the naphtha (which approval could not be unreasonably withheld). However, falling behind the contractual delivery date by several days, Greeni rushed the naphtha onto a vessel named the Bear G and dispatched it to Valero’s refinery in New York without obtaining advance approval. With the ship enroute somewhere in the Atlantic, Valero notified Greeni that it would not approve late delivery by the Bear G. If Greeni desired Valero to accept delivery of the naphtha, Greeni would have to accept the entire expense of off-loading the naphtha onto barges in the New York harbor, which would then deliver the naphtha to Valero. In addition, Valero stipulated that the purchase price would be reduced. Having zero negotiating leverage at this juncture, Greeni accepted Valero’s modified terms, as dictated to it. In the litigation that ultimately ensued, Greeni claimed that Valero had no right to impose the contract modification, which essentially gave Valero legal remedies for Greeni’s miscues under the original contract beyond what the CISG would provide. Greeni claimed that, under Article 47 of the CISG, its failure to obtain the prior approval of the Bear G and to deliver the product 2-3 days earlier did not constitute a “fundamental breach” of the original contract justifying such remedies. Indeed, the federal district court found that Valero’s refusal to approve the Bear G was unreasonable in holding for Greeni. However, the Court of Appeals held that, even if Valero’s modified terms exceeded its remedies under CISG, the contract modification was enforceable under Article 29 of the CISG. Under Article 29, “a contract may be modified or terminated by the mere agreement of the parties.” Although Valero’s negotiating tactics were brutal, there is no dispute that Greeni acquiesced in Valero’s modified terms, and therefore the contract modification was binding under the CISG. The moral of the story: Greeni would have been better advised to reject Valero’s modified terms. Absent a fundamental breach of a contract governed by CISG, neither party has the right to cancel the contract (unless the contract expressly states otherwise). —Charles V. McPhillips