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Chapter 4
Formation of the Contract
In this chapter, you will learn the following key points:
Article 14-24 of CISG: formation of the contract
Brief introduction to international contractual documents
Cases analysis
A sales contract or sales confirmation contains some general terms and conditions as well as the specific terms that vary with the commodity.
Article 14 to 24 of CISG (United Nations Convention on Contracts for The International Sale of Goods) can help us to understand further the requirements for construction of a contract.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 14
(1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offerer to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 14
(2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 15
(1) An offer becomes effective when it reaches the offeree.
(2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 16
(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.
(2) However, an offer cannot be revoked:
(a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or
(b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 17
An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror.
Article 18
(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 18
(2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 18
(3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 19
(1) 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.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 19
(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 19
(3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 20
(1) A period of time for acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter or, if no such date is shown, from the date shown on the envelope. A period of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous communication, begins to run from the moment that the offer reaches the offeree.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 20
(2) Official holidays or non-business days occurring during the period for acceptance are included in calculating the period. However, if a notice of acceptance cannot be delivered at the address of the offeror on the last day of the period because that day falls on an official holiday or a non-business day at the place of business of the offeror, the period is extended until the first business day which follows.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 21
(1) A late acceptance is nevertheless effective as an acceptance if without delay the offeror orally so informs the offeree or dispatches a notice to that effect.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 21
(2) If a letter or other writing containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without delay, the offeror orally informs the offeree that he considers his offer as having lapsed or dispatches a notice to that effect.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 22
An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.
Article 23
A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention.
4.1 CISG Part Ⅱ-Formation of the Contract
Article 24
For the purposes of this Part of the Convention, an offer, declaration of acceptance or any other indication of intention “reaches” the addressee when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address, to his habitual residence.
4.2 A Brief Introduction to International Contractual Documents
Contract, Confirmation, Agreement and Memorandum can be used.
a confirmation = a simplified form of the contract, only contains some main terms such as description of commodity, quality, quantity, packaging, price, delivery time, shipment, insurance, payment, etc.
For Contents of Sales Contract, please click here
Case 1
Company H had a number of wool for sale. On April 2nd, its Sales Department issued an offer to a city's No. 1 Textile Mill in the form of letters, including major provisions such as the wool’s quantity, quality, price and the alike. In addition, it designated that any dispute will be submitted to an Arbitration Commission. In particular, it indicated that Company H wished to receive a reply within 15 days. However, due to negligence, the letter did not specify the commencement date of the offer, and the letter was not signed off with the date either. On April 4th, the letter was sent out, while the Textile Mill received it on April 17th. It happened that they badly needed a batch of wool, so the next day, a telegram was sent back to Company H requesting them to deliver the goods ASAP. The telegram reached Company H on April 19th. But unfortunately, Company H , having not received the reply from the textile mill, sold the batch of wool to another mill on April 18th. No. 1 Textile Mill urged the delivery several times, yet in vain. So they submitted a request to an Arbitration Commission for a loss compensation from Company H. Please analyse this case based on CISG.
Analysis of case 1
The commencement date of the offer should be the date on which the offer reached the receiver. Since the letter does not specify the date of commencement, the postmark date—April 4th—hence became the commencement date. So, April 19th is the valid period for the issuing date. All in all, the offer is valid. If the No. 1 Textile Mill submitted an arbitration, company H must compensate for their losses.
Case 2
One of our foreign contractors asked for an offer about a batch of steel from a German supplier on May 3rd in the form of telex. We have stated in the telex that the request is for the purpose of calculating the price of a building and determining whether to participate in the bid, and we must send the book of tender to the tenderee on May 15th, and the bid opening date is May 31st. On May 5th, the German supplier sent us an offer. We have calculated the price and submitted a proposal back on May 15th. On May 20th, the German supplier sent a telex notice to revoke their May 5th offer, claiming that it was due to steel price increase. We immediately reply that we do not agree to withdraw the offer. And hence dispute arose. We won the bid on its opening date, May 31st. Then the telex informed the German supplier that we accepted the offer of May 5th, but the German side insisted that the offer was revoked on May 20th, for the contract was not landed. Q: Is the contract tenable Why
Analysis of Case 2
The contract was tenable and the offer could not be revoked. Because the offeree has acted in accordance with the trust of the offer, that is, the calculation of the price, and the relevant work of the bid. The offeree is equivalent to being accepted, so the revocation by the German supplier is invalid, and the contract was landed.
Case 3
We made a telex offer to the British counterpart at 10 o'clock in Monday morning, with the original price at 2000 per unit CIF London. Due to the operator’s error, the price was mis-reported as US$ 2000 per unit CIF London. If we found out the mistake at 2 o'clock that afternoon, how can we tackle the problem If the mistake was found at 9 o'clock the next morning with the clients having not received our offer, how to cope with it Please analyse this case based on CISG. (Note: The transfer of the offer takes 10 hours.)
Analysis of Case 3
(1) We could withdraw the offer, provided the notice of the withdrawal reached the offeree before or at the same time with the arrival of the offer.
(2) We could withdraw the offer, provided that the offer is revocable and the notice of the withdrawal reached the offeree before or at the same time with the arrival of the offer. (However, in either case, the offer cannot be revoked.)
Case 4
One of our company made a telex offer on May 20th, with a stipulation saying "replied by May 25th". A foreign customer replied to us on May 23rd, requesting to change the sight credit into a L/C at 30 days sight. Our company was discussing about this issue while the next day, we’ve received another telex, expressing unconditional acceptance of our May 20th offer.
Q: Is the deal landed
Analysis of Case 4
The deal is not tenable. The request to amend the L/C is a substantive modification, and hence it is a counter-offer, which nullifies the original offer. So even though the counterpart sent the telex saying they would accept the original offer, the deal could not be closed.
Case 5
One of our companies offered a UK Company A. Company A accepted this offer within the validity period, while at the same time pointed out that "Where there is a dispute, the two sides should be amicably negotiated settlement. And if the negotiation cannot be resolved, the dispute should be submitted to China’s International Economic and Trade Arbitration Commission.” On the third day, we received a letter of credit from the bank designated by Company A. Being informed that the price of the goods in international market has risen substantially, our company returned the letter of credit that very day. But Company A insisted that the acceptance is valid while the contract established. Disagreement between the two sides occurred, and it then was submitted for arbitration.
Q: Provided you were the arbitrator, in light of CISG, what decision would you make
Analysis of Case 5
We should fulfill the contract. The request by the counterpart does not belong to substantial change, just some supplements, so we should accept the original offer. What’s more, the counterpart had issued an L/C, indicating that they had acted according to the offer, so we should fulfill the contract.
Case 6
Our company made an inquiry to a foreign company concerning the sale of certain products. Soon we received an offer, with the validity by August 20th. We telexed them on August 22th to express our acceptance, yet, receiving no reply thereafter. Because of the changes in commodity market with increasing prices, on September 24th, the other party suddenly called to request that we should effect the delivery by September 26th, or else we would be held responsible for the breach of the contract. Q: Should we deliver the goods Why or why not
Analysis of Case 6
We should not effect the delivery. Because we had made a late acceptance, and after receiving late acceptance, the other party had not made any reply, indicating that the late acceptance is invalid. So we do not need to deliver the goods.
Case 7
Our company negotiated with a foreign company, we had agreed upon the main trading conditions of the contract, but we indicated in the telex that the transaction would come into force only after the signing of the confirmation. Thereafter the other party sent us a draft for our confirmation. But the wording of some relevant provisions still need to be studied, so we did not give them a timely response. Shortly after, the market price of the goods dropped, and the counterpart urged us to open a letter of credit, while we refused on the basis of the invalid contract. Q: Is our refusal reasonable Why
Analysis of Case 7
Our telex indicates that the transaction entered into force when the confirmation was signed, so the contract was not established for the confirmation not having been signed. So our refusal is reasonable.
Thank you.

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