Official Comments
 Article #  

 
4.3
(Relevant circumstances)

In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including
(a) preliminary negotiations between the parties;
(b) practices which the parties have established between themselves;
(c) the conduct of the parties subsequent to the conclusion of the contract;
(d) the nature and purpose of the contract;
(e) the meaning commonly given to terms and expressions in the trade concerned;
(f) usages.


 
Official Comment
 1. Circumstances relevant in the interpretation process

This Article indicates circumstances which have to be taken into consideration when applying both the “subjective” test and the “reasonableness” test in Articles 4.1 and 4.2. The list mentions only those circumstances which are the most important and is in no way intended to be exhaustive.

2. “Particular” and “general” circumstances compared

Of the circumstances listed in this Article some relate to the particular relationship which exists between the parties concerned, while others are of a more general character. Although in principle all the circumstances listed may be relevant in a given case, the first three are likely to have greater weight in the application of the “subjective” test.

Illustrations

1. A contract for the writing of a book between A and B, a publisher, indicates that the book should consist of “about 300 pages”. During their negotiations B had assured A that an approximate indication of the number of pages was necessary for administrative reasons and that A was not bound to stick precisely to that number of pages, but could exceed it, substantially if need
be. A submits a manuscript of 500 pages. In interpreting the meaning of “about 300 pages” due consideration should be given to these preliminary negotiations (see Article 4.3(a)).

2. A, a Canadian manufacturer, and B, a United States retailer, conclude a number of contracts for the delivery of optical lenses in which the price is always expressed in Canadian dollars. A makes B a new offer indicating the price in “dollars” without further specification, but intending to refer again to Canadian dollars. In the absence of any indication to the contrary, A’s intention will prevail (see Article 4.3(b)).

The remaining circumstances listed in this Article, i.e. the nature and purpose of the contract, the meaning commonly given to terms and expressions in the trade concerned and usages, are important primarily, although not exclusively, in the application of the “reasonableness” test.

The criteria in sub-paragraphs (e) and (f) may at first sight appear to overlap. There is however a difference between them: while the “usages” apply only if they meet the requirements laid down in Article 1.9, the “meaning commonly given [...] in the trade concerned” can be relevant even if it is peculiar to a trade sector to which only one, or even neither, party belongs, provided that the expression or term concerned is one which is typical in that trade sector.

Illustrations

3. A and B conclude a contract for the sale of a cargo of oil at USD 80 per barrel. The parties subsequently disagree on the size of the barrel to which they had referred, A having intended a barrel of 42 standard gallons and B one of 36 Imperial gallons. In the absence of any indications to the contrary, A’s understanding prevails, since in the international oil trade it is a usage to measure barrels in standard gallons (see Article 4.3(f)).

4. A, a shipowner, concludes a charterparty agreement with B for the carriage of grain containing the standard term “whether in berth or not” with respect to the commencement of the lay-time of the ship after its reaching the port of destination. When it subsequently emerges that the parties attached different meanings to the term, preference should, in the absence of any indication to the contrary, be given to the meaning commonly attached to it in the shipping trade since the term is typical in the shipping trade (see Article 4.3(e)).

3. Practices established between parties and conduct subsequent to the conclusion of the contract relevant particularly in interpretation of long-term contracts

Conduct subsequent to the conclusion of the contract can assist in determining what the parties intended their obligations to be. This may be the case particularly in the context of long-term contracts which involve complex performance and are “evolutionary” in nature, i.e. may require adaptations in the course of performance. Such contracts may involve repeated performance by one party with the opportunity for the other to assert that such performance does not conform to the contract.
As a rule the subsequent conduct of the parties can only be an interpretative tool, i.e. be used to explain or amplify, but not to contradict, the terms of the contract as originally agreed between the parties.

Illustrations

5. Supplier A enters into a five-year contract with Shopping Mall B to supply B’s need for “salt” to clear ice in its parking lot and on its sidewalks. For the first two winters, A provides an ice-melting substance which is not a “salt,” with no objection being raised by B. At the start of the next winter, B objects that the substance is not a “salt” as stated in the contract. The fact that for two winters both A and B performed as though the supplied substance satisfied the contract permits the inference that the parties intended the contract’s reference to “salt” to include such an ice-melting substance.

6. Contractor A agrees to provide Client B with concrete slabs of a particular thickness in a building at a unit price of X without specifying whether that price applies to a square metre of those slabs or cubic metres of concrete. The parties perform over several months without any objection as though the unit price applied to square metres of slabs. A dispute subsequently arises regarding the proper unit of measure. The fact that for several months A and B had performed as though the proper unit of measure was square metres of slabs permits the inference that the parties intended that to be the proper unit of measure.

To avoid any uncertainty as to the effects of subsequent conduct on the content of the contract, the parties may wish to adopt particular mechanisms for possible variations and adjustments of the contract in the course of performance. They may, for instance, provide for the issuance of “variation orders” by one party for acceptance by the other party (e.g. in construction contracts the “Employer’s Representative” and the “Contractor’s Representative”, respectively), or establish special bodies composed of representatives of both parties or of independent experts (so-called “contract management committees”, “auditing bodies” or the like), with the task of monitoring both parties’ performance and possibly also of suggesting adjustments to the contract so as to bring it in line with developments. Obviously, the more precisely the parties regulate the procedure for adjustments to the contract, the less relevant any informal conduct of the parties would be to the interpretation of the contract.

Illustrations

7. A construction contract between Employer A and Contractor B provides that A’s “Representative” has the authority to give instructions regarding additions, omissions or other changes in work to be performed by B. So long as those additions, omissions or other changes fall within the overall scope of work under the contract, B will be bound to perform them and they will have the effect of changing the relevant work provided for in the original contract.

8. Contractor A enters into a Design, Build and Operate (“DBO”) contract with Company B to design and build a factory and operate it for twenty years. The contract provides for the parties to appoint jointly an independent and impartial Auditing Body whose purpose is to audit and monitor the compliance of each of the parties with the operation management requirements set out in the contract. The contract may also provide that, if the Auditing Body determines that a party has failed to comply, that party must take appropriate corrective action. Therefore, if in a given case the Auditing Body determines that A has not complied with its obligations under the contract, A is bound to take the appropriate action.

4. “Merger” and “No oral modification” clauses

Parties to international commercial transactions in general, and to complex long-term contracts in particular, frequently include a provision indicating that the contract document completely embodies the terms on which they have agreed (so-called “merger” or “entire agreement” clauses) and that any modification to the contract or specific terms of it must be made in writing (so-called “no oral modification clauses”). For the effect of the former type of clauses, in particular whether and to what extent they exclude the relevance of preliminary negotiations between the parties, albeit only for the purpose of the interpretation of the contract, see Article 2.1.17. As to the latter type of clauses, see Article 2.1.18, and the limitation of the rule therein contained by virtue of the principle of prohibition of inconsistent behaviour laid down in Article 1.8.

Illustration

9. Manufacturer A enters into an agreement with Distributor B for the distribution of its products in country X. The agreement expressly states that the distributorship is non-exclusive and, in fact, in country X A’s products are distributed also by Distributor C. The agreement between A and B also contains a “no-oral modification” clause according to which any modification of its terms has to be in writing and approved by A’s parent company. Subsequently C ceases its activity and B acts, to A’s knowledge, as though it has become the exclusive distributor of A’s products in country X by, among others things, holding itself out as such to C’s clients, without any reaction on the part of A. When A replaces C with a new distributor, B may not object that by their conduct A and B have modified their original agreement, turning it into an exclusive agreement.