The Knock-out Rule as a Solution to the Battle of Forms under the CISG

The knock-out rule as uniform solution to the battle of forms problem under the CISG? Application of the knock-out rule to battles of the forms under the CISG.

An analysis of the theoretical justification(s) in the CISG-AC Opinion No. 13

Table of Contents

Introduction

I. Battlefield

II. Last-shot rule

A. Incorporation of the ‘last shot’

B. Objections against the rule

III. Knock-out rule

A. ‘Knock-out’ of conflicting terms

B. Proposed theoretical justifications

C. Objections against the rule

IV. Need for a persuasive theoretical justification

V. Analysis of the theoretical justifications in Opinion No. 13

A. Overview

B. No (clear) theoretical justification

1. Arguments in favour of the rule (Comment B.10.6)

2. Powdered milk case (Comment B.10.7)

3. Party autonomy (Comment B.10.9)

C. Persuasiveness of the theoretical justification of (implied) derogation from Article 19

Conclusion

Introduction

The problem of sales transactions which are consummated on the basis of a routine exchange of conflicting standard terms[1], commonly called the ‘battle of the forms’, is one of the most controversial topics under the United Nations Convention on Contracts for the International Sale of Goods (‘CISG’).[2]

The CISG itself does not expressly prescribe how to resolve the battle of the forms. A literal approach to Article 19 CISG which implements the traditional mirror-image principle leads to the application of the so-called ‘last-shot rule’.[3] However, the rule faces wide criticism for not fitting with business reality and producing unjust outcomes.[4] Therefore, some academics and national courts favour the so-called ‘knock-out rule’, using various interpretative theories to reach the desired result.[5] This has led to a non-uniform application of the CISG and causes legal uncertainty.[6] But the CISG can only serve its purpose as a framework for international trade when it is applied consistently (see Article 7(1) CISG). Therefore, all courts should apply the same (i.e. uniform) solution.[7]

According to the CISG Advisory Council (‘CISG-AC’), this uniform solution shall be the knock-out rule as set out in Rule 10 of its ‘Opinion No. 13 on the incorporation of standard terms’ (‘Opinion No. 13’ or ‘Opinion’).[8] Although the CISG-AC is a private initiative by scholars with the aim to promote a uniform interpretation of the Convention and the opinions it publishes are not binding, they have in some cases nevertheless been used as authoritative interpretations of the CISG by both scholars and courts.[9] However, given the longstanding debate about the solution to the battle[10], the homeward trend which courts sometimes follow[11] and the lack of an overarching court or authority[12], the persuasive power of the Opinion seems crucial for the envisaged harmonisation process.

Arguing that the wording of Article 19 and the therefrom resulting last-shot rule are the natural starting point when looking for a solution to the battle of the forms, this paper will investigate whether the Opinion No. 13 provides a persuasive, and not just defendable, theoretical justification for the application of the knock-out rule under the CISG. It will discuss that (ostensible) scholarly popularity, desired results or assumed party interests alone are insufficient for this purpose. The fundamental question is if and how the rule can be construed in a dogmatically convincing way within the CISG.[Does not dealwith question of preferable solution]. The paper will contend that the Opinion fails to provide an unambiguous dogmatic backing and that, moreover, the persuasiveness of the presumably underlying theory of (implied) derogation from Article 19 through Article 6 seems to base on questionable assumptions. Therefore, on the existing basis of the CISG, the application of the knock-out rule as uniform solution to the battle seems difficult to dogmatically justify and the Opinion No. 13 might hardly achieve its purpose.

Section I of this paper illustrates the battle of the forms problem which is addressed in Rule 10 of the Opinion. The following Sections II and III discuss the last-shot and knock-out rule and show why and how advocates of the knock-out rule try to sidestep Article 19. Section  REF _Ref489515980 h IV. IV argues that the applicability of the knock-out rule can only be justified if the Opinion provides a persuasive theoretical justification, the discussion of which is the subject of Section V.

For the reader’s convenience, the Opinion is attached as Appendix 1. Legal provisions mentioned in the paper are reproduced in Appendix 2.

I. Battlefield

It is common for parties to a commercial sales transaction to attempt to use their own standard terms when negotiating a contract.[13] This is usually motivated by efficiency considerations, the parties’ intent to streamline contract negotiations and the aim to secure a favourable position in case of a dispute.[14] As an outgrowth of this use of standard terms, battles of the forms may arise. They occur in the contract formation stage when both parties to a transaction seek to incorporate their respective standard terms into the contract by exchanging non-matching sets of standard terms, and then go ahead with the performance without actually having agreed which party’s standard terms govern the contract.[15] Since the parties rarely have the same interests in mind when drafting their standard terms, the terms will hardly ever match and almost unavoidably lead to discrepancies between offer and (purported) acceptance.[16] In many cases this discrepancy already occurs between the respective rejection clauses with which each party refers to its own standard terms qualifying them as indispensable part of their assent and expressly denying effect to deviating terms of the counterparty.[17]

However, the unresolved conflicts in the parties’ standard terms often remain dormant.[18] It is only when a dispute breaks out and each party wants to invoke its own standard terms that the question arises if the parties have in fact formed a contract despite the exchange of conflicting offers and acceptances and, if so, what the content of this contract is.[19] The existence of the contract is usually difficult to dispute once both parties have performed or showed any other type of conduct that indicates the existence of a contract so that the main question is what actually the contract’s terms are.[20]

How to solve the battle of the forms problem is not expressly addressed in the CISG.[21] It is one of the most disputed issues and there is no uniform case law among the member states of the Convention.[22] In essence, the following two main solutions (which are also the two main solutions worldwide[23]) are proposed and practiced, both leading to different results:[24]

• The last-shot rule which relies on a strict enforcement of the CISG’s rules of offer and acceptance stipulated in Article 19 (mirror-image rule) and results in a contract on the standard terms last referred to.[25]
• The knock-out rule which is based on an interpretative approach to the CISG leading to a contract on the individually negotiated terms whilst the conflicting (or positively formulated not common) standard terms are left out and replaced by the provisions of the governing law.[26]

This disagreement over the solution to the battle of the forms runs not only counter to Article 7(1) requiring a uniform application of the CISG, but also impairs legal certainty.[27] Against this background, the CISG-AC proclaimed in Rule 10 of its Opinion No. 13 the application of the knock-out rule as uniform solution[28] although the last-shot rule ‘seems to be in accordance with a strictly literal interpretation of Article 19’[29]. The CISG-AC’s position might surprise because legal positions should in the first place follow from the text of the convention if it wants to serve as a clear and reliable framework for international sales transactions. Moreover, remaining with the wording of a provision as long as possible has the advantage of ensuring uniformity.[30]

The following Section discusses the last-shot and knock-out rule in a simplified form and shows why the latter rule finds considerable support. The subsequent Sections XX will then be dedicated to question whether the Opinion can dogmatically justify the application of the knock-out rule.

II. Last-shot rule

A. Incorporation of the ‘last shot’

Article 19(1) CISG reflects the traditional and generally accepted ‘mirror-image principle’ which prescribes that a binding contract is only formed if the offer is met by an exactly matching acceptance.[31] Exceptionally, a non-exactly matching acceptance can result in the conclusion of a contract provided that the discrepancies in the reply are non-material and the offeror does not promptly object to their inclusion in the contract (Article 19(2)). Yet, the scope of this exception is considerably limited by Article 19(3) which sets a very broad presumption for terms considered to be material thereby turning most modifications into material ones and subjecting them to the regime of Article 19(1).[32]

By strictly applying Article 19 to a battle of the forms, each reply to an offer in which the replying party refers to its own standard terms does not constitute an acceptance, but a counteroffer. Whilst each case must be examined in the context of the particular transaction, the inclusion of standard terms in the reply to an offer is frequently, by itself, a material alteration in the sense of Article 19(3), for instance because the terms concern limitations of liability or jurisdiction clauses.[33] Hence, there is usually no exactly matching acceptance until one party starts performance of the perceived contract (for instance by shipping goods, taking delivery or making payments) or begins to engage in any other form of assenting conduct, thereby expressing implied consent (Article 18(1)).[34] This leads thus to the incorporation of the ‘last-shot’, i.e. the standard terms of the party who last referred to its own standard terms without the other party subsequently objecting.[35] The final offer forms the basis for both the resulting contract and the content of the contract.[36]

This approach finds support in both literature[37] and case law[38], particularly in the case law of US courts which apply the last-shot solution[39]. The main argument in favour of this rule is its apparent/manifest compatibility with the wording of Article 19, which is not only acknowledged in Opinion No. 13, but also by other opponents.[40]

B. Objections against the rule

Nevertheless, the last-shot rule faces wide criticism both under the CISG and worldwide.[41] Various legal systems, such as for instance the US[42], French[43] and German law[44] as well as many international contract law instruments[45] have thus softened the mirror-image rule when it comes to battles of the forms. The critique namely relates to the rules’ outcomes which Opinion No. 13 dismisses as ‘random, casuistic, unfair and very difficult to foresee for the parties’.[46] This critique refers to the fact that the last-shot rule is a ‘winner-takes-it-all approach’ leading to the incorporation of the standard terms of the party who has managed to fire the last-shot.[47] Moreover, it may have the effect that each party tries to have the last-shot and thereby increases the number of forms exchanged.[48] In doing so, the parties cause legal uncertainty because it can be somewhat random and thus difficult to foresee which party will make the last offer – although in practice it is often the seller’s order confirmation.[49]

On the other hand, the last-shot rule has also been subject to criticism for being too mechanistic thereby ignoring the parties’ intent and modern realities of commerce in which businesses tend to disregard the classic offer-acceptance model of contract law.[50] The critique bases on the view that standard terms are usually not subject to negotiations, but only referenced in the parties’ correspondence and often not even read.[51] Furthermore, once the parties have reached an agreement on the openly negotiated terms, they may assume that they have a deal and start performance of the perceived contract without having regard to the conflicting standard terms.[52] Accordingly, opponents of the rule consider it as problematic to infer acceptance of a counteroffer from a party’s performance.[53] This is particularly highlighted for the case in which both parties apply rejections clauses.[54]

III. Knock-out rule

A. ‘Knock-out’ of conflicting terms

In essence, the knock-out doctrine is characterised by a contract which contains the elements that are subject to the parties’ agreement (covering at least the essentialia negotii) whilst inconsistent terms are left out, literally knocking each other out.[55] The underlying idea is that when the parties perceive the contract to be concluded and perform it, ‘this in itself should be recognized as an enforceable basis for contract formation under the law – notwithstanding any unresolved issues’.[56] The knock-out doctrine attempts thus overcome the criticised mismatch between the parties’ presumptions and expectation in everyday reality of businesses which are associated with the last-shot rule.[57]

In the variant of the so-called ‘rest validity theory’ which is proclaimed in Rule 10 of the Opinion and widely supported by advocates of the knock-our rule[58], the contract consists of the negotiated terms and the standard terms which are in common (and on which the parties are deemed to have agreed on).[59] Only the conflicting terms cancel each other out and are replaced by the provisions of the applicable law.[60] The knock-out rule produces thus principally a more balanced outcome than the all-or-nothing approach of the last-shot doctrine.[61]

In contrast to the last-shot rule, the knock-out rule separates the contract formation and the content of the contract.[62] It is therefore necessary to first establish the existence of a contract through manifestation of the parties’ agreement (consent) and then to determine the content of this contract from the extent of the parties’ agreement.[63] The knock-out approach does exceptionally not apply if one party clearly indicates that it objects to the conclusion of the contract on the above described basis.[64]

This knock-out solution finds wide support in literature.[65] Moreover, there is also case law employing it, most prominently the case law of German courts since the German landmark decision Powdered milk in 2002.[66] Whether the knock-out solution is indeed the favoured approach by the majority of scholars and case law as it is assumed in Opinion No. 13[67] seems questionable. The conclusion appears to base mainly on German authorities.[68] Moreover, whilst German case law indeed uses the knock-out approach, US law – which is the other jurisdiction with a greater number of cases – does not.[69]

B. Proposed theoretical justifications

The knock-out rule circumvents the mirror-image principle set out in Article 19 and this circumvention is not provided by an express provision in the CISG (contrary to, for example Article 2.1.22 UPICC or Article 2:209(1) PECL).[70] Hence, scholars have undertaken various ‘constructive efforts’ in order to dogmatically justify the application of the rule.[71] Generally spoken, the constructions have in common that they assume that the ‘parties’ [actual or deemed] interests in forming a contract is usually stronger than their interest in enforcing their own standard terms at the expense of the transaction going though’[72].[73] Without doing justice to all constructions and nuances of the different scholars[74], the following basic positions can be distinguished:

A first group of scholars relies on the theory that the battle of the forms is an internal gap within the meaning of Article 7(2) which has to be solved by application of the general principles on which the Convention is based.[75] Following this approach, some consider the principle of good faith (Article 7(1)) as the relevant gap-filling principle because it allows courts to decide in the interests of both parties[76] whilst others advocate that the gap can be filled with Article 2.1.22 UPICC or Article 2:209(1) PECL[77]. Yet, these gap-based approaches are generally rejected because the battle of the forms is not considered to be an unsettled issue in the sense of Article 7(2) given the problem’s extensive discussions during the drafting process of the CISG.[78] In addition, the scope of application of the good faith principle is highly disputed.[79] Even if one admits the principle to apply to the contractual relationship between the parties and not only as an interpretative principle, it is difficult to see how this unwritten and inherently vague principle should achieve a uniform application.[80] Furthermore, supplementation of the CISG with the UPICC or PECL is widely unaccepted.[81]

A second, and as it seems far greater group, relies on Article 6 as foundation for the knock-out approach.[82] The principle of party autonomy manifested in Article 6 not only allows the parties to exclude the applicability of the CISG or to derogate from its provisions, but more generally establishes that the common intent of the parties prevails over the CISG which only applies as background law.[83] Reliant on Article 6, it is thus often held that if the parties have somehow expressed their common intention not to be bound by the default rule of Article 19 (typically by performing the contract despite conflicting standard terms), there is an (implied) derogation from Article 19.[84] It seems that scholars construe this derogation in basically two different ways, without, however, always clearly differentiating between the two. [85] Following Schroeter, who provides compared to other commentators a rather comprehensive argumentation, the following two variants will commonly be referred to as construction of ‘(implied) derogation’.[86]

• In the first variant, the parties’ performance is considered to result itself in a subsequent implied agreement about a derogation from Article 19 through Article 6.[87] This agreement allows the conclusion of the contract without regard to the traditional mechanism offer and acceptance. Opinion No. 16.
• In the second variant, the subsequent performance is taken into account when interpreting the parties’ initial declarations of offer and acceptance to determine their consent about the contract being formed.[88] Such interpretation of declarations – which is usually carried out in accordance with the objective standard set out in Article 8(2) and (3)[89] – requires that all relevant circumstances are taken into account, including subsequent conduct (Article 8(3)). Accordingly, subsequent performance is typically regarded as indication that the parties did not consider ‘the inclusion of their respective standard terms to be a “conditio sine qua non” for the contract’s conclusion’[90] and the parties’ consent about the contract being formed is thus established.

Two points become obvious from the above: First, there is no general agreement on the theoretical backing for the knock-out rule. Second, even the frequently-referred construction of ‘(implied) derogation from Article 19 through Article 6’ seems not clear-cut. We will come back to these points in Section V.B.3.

C. Objections against the rule

Despite its advantages, which in the words of the Opinion are the ‘conformity with the intention of typical parties in international commercial relations’, the ‘acceptable results’ it produces and the concordance with the ‘approach adopted in the UPICC’, the knock-out rule also faces criticism.[91] The main point of critique concerns the (artificial) deviation from the apparent solution under Article 19 CISG[92] and the incompatibility with the drafting history of Article 19 which shows that the insertion of a specific provision dedicated to the battle of the forms was rejected.[93] Furthermore, it is criticised that the application of the knock-out approach in addition to the already existing (and at least as default-solution still applying) last-shot rule conflicts with the Convention’s aim of uniform interpretation (Article 7(1)) and can cause legal uncertainty.[94] The latter may be further increased by the fact that the determination of the contractual content usually leaves wide room for interpretation because it is rarely entirely clear which terms are in common (or conflicting).[95] Moreover, the replacement of the knocked-out terms with the applicable law does not always balance the parties’ interests, especially if their conflicting clauses both deviate in the same direction away from the rules in the applicable law.[96]

In conclusion, it has been shown that the last-shot rule is in accordance with Article 19, but is widely criticised for not corresponding with ‘what actually happens’ and producing unjust results. The knock-out rule which aims at overcoming these weaknesses by sidestepping Article 19, does not follow naturally/evidently from the CISG and requires theoretical constructions. Even without having critically discussed the purported benefits and drawbacks of the two rules, it has become obvious that neither rule is perfect.[97]

The next Section argues why the last shot-rule is (despite is unwelcome effects) the more evident approach to the battle and what this means for the required justifications of the knock-out rule.

IV. Need for a persuasive theoretical justification

When looking at the CISG in search for a solution to the battle of the forms problem, Article 19 is the natural starting point.[98] First, applying the classical pattern of offer and acceptance has traditionally been viewed as a solution to the battle of the forms and is still the doctrine followed by the majority of jurisdictions worldwide, such as for instance English law[99].[100]

Second, the CISG does not contain a specific rule addressing the battle of the forms problem as this is for instance the case in US law with § 2-207 UCC or on international level with Articles 2.1.22 UPICC or 2:209(1) PECL. The insertion of a dedicated provision was debated during the drafting process of the CISG, but in the end no such provision was inserted.[101] A first proposal that material deviations in pre-printed forms shall not constitute a rejection of the offer was dismissed because material alterations should always be treated in the same way irrespective of whether they are individually negotiated or in pre-printed form.[102] A later proposal by the Belgian delegation to include a fourth paragraph in Article 19, providing that conflicting standard terms do not prevent the valid conclusion of the contract (but will not form part of the contract), was also rejected.[103] Opposing delegates argued that it conflicted with the basic contract law, that the issue ‘was too complicated for the Committee to settle’ and that the solution to the battle of the forms was already to be found in Article 19 [put here exact wording of document! check if principles or 19][104]. Scholars do not entirely agree if the drafting history has to be read in the sense that Article 19 is the solution to the battle of the forms or if the solution was rather left open for courts to decide.[105] However, the only vote which could be read in the sense as to deliberately leave room for the knock-out approach seems the argument of the premature proposal; the other votes indicate that Article 19 shall apply. In any case, neither of the votes shows that Article 19 (and the last-shot rule) shall not apply.[106]

Third, the interpretation of the CISG has to start with a literal interpretation in accordance with the ordinary meaning (normal understanding), followed by the other elements of context, purpose and drafting history. [107] The general principles of uniformity, internationalism and good faith set out in Article 7(1) provide guidance in doing so. [108] This priority of literal interpretation, emphasises that (clearly) written provisions such as Article 19 come before other interpretive elements and in particular before interpretative constructions. This must also apply if the battle is not expressly addressed in Article 19, because it is technically seen a problem which arises in the contract formation stage. There are thus good reasons to consider Article 19 and the last-shot rule as the natural and evident solution under the CISG.

Hence, the above sets high hurdles for justifying the reinterpretation of the CISG in the sense that the knock-out rule is the sole (and uniform) solution. After all, the Convention has the purpose of serving as a reliable and predictable framework for commercial transactions and should thus provide legal certainty.[109] This means that the knock-out rule must follow from the law[110] and be based on a dogmatic basis which convincingly justifies the disregard of Article 19. Only if such theoretical justification is given, other justifications such as the well-known argument that the rule conforms better with the parties’ intent and produces fairer results should become decisive factors.

In the following it is analysed how Opinion No 13, calling for the application of the knock-out rule, masters this task.

V. Analysis of the theoretical justifications in Opinion No. 13

A. Overview

Rule 10 of the Opinion No. 13, which closely follows the wording of Article 2.1.22 UPICC, does not provide any explication or justification for the application of the knock-out rule. Therefore, in the following a closer look will be taken at the accompanying comments (‘Comments’), in particular B.10.6 (setting out why the rule is the favourable one), B.10.7 (quoting extracts from the German Powdered milk case) and B.10.9 (alluding to the principle of party autonomy and addressing the determination and incorporation of common standard terms).[111]

B. No (clear) theoretical justification

1. Arguments in favour of the rule (Comment B.10.6)

Comment B.10.6 sets out why the knock-out approach is the favourable one. The well-known arguments concern in essence (i) the rule’s popularity by scholars and in case law[112], (ii) conformity with the solution under the UPICC, (iii) respect of parties’ actual intent and (iv) fairer and more predictable outcomes. In the light of what has been argued in the precedent Section III.C, these arguments alone cannot justify the disregard of the last-shot rule. Namely the reference to the UPICC does not provide a dogmatic backing. The knock-out rule is the solution under the UPICC because its Article 2.1.22 expressly provides so. Furthermore, as already set out above in Section III.B, the dogmatic construction of gap-filling with the UPICC is not only rejected by most scholars, but would furthermore also conflict with what is set out in Comment B.10.9, indicating a party autonomy-based construction. [No usage in the sense of Article 9]

2. Powdered milk case (Comment B.10.7)

The German Powdered milk case from 2002 is often cited as the leading case on the knock-out rule.[113] The decision is the first reported case which addresses the battle of the forms problem in detail and the previously inconsistent case law of German courts has settled in favour of the knock-out rule since then.[114] However, its effect on the (anyway small number of[115]) cases from other jurisdictions seems modest. There is a Dutch decision which applies the knock-out rule, but as far as can be understood from the untranslated decision it does so not directly based on the Powdered milk case, but on the Opinion No. 13.[116] US case law continues to apply the last shot rule and the Roser Technologies case, the only case which has commented on German case law including the Powdered milk case, held that ‘German Courts have interpreted Article 19 as embodying a mirror image rule’.[117]

The Powdered milk case concerned a dispute which arose with regard to the extent of seller’s (defendant) liability for the delivery of defective milk powder to the buyer (claimant).[118] The standard terms which the parties had exchanged conflicted in the sense that the buyer’s terms contained a favourable limitation clause for the seller whereas the seller’s terms contained a rejection clause of buyer’s terms. [119] In a first step, the Federal Supreme Court (FSC) briefly addressed the existence of the contract which it affirmed. It held (as cited in Comment B.10.7) that there was no ‘failure of the contract within the meaning of Art. 19(1) and (3) CISG because of the lack of a consensus (dissent)’ and that the parties, by performing the contract, ‘indicated that they did not consider the lack of an agreement between the mutual conditions of contract as essential within the meaning of Article 19 CISG’.[120] In a second step, the contract’s content was determined and the court found that the parties’ liability regimes were knocked out and replaced by the background law.[121] Interestingly, it was only at this stage of the reasoning that the court addressed the competing theories of the last-shot and knock-out rule.[122] It held (as again cited in Comment B.10.7) that ‘according to the (probably) prevailing opinion, partially diverging general terms and conditions become an integral part of a contract (only) insofar as they do not contradict each other; the statutory provisions apply to the rest (so-called “rest validity theory” [….]’. [123]

The first part of the decision dealing with the contract formation is very brief and does not explicitly refer to the knock-out doctrine.[124] Nevertheless, it is essential as it sets out the alternative contract formation theory the FSC employs.[125] Especially the use of the term ‘dissent’ indicates that the FSC’s reasoning seems strongly influenced by German law thinking which since a landmark decision in 1973[126] approaches the battle of the forms as a question of (partial) consent, respectively dissent. [127] Without going into details of the interpretative efforts German courts have made to § 150(2) (mirror-image rule) and § 154(1) (overt lack of agreement, dissent) of the German Civil Code[128], the contract formation theory can in essence be described as follows: dissent between the parties with regard to their standard terms does not prevent the conclusion of a contract if the parties clearly manifest, for instance through performance, that they recognise the existence of the contract irrespective of their conflicting standard terms. [129]

This alternative contract formation theory fits with Rule 10 of the Opinion. It does however not explain how this theory is dogmatically anchored within the CISG. When studying the court’s rather elliptical reasoning it seems that the FSC has in fact struggled to make its approach fit with the Convention.[130] This impression is reinforced by the fact that scholars read different dogmatic justifications into the case. By way of example, Perales Viscasillas assumes that the court considered the battle of the forms as a gap which was resolved in accordance with the principle of good faith[131]. Steensgaard in contrast argues that the court based its decision on the application of Article 19(2) because this provision allows the conclusion of contracts without fully mirrored assent, i.e. in case of dissent .[132] Such construction would be dogmatically wrong though because Article 19(2) always leads to the inclusion of all terms of the last offer and leaves no room for the rest validity theory.[133] Other scholars as for instance Wildner see the theoretical backing in the implied derogation from Article 19 through Article 6 CISG because the partial consensus approach respects the parties’ intention as the ‘masters of the contract’ and gives credit to the parties’ autonomy. [134]

As already discussed above in Section XXXX, this theoretical construction of implied derogation is a widespread one. And indeed, the three well-known German authorities the FSC is referencing in the context of the rest validity theory would support this construction, without, however, clearly distinguishing between the two variants of the construction [check for Schlechtriem].[135] In addition, an earlier decision of the District Court Kehl applied the knock-out rule based on the assumption that either ‘[the parties] waived the enforcement of their conflicting Terms of Business or that they derogated from the application of Article 19, taking advantage of their party autonomy under Art. 6 CISG’.[136] Nevertheless, a derivation of the theoretical justification merely from the study of cited sources – which are, moreover, referenced as justification for the rest-validity theory (contractual content) and in two cases also referenced with different paragraphs than the ones setting out the dogmatic backing[137] – is rather vague/sloppy/shaky and comes close to guess working. The same applies for the reliance on an ‘either-or’ justification in the decision of the district court Kehl which is not even referenced in the Powdered milk case. Unfortunately, the decision of the previous instance in the Powdered milk case[138]does not address the underlying qualification of its approach neither; nor does the case law postdating the case[139].

In conclusion, the Powdered milk case does not succinctly explain based on which legal basis the dissent-based contract formation theory and the related rest validity theory apply.[140] The underlying reasoning may (or may not) be an implied derogation from Article 19, be it via separate agreement or Article 8. This may illustrate the difficulty of a dogmatic sound justification for the knock-out rule within the given system of the CISG. Moreover, it has been shown that the FSC’s reasoning is strongly influenced by German law and is for instance not followed by US courts.

3. Party autonomy (Comment B.10.9)

Comment B.10.9 starts with a short description of the general principle of party autonomy manifested in Article 6.[141] Whilst Article 6 is often used as theoretical basis for the knock-out rule, one might have doubts if this is indeed the focus of Comment B.10.9. Namely the rest of the Comment, starting with ‘[a]ccordingly’ seems somewhat exclusively focussed on the common element of standard terms. It seems almost as if Comment B.10.9 only refers to the principle of party autonomy to justify the rest validity theory as opposed to the full knock-out theory (where also the common elements are knocked out)[142]. Yet, the rest validity theory and the question which terms are in common (and therefore incorporated in the contract under the assumption that this is the parties’ common interest[143]) concerns the determination of the contractual content, not its formation. The latter seems however not addressed by Comment B.10.9, but rather taken for granted. This would also explain why Comment B.10.9 does not address the negotiated terms neither when talking about the contractual content.

Although the analysis of the contract formation differs under the last-shot and the knock-out rule[144], the rules’ differences manifest more obviously in the contractual content. This is why the knock-out rule is sometimes only discussed in the context of the contractual content, as this was also the case in the Powdered milk case.[145] One could thus argue that the reference to Article 6 has to be understood more holistically, also covering the contract formation process. If one does so, Comment B.10.9 does nevertheless not clarify based on which variant of the theory of implied derogation the contract formation is based.

Hence, even where a broad reading is applied to Comment B.10.9, the reader remains in the dark as to whether the contract is concluded because the parties’ performance indicates an implied separate agreement to derogate from Article 19 (and is further coupled with the assumption that the parties at the same time waive the inclusion of their conflicting standard terms) or because the parties’ initial declarations of offer and acceptance are already interpreted in this sense. The difference seems however to matter. Whilst the first variant is established on [ties in with?] the subsequent acts of performance, the second is established on [ties in with?] the parties’ earlier declarations and uses subsequent performance only as a means of interpretation. If this understanding is correct, it would mean that the two different variants differ with regard to the moment of contract conclusion, i.e. after exchanged performances (first variant) or when the contractual agreement is reached (second variant). [146]. [INSERTOne solves problem of 19 re no contract, other not?] [On the other hand, it may also have an influence on the question whether both parties need to perform (this seems at least necessary for an implied later derogation as this is a separate agreement subject to Article 14-24 CISG[147]), or if performance by one party is sufficient. The latter could arguably be the case under Article 8 because unilateral performance may be enough for the performing party to demonstrate that it perceives the contract to be concluded and the other party may reasonably understand the performing party’s conduct in this way[148]). [Rethink if this is correct]

This lack of dogmatic clarity in Opinion No. 13, which may lead to different results in practice, is regrettable and detrimental to legal certainty. After all, Schroeter who is prominently cited thorough the Opinion[149] introduces its own theoretical construction by stating that the knock-out rule’s ‘desirable international acceptance […] will make it necessary to further clarify and explain its compatibility with the Convention’s rules on contract conclusion’[150]. In the light of the above analysis probably unsurprisingly, he repeats the same in his newest commentary postdating Opinion No. 13[151] and even having become a member of the CISG-AC in the meantime[152].

To sum up, the analysis has shown that the Opinion cannot provide an unambiguous theoretical justification for the knock-out rule. Whilst different factors indicate that the underlying theory could be the one of (implied) derogation from Article 19 through Article 6, the exact details of the construction are not discernible. This is regrettable as the different variants of the construct might produce different results.

The following Subsection XX goes nevertheless a step further and takes a closer look at the persuasiveness of the putative construction, in particular the assumptions it relies on.

C. Persuasiveness of the theoretical justification of (implied) derogation from Article 19

Even proponents of the knock-out rule have admitted that their constructions are somewhat ‘artificial’.[153] And indeed, the construction of (implied) derogation from Article 19 through Article 6 is on the one hand artificial because it does not follow from the Convention with the same self-evidence and naturalness as the last-shot rule (see Section XXX above). On the other hand, it may also seem artificial because it bases on assumptions as to what the actual or deemed intention of the parties are and not directly on Article 6 which is advanced as legal backing. Article 6 itself does not say anything about the solution to the battle or contract formation in general; it only functions as the ‘device’ to bring the assumptions regarding the parties’ common interest into the CISG. But this means that Article 6 could equally be used to derogate from the CISG based on any other assumption.

This leads us to the persuasiveness of the underlying assumptions themselves. First, one might generally question whether it is safe to assume that the parties both intend the knock-out solution, [i.e. a conclusion of the contract based on the essentialia negotii despite conflicting standard terms and a contractual content consisting of the common elements of the standard terms whilst the conflicting ones are knocked-out and replaced by the background law[154]?] Given that the CISG is an international convention bringing together business partners with different legal backgrounds it is not immediately apparent why the parties should have a common intent at all and why this common intent is necessarily the knock-out solution[155]. In fact, the majority of legal systems worldwide still applies the last-shot rule.[156] An average business person may thus understand the situation as a question of offer and acceptance, in particular if he/she is not familiar with the rather particular dissent-theory which has been developed under German law.[157] By way of example, not even US courts seem to consider the possibility that a contract could be formed through this theory as the already mentioned Roser Technologies case seems to indicate.[158] Besides, the arguments already put forward in favour of Article 19 as the more natural approach to solve the battle (see Section IV) may also apply here. Finally, the prevailing trend in international contract law to provide for the knock-out rule might not justify the assumptions neither, given that these codes – in contrast to the CISG – expressly provide for the knock-out rule.[159] There is no evidence neither, that the knock-out rule (yet) amounts to a usage in the sense of Article 9(2).[160]

Second, the assumptions are based on the view that the parties prefer the conclusion of a contract without their conflicting standard terms over the situation where no valid contract would be concluded according to Article 19.[161] In other words, it is assumed Article 19 prevents the conclusion of a valid contract.[162] But there is usually a contract under the last-shot rule, concluded upon the parties’ performance.[163] Under Article 18(1) it is sufficient that the parties’ conduct is ‘objectively understood as an act of acceptance’[164], i.e. that they perform or otherwise engage in a conclusive manner.[165] Moreover, if one looks comparatively at English law and the rather far-going Butler case[166], it can be seen that courts tend to protect the parties’ reliance even if this means that they have to construe an agreement out of disagreement.[167] This might support the critique that there is a discrepancy between the actual behaviour of businessmen and the qualification of their behaviour under the mirror-image rule.[168] But at the same time it also shows that there are ways to meet the parties’ expectations with regard to the existence of a contract without taking recourse to an artificial construction as the knock-out rule. Admittedly, the contract concluded in accordance with Article 18(1) is only concluded upon performance, not upon agreement of the essentialia negotii as at least the variant of the knock-out rule construed via Article 8 seems to indicate. There may thus be a (short) period in which no contract is concluded yet and parties could indeed escape from the contract using the colliding standard forms as excuse.[169] However, this risk exists only during a limited period of time and the escape may usually not be in the interest of the either party so that it does not justify the general assumption that the parties do not want to apply Article 19.

In sum, the selected aspects discussed above provide good reasons to assess the construction of (implied) derogation through Article 6 as artificial and not entirely persuasive. It seems especially doubtful to assume that all parties’ share the same intent to derogate from Article 19 and to apply the knock-out rule, irrespective of their legal background. Coupled with the lack of an unambiguous theoretical justification which the Opinion No. 13 cannot provide (see B above), it appears difficult to consider the knock-out rule as a dogmatically soundly embedded solution within the CISG although its aims may be well-intended. Moreover, in the light of the fact that the exact construction of the approach is unexpressed, there is a risk that even the courts applying this ‘uniform’ solution might apply it differently, thereby producing non-uniform solutions again.

Conclusion

The CISG has been in force for almost 30 years and the battle of the forms is still not solved. Courts use different solutions, thereby producing different results and hampering the very purpose of the CISG to serve as a reliable and predictable framework for international sales transactions.[170] Unfortunately, it seems unlikely that the CISG-AC’s Opinion No. 13 has the persuasive power to change this.

The Opinion’s proposal to overcome the undesired effects of a literal approach to Article 19 and instead to uniformly approach the battle with the knock-out rule is well-meant. But whilst the knock-out rule might arguably be the better-suited approach to battles of the forms, it is difficult to find a dogmatically persuasive justification for the rule. The latter is however important because any solution to the battle should comprehensively follow from the law for reasons of legal certainty. Moreover, courts which are not yet applying (or inclined to apply) the knock-out approach may only be willing to consider this approach if it is dogmatically convincingly established how the rule applies within the existing CISG.

This paper has shown that scholars have not only brought forward different theoretical constructions, but that the details of their theories and the exact application in practice remain rather opaque. Almost symptomatic of this, neither the often-cited German Powdered milk case nor the Opinion No. 13 itself clearly express the underlying theoretical constructions. Whilst different factors indicate that the underlying theory may be the one of implied derogation from Article 19 through Article 6, the exact details of its construction and its practical application remain ambiguous, leaving the way open for different results. The therefrom resulting lack of a theoretical justification for the knock-out rule is further aggravated if one follows this paper’s argumentation that the assumptions underlying the theoretical construction of (implied) derogation are highly artificial and non-cogent.

To really/actually solve the battle of the forms problem and achieve a uniform interpretation of the CISG (Article 7(1)) by all courts, there seems only one promising solution: a revision of the CISG introducing a provision dedicated to the problem.[171] Whether the provided solution shall be the last-shot or the knock-out rule has not been the subject of this paper. But any express solution seems preferable to the current situation, hampering the Convention’s purpose as a reliable framework for international sales transactions[172].

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