Define any Contract: Custom in the Industry vs. the Parties' Practices

January 5, 2011, 11:07 AM

In determining the intent of the parties' contractual terms, Article 8 of the CISG (United Nations Convention on Contracts for the International Sale of Goods) instructs the court to give "due consideration" to "all relevant circumstances", including the parties' negotiations, any practices which have developed between the parties, and any "usages" adopted by the parties. Under Article 9(2) of the CISG, the parties are deemed to have "impliedly" incorporated into their contract any "usage" regularly observed in international trade by parties to similar types of contracts. This raises the question whether the parties' definition of a trading term or the industry's definition of the same trading term will prevail in the case of a conflict.

In Treibacher Industrie, A.G. v. Allegheny Technologies, Inc., the Eleventh Circuit Court of Appeals considered a course of dealing by which an Austrian vendor of hard metal powders (Treibacher) supplied its chemical compounds on "consignment" to a manufacturer of tungsten-graded carbide powders located in Alabama (Allegheny). At some point in the relationship, the buyer found a lower-cost supplier and chose to reject certain pending shipments from Treibacher, and also demanded that Treibacher accept a return of unused inventory. Treibacher refused, claiming that under the parties' course of dealing, "consignment" was interpreted to mean that the buyer was obligated to pay for all of the chemical compound delivered, but simply would not be invoiced until the product was actually consumed in the manufacturing process. However, the buyer responded that, in the metals industry, "consignment" meant that no sale occurred until the compound was actually used by the buyer, thereby giving the buyer the right to refuse pending deliveries and to return unused inventory for credit.

The Eleventh Circuit held that the parties' actual usage of the term "consignment" in the course of their dealings trumped the meaning given to that term in customary industry usage.

The moral of the story: the parties should carefully examine the definitions used in their export-import contracts as well as the implied definitions given to terms in unwritten contracts, because these usages may prevail over any conflicting usages to which either party has become accustomed in the industry. In the Treibacher case, "consignment" meant whatever the two parties meant by it in their course of dealings, not necessarily what it meant in common industry parlance.--Charles V. McPhillips