India International University of Legal Education and Research

Law of Contracts-2
Internal Assessment-1
Topic: The Role of Trade Usages and Customs in Interpreting
Conditions and Warranties in International Contract

Submitted To - Submitted
By-
Dr. Anirban Chakraborty Sai Pratham Pedaparthi
Professor of Law 2022BA023
IIULER GOA

Dr. Padma Singh

Associate Professor of Law
IIULER GOA
 Table of Contents

Page Number

Index of Authorities 3

Introduction 4-6

Principles of Interpretation in International Contracts 7-9

Application of Conditions and Warranties in 9

International Contracts

Role of Trade Usages and Customs in Interpretation of 10-11

Contracts

Research Findings and Conclusion 12-13

Bibliography 14
 Index of Authorities

Statutes/Conventions etc.:
US Uniform Commercial Code
The United Nations Convention on Contracts for the International Sale of Goods
The International Chamber of Commerce (ICC) Incoterms

Case Laws:
General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria 1983 QB 856, 874
Libyan Arab Foreign Bank v Bankers Trust Co 1989 QB 728
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
Schuler A.G. v Wickman Machine Tool Sales Ltd [1973] 2 WLR 72
 Introduction

Trade usages and customs are informal rules and practices that have developed over time within
specific industries or regions. They are like unwritten guidelines or traditions that businesses
follow when they're trading internationally. For example, it might be common practice in a
certain industry to make payments within 30 days of receiving goods, even if it's not explicitly
stated in a contract. Conditions and warranties are terms included in contracts that specify what
each party is responsible for. Conditions are crucial terms that, if not met, can lead to the contract
being terminated. Warranties are less critical terms, and a breach usually results in compensation
rather than termination. In the context of interpreting conditions and warranties in international
contracts, trade usages and customs play an important role. They help clarify ambiguous terms,
fill gaps in contracts, or even override specific clauses in contracts if they conflict with
established industry practices. International trade relies on a complex web of contractual
agreements governed by various legal principles and conventions. Among these, the
interpretation of conditions and warranties is crucial for determining the rights and obligations of
parties involved in international contracts. Trade usages and customs play a significant role in
shaping the understanding and application of these contractual terms, providing contextual
relevance and industry-specific norms that inform their interpretation.

Important Terminologies:
Trade Usages- The parties are bound by any usages to which they have agreed and by any
practice which they have established between themselves. Unless agreed otherwise, they are
considered to have impliedly made applicable to their contract or its formation a usage of which
the parties knew or ought to have known and which in international trade is widely known to,
and regularly observed by, parties to contracts of the type involved in the particular trade
concerned.1 Trade usage is a reflection of standard operating procedures that are consistently and
faithfully adhered to within a specific trade. As demonstrated by the lex mercatoria, an a-national
legal system that flourished as independent law in the Middle Ages but lost its power with the
introduction of the nation state, trade usage has always played a significant part in international
sales. These days, there is debate about the legitimacy of legal merchants as well as the purpose
and application of mercantile custom. In spite of this, trade usage continues to serve a normative
purpose in sales contracts; in fact, trade usage binds contractual parties even in the absence of
actual knowledge.
Conditions- In its simplest terms, a condition of a contract is a requirement or term that one or
both parties must adhere to. In other cases, a condition of the contract refers to an uncertain
future event that, if it happens, affects the obligations within the contract. If such a condition
arises, it may render the entire contract void, or it may alter the obligations of one or both parties.
Conditions of the contract can be explicit or implied. An express condition, which is quite
common, is explicitly stated within the contract. For instance, a financing contingency in a real

1 Coetzee, J. 2015. The role and function of trade usage in modern international sales law. Uniform Law Review,
20(2-3):243–270. doi:10.1093/ulr/unv011
estate contract stipulates that the completion of the sales agreement depends on the buyer's
ability to secure financing. Thus, if the buyer fails to obtain financing, the sale will not proceed.
On the other hand, an implied condition is not explicitly stated in the contract, but the law may
presume its existence.2 For example, if a horse breeder agrees to sell and deliver a specific mare
to a buyer, but the mare dies before the delivery date through no fault of the seller, the seller is
generally not considered in breach. This is because the law reasonably implies the condition that
the animal must be alive for delivery to take place.

Warranties-A warranty, integral to a sales contract, obligates the seller to ensure that a product or
service meets certain standards. It can be explicit, where the seller explicitly guarantees the
quality of the item, or implied, where the law assumes certain standards. Express warranties are
explicitly stated by the seller, while implied warranties automatically apply to the sale,
particularly for merchant sellers.3 Express warranties can include statements like "Wrinkle-free
shirt" or "Lifetime guarantee." If a breach of warranty occurs, the seller is liable, regardless of
claims of truth, due care, or reasonableness. Implied warranties, such as the warranty against
infringement or fitness for normal use, exist even without explicit statements, especially with
merchant sellers. Express warranties do not override implied warranties unless they are
consistent and cumulative, with the express warranty generally prevailing.

International Contract- International contract is the legal instrument by which two or more
private parties enter and govern a business relationship between them which has certain links
with more than one State contact with one or more foreign legal systems. A contract is
considered international when it involves links with more than one state. This includes cases
where the parties must choose between the laws of at least two different states, a concept known
as conflict of laws or private international law. This involves identifying the most appropriate set
of rules and criteria for governing the parties' relations from among the conflicting national laws.
Internationality is evident not only when parties from different countries are involved but also
when a contract contains foreign elements, regardless of the parties' citizenship. This can occur
when parties are based in different countries or when a contract is to be executed abroad.
Conversely, a contract is not considered international if all of its significant elements are
connected with only one state, making it purely domestic. Even if significant elements are
connected with different territorial units within the same national state, the contract is not
international. Additionally, merely choosing a foreign state's law to govern the contract does not
automatically make it international.
International Trade Contract- An international trade contract is a commercial agreement made by
a trader as part of their business activities. This includes contracts made by professionals in the
exercise of their trade or profession. Whether a party is considered to be acting in the exercise of

2Ashley, C. D. (1905). Conditions in Contract. The Yale Law Journal, 14(8), 424–430.
https://doi.org/10.2307/781475
3 Valbrune, Mirande, and Renee De Assis. Business Law I Essentials. OpenStax, Sep 27, 2019.
Houston, Texas. https://openstax.org/books/business-law-i-essentials/pages/8-2-warranties-and-sales-
contracts.
their trade or profession depends on the specific circumstances of the contract, rather than solely
on the parties' status.4 The definition of international trade contracts encompasses various
commercial activities, including those of merchants, manufacturers, craftsmen, and professionals
such as lawyers or architects. It also includes insurance contracts, contracts transferring or
licensing intellectual property rights between professionals, as well as agency or franchise
contracts. For instance, a contract between a German entrepreneur and a Pakistani commercial
agent is considered an international trade contract. Similarly, a joint venture agreement between
a French fashion garment manufacturer and a Thai textile supplier falls within the scope of
international trade contracts.

Principles of Interpretation in International Contracts

4 Cavalieri, Renzo, and Salvatore, Vincenzo. *An Introduction to International Contract Law*. G
Giappichelli Editore. (23-04-24)
https://www.giappichelli.it/media/catalog/product/excerpt/9788892114838.pdf
According to one scholar, trade usage is becoming outdated and will eventually be replaced by
the trade practices developed by individual parties in their contracts.5 The argument is that trade
usage thrives only in closed business circles where everyone is familiar with it. In today's
globalized environment, where commercial interactions are not confined to closed groups, it's
challenging to establish and prove the content of trade usage, leading to its eventual irrelevance
due to uncertainty. The inherent uncertainty of uncodified practices makes it difficult to rely on
trade usage effectively. Trade usage can be interpreted differently depending on the context,
geographical location, or even the court that applies it. Its flexible and dynamic nature adds to
this uncertainty, making it problematic to prove its existence and content, except in exceptional
cases where courts can take judicial notice of it. Although arbitrators may be more familiar with
trade usages than judges in national courts, expert evidence on trade usage often yields
contradictory results. Research in the USA has shown that traders prefer standard form contracts
from trade associations over the uncertainty of unwritten customs and usages.

In General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria6, Lord Justice Slade noted
a significant distinction between practices observed as a matter of grace and those observed as a
legal obligation. When a practice is a legal obligation, it implies that the other party to the
contract has the right to demand its observance as per the law, while in cases where there is no
such obligation, the other party usually has no recourse. This principle was applied by Justice
Staughton in Libyan Arab Foreign Bank v Bankers Trust Co7. In this case, the court had to
determine whether the defendants had the right to demand payment through a US clearing
system. The plaintiffs, holding a Eurodollar deposit with an American bank, sought payment in a
manner that did not involve clearing the payment through a US system due to a freeze on Libyan
assets. The defendants argued that it was a trade usage that deposits could only be withdrawn
through the clearing system of the currency in which the account was denominated, i.e., US
dollars. However, the defendant's expert witness testified that the practice was followed for
commercial convenience and not out of legal obligation. As a result, the court concluded that
there was no binding practice or usage, allowing the Libyan party to withdraw the London
deposit of nearly US $300 million in cash.
Usage by itself is not legally binding under English law; rather, the parties to a contract must
expressly or implicitly concur for it to have legal force. It appears that a practice is only given
legal force by the courts if its adherents view it as a mandatory guideline. Similar requirements
have been cited by the Supreme Court of Germany, the legislation of the Philippines, the Italian
law, the civil code of Estonia, and other legal documents. Conversely, the Chechnyan law, for
instance, and the US Uniform Commercial Code (UCC) only demand routine obedience. The
CISG's Article 9(2) likewise says nothing about this kind of obligation. Here are the main
principles of contract interpretation:
1. Objective Test: The intention of the parties to the contract is determined through an objective
test, which means analyzing the contract from the perspective of a reasonable hypothetical

5 Filip De Ly, ‘Sources of International Sales Law: An Eclectic Model’ (2005–06) 25(1) Journal of
Law and Commerce 1, 5.
6 1983 QB 856, 874.
7 1989 QB 728
person. The actual subjective intentions of the parties and any previous negotiations are generally
considered irrelevant.
2. Natural Meaning of Words: Words in the contract are interpreted according to their natural
and ordinary meaning – what the clause actually says
3. Consideration of Overall Purpose: The overall purpose of the clause and the contract is taken
into account. Additionally, the facts and circumstances known or assumed by the parties at the
time of entering into the contract should be assessed.
4. Examination of Background: The factual, legal, and regulatory background within which the
contract is set may be examined if necessary to provide further context.
5. Commercial Common Sense: Where the wording of the contract is ambiguous, courts are
likely to apply a commercial common sense interpretation.
6. No Power to Improve Contract: Courts are well-established to have no power to improve a
contract; their concern is solely to discover what the contract means.

Trade usages and customs play a significant role in international contracts by providing a
common understanding of commercial practices and expectations among parties from different
jurisdictions. They help bridge cultural and legal gaps, facilitating smoother transactions and
reducing the risk of misunderstandings and disputes.
8

● CISG Article 9 and Trade Usages: The United Nations Convention on Contracts for the
International Sale of Goods (CISG) Article 9 recognizes the importance of trade usages
and customs in international contracts. In a landmark judgement, the court referred to
Article 9 of the CISG to recognize trade usages in the textile industry, which influenced
the interpretation of the contract terms.
● ICC Incoterms: The International Chamber of Commerce (ICC) Incoterms are widely
used in international trade to define the responsibilities of buyers and sellers regarding
the delivery of goods. The courts refer to the ICC Incoterms to determine the obligations
of the parties under the contract.
● Usage of Specific Terms: The courts have recognized the trade usage of the term "market
price" in the context of the sale of electricity, which helped interpret numerous contracts
and resolve disputes between the parties.

In conclusion, trade usages and customs provide essential context for interpreting and enforcing
international contracts. They enhance predictability, facilitate negotiations, and contribute to the
efficient resolution of disputes, making them indispensable in the realm of international trade.

Application of Conditions and Warranties in International Contracts

In international contracts, conditions and warranties play a crucial role in defining the rights and
obligations of the parties involved. Conditions are essential terms that go to the root of the

8Ian Ayres and Robert Gertner, ‘Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules’
(1989) 99(1) Yale Law Journal, 87.
contract, while warranties are secondary terms that are not essential to the main purpose of the
contract. Understanding the application of these terms is essential for interpreting and enforcing
international contracts effectively.

Conditions in international contracts are fundamental terms that must be fulfilled for the contract
to be valid. Failure to meet a condition may result in the contract being terminated, and the
innocent party may seek remedies for the breach. One notable case illustrating the application of
conditions in international contracts is Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen
Kaisha Ltd9. In this case, the court held that the condition of seaworthiness in a charterparty was
breached, leading to the termination of the contract.

Warranties in international contracts are secondary terms that are not fundamental to the main
purpose of the contract. Breach of a warranty entitles the innocent party to claim damages, but it
does not give them the right to terminate the contract. An example demonstrating the application
of warranties in international contracts is Schuler A.G. v Wickman Machine Tool Sales Ltd 10. In
this case, the court held that a statement made during negotiations constituted a warranty rather
than a condition, limiting the remedies available to the innocent party.

The application of conditions and warranties in international contracts is vital for ensuring
clarity, fairness, and enforceability.

Role of Trade Usages and Customs in Interpretation of Contracts

Trade usages and customs play a significant role in the interpretation of conditions and
warranties in international contracts across different industries and jurisdictions in several ways:
a. Contextual Interpretation: Trade usages and customs provide context for interpreting
contractual terms by reflecting industry-specific practices and expectations. For example, in the
shipping industry, the interpretation of delivery terms may be influenced by standard practices
such as the ICC Incoterms.

9[1962] 2 QB 26
10[1973] 2 WLR 72
b. Implied Terms: Trade usages and customs can imply terms into contracts, even if not
expressly stated. For instance, in the construction industry, it may be customary for certain
materials to meet specific quality standards, which could be implied into the contract as a
warranty.
c. Resolution of Ambiguities: In cases of ambiguity, trade usages and customs can help clarify
the meaning of contractual terms. For example, if a contract does not specify a method of
payment, industry practice may dictate the standard payment terms.
d. International Harmonization: Trade usages and customs can contribute to the harmonization of
contractual practices across different jurisdictions, particularly in industries with global
operations. This helps ensure consistency and predictability in contract interpretation.

Despite their importance, parties encounter several challenges in incorporating and proving trade
usages and customs in contractual disputes:
a. Variability: Trade usages and customs may vary widely across industries, regions, and even
individual companies. Determining the applicable custom or usage can be challenging, especially
in complex international contracts involving multiple parties and jurisdictions.
b. Lack of Evidence: Proving the existence and content of trade usages and customs can be
difficult, particularly if they are not documented or widely recognized. This challenge is
exacerbated in legal proceedings where parties must provide evidence to support their claims.
c. Contradictory Evidence: Expert testimony on trade usages and customs may yield
contradictory results, leading to uncertainty in their application. Different experts or parties may
interpret industry practices differently, making it challenging to establish a clear standard.
d. Judicial Recognition: Some courts may be hesitant to recognize trade usages and customs,
especially if they are not explicitly stated in the contract or widely accepted. This can lead to
inconsistent application of industry practices in legal proceedings.

Addressing Challenges in Legal Proceedings

These challenges in incorporating and proving trade usages and customs in contractual disputes
are addressed in legal proceedings through various means:
a. Expert Testimony: Parties may present expert testimony from industry professionals to
establish the existence and content of trade usages and customs. Expert witnesses can provide
insights into industry practices and help clarify complex issues for the court.
b. Documentary Evidence: Parties may rely on documentary evidence, such as industry
standards, trade publications, or previous contracts, to support their claims regarding trade
usages and customs.
c. Judicial Notice: In some cases, courts may take judicial notice of well-established trade usages
and customs without the need for extensive evidence. This can streamline the legal process and
provide greater certainty to the parties.
d. Arbitration: Arbitration, often chosen as a dispute resolution mechanism in international
contracts, allows parties to select arbitrators with industry expertise who are familiar with trade
usages and customs. This can lead to more informed decisions and consistent outcomes.
Case Study 1: Incoterms in International Sales Contract
In a contract between a German manufacturer and a US buyer for the sale of machinery, the
parties agreed to use the ICC Incoterms to define the delivery terms. The contract specified that
the goods would be delivered "FOB Hamburg." However, a dispute arose when the machinery
was damaged during transportation. The US buyer argued that "FOB Hamburg" meant the seller
was responsible for delivering the goods to the port of Hamburg, while the German manufacturer
claimed it meant the seller was responsible for loading the goods onto the vessel. The court
considered the prevailing trade usage in international trade, which commonly interprets "FOB
Hamburg" to mean that the seller is responsible for delivering the goods to the named port and
loading them onto the vessel. This interpretation aligned with the ICC Incoterms and industry
practices. As a result, the court ruled in favor of the German manufacturer, holding that they
fulfilled their obligations under the contract by delivering the goods to the port of Hamburg. The
case illustrates how trade usages, as reflected in the ICC Incoterms, can influence the
interpretation of delivery terms in international contracts.
11

Case Study 2: Construction Industry Quality Standards

In a construction contract between a developer and a contractor, the contract specified that the
contractor would provide "high-quality materials" for the project. However, a dispute arose when
the developer claimed that the materials used did not meet industry standards. The contractor
argued that the materials met the standards commonly used in the construction industry and that
the term "high-quality" was subjective and open to interpretation. The court considered the trade
usage and custom in the construction industry, which typically interprets "high-quality materials"
to mean materials that meet industry standards for durability, safety, and performance. The court
also looked at expert testimony from industry professionals to establish the prevailing standards.
Based on the evidence presented, the court determined that the materials provided by the
contractor did not meet industry standards, and therefore, the contractor breached the contract.
The case highlights how trade usages and customs in specific industries can influence the
interpretation of contractual terms, such as quality standards, in international contracts.
Research Findings and Conclusion

Trade Usages(TUs) and Customs are integral to every contract and differ from place to place. In
cases of International Contracts which govern multinational entities, it is complex and intricate to
weave through the differing and various trade usages and customs followed by different
countries. It is also imperative to take into cognisance how such trade usages and customs which
are established influence and affect the conditions and warranties. This gives rise to certain kinds
of outcomes in such cases which are:
● Where the conditions and warranties are in conflict with the trade usages and customs
11 Ben Thompson, INCOTERMS® 2020 EXPLAINED - THE COMPLETE GUIDE INCODOCS (2024),
https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/ (last visited Apr 23, 2024).
 ● Where the conditions and warranties align with the principles laid down by the trade
usages and customs
● Where the conditions and warranties alter the trade usages and set new customs
● Where the conditions and warranties do not affect the trade usages and customs as they
are alienated from practices involved in the Contract

Among the four aforementioned outcomes, the first three are the most crucial ones that play a
significant role in the interpretation of the contracts. The interpretation of the clauses comes into
place only when there is a necessitated requirement to resolve a dispute.

The recent case decided by the Italian Supreme Court (Order, Sec. 2, No. 36144 of 2022)
highlights the risks associated with selling products abroad without due attention to the legal
aspects of the contract. The case underscores the importance of not only what is explicitly stated
in the contract but also what is not mentioned, as implied warranties of merchantability may
apply, making the product unsuitable for use despite meeting technical specifications. In the
case, a German company sued an Italian company for non-payment of invoices for steel supplies.
The Italian company counterclaimed, citing non-conformity of previous deliveries and seeking
damages. While the first instance court partially granted both parties' claims, the Court of
Appeals of L'Aquila reduced the amount owed by the Italian buyer. The Court of Appeals
applied the Vienna Convention on the International Sale of Goods (CISG) and ruled that the
steel's chemical composition, though not a defect, constituted a lack of conformity, making it
unsuitable for its ordinary use. The Italian Supreme Court upheld the ruling, emphasizing that the
implied warranty of merchantability applies unless expressly excluded by the parties. The Court
noted that any attempt to exclude this warranty must be explicitly stated in the contract. In this
case, the absence of a minimum silicon percentage in the contract did not suffice to exclude the
warranty of merchantability.
The case underscores several key points for businesses selling abroad:
- The CISG applies automatically to contracts between companies from different countries.
- Implied warranties, including merchantability, apply unless expressly excluded in clear and
explicit terms.
- Descriptive documents attached to the contract may not suffice to exclude implied warranties.
- Attention to applicable law and jurisdiction clauses is crucial in international contracts.

This case sheds light on how implied warranties and trade usages in a way are synonymous with
each other. They not only align with each other but also serve the same purpose in a broader
sense and heavily influence each other.

In the realm of international trade, the interpretation of conditions and warranties in contracts is
significantly influenced by trade usages and customs. 12This influence is evident in various

12 F A Mann, ‘Reflections on a Commercial Law of Nations’ (1957) 33 British Yearbook of International Law 20.
international laws, conventions, and case precedents. The Vienna Convention on the
International Sale of Goods (CISG), a widely adopted international treaty, provides a legal
framework for the interpretation of contractual terms in cross-border transactions. Under Article
9 of the CISG, trade usages and customs are considered relevant factors in determining the intent
of the parties and interpreting contractual terms. Several cases, such as the recent Italian
Supreme Court decision (Order, Sec. 2, No. 36144 of 2022), demonstrate the importance of trade
usages and customs in interpreting conditions and warranties. In this case, the Court upheld the
implied warranty of merchantability, highlighting that it applies unless expressly excluded by the
parties. The decision underscores the need for parties to consider industry practices and customs
when drafting and interpreting contracts. Trade usages and customs influence interpretation by
providing context, implying terms, and resolving ambiguities. They reflect industry-specific
practices and expectations, helping parties understand the intended meaning of contractual
provisions. For instance, in shipping contracts, terms like "FOB" or "CIF" have specific
meanings that align with trade practices and customs.

Moreover, trade usages contribute to international harmonization by promoting consistency in

contract interpretation across different industries and jurisdictions. Standardized practices, such
as those reflected in the ICC Incoterms, facilitate smoother international transactions by
providing clear guidelines for interpreting contractual terms. In conclusion, trade usages and
customs play a crucial role in interpreting conditions and warranties in international contracts.
Understanding and incorporating industry practices and customs into contractual agreements can
help parties avoid disputes, ensure clarity, and promote the efficient resolution of contractual
issues in the global marketplace.

Bibliography

Web Journals and Articles-

● https://www.law.cornell.edu/ucc/2/2-314
● https://code.dccouncil.gov/us/dc/council/code/sections/28:2-314
● Karton, Joshua, 'Case Study 2: The Interpretation of Contracts', The Culture of
International Arbitration and The Evolution of Contract Law (Oxford, 2013; online edn,
Oxford Academic, 23 May 2013),
https://doi.org/10.1093/acprof:oso/9780199658008.003.0007, accessed 24 Apr. 2024.
● https://precontractual.com/cross-border-contracting-book/explaining-certain-types-of-clauses/
warranties-and-conformity/
● https://www.hcrlaw.com/news-and-insights/the-main-principles-of-contract-interpretation/
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