Subjective Intent in American Contract Law and the CISG

In the recent case of Hanwa Corp. v. Cedar Petrochemicals, Inc., 2011 WL 165404 (S.D.N.Y.), the court concluded that a Korean buyer of the petrochemical toulene had not made an effective offer to purchase under Article 14 of the CISG because it did not reveal an intent to be bound when it made its bid for the goods.  The court determined that the parties had created a practice between themselves of a two-step process of contract formation in which neither party performed until they had reached agreement on terms that were not included in initial bids.  Analysis of the circumstances in which the parties’ prior transactions occurred supported the proposition that they had not entered into a final contract when they disagreed about a choice of law clause, even if they had already agreed on product, quantity, and price.

In the course of reaching that decision, however, the court made broader allusions to the role of intent in contract formation under the CISG. Unfortunately, those allusions reveal a possible misunderstanding of the CISG’s position on the use of subjective versus objective intent. Moreover, the court’s comment is consistent with remarks made in at least one other American CISG opinion and thus requires some clarification.

The court in Hanwa Corp. began its analysis of the intent to contract issue by referencing CISG Article 8 for the proposition that “although the CISG expresses a preference that the offeror’s intent be considered subjectively, that consideration is not possible in this case since neither party submitted any competent evidence of their subjective intentions.”  It is certainly true that in the hierarchy of intent, subjective intent of the parties, when properly applicable, takes priority over other tools of interpretation.  But that is a far cry from a claim that the CISG “expresses a preference that the offeror’s intent be considered subjectively.”  The latter comment suggests that subjective intent consistently dominates objective evidence in the formation or interpretation of contracts.  The court’s comment might be dismissed as an overstatement or a casual dismissal of an issue not really before the court, given that no evidence of subjective intent was available.  Nevertheless, it is reminiscent of other judicial references to the relevance of subjective intent under the CISG.  Perhaps most notably, the court in the well-known case of MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A., 144 F.3d 1384 (11th Cir. 1998), purported to juxtapose Article 8(1)’s invocation of subjective intent with the American “preference for relying on objective manifestations of the parties’ intentions,” and cited Justice Holmes for the proposition that the law was unconcerned with “the actual state of the parties’ minds.”

One might infer from these comments that the CISG has embraced 19th century notions of subjective intent that required an actual meeting of the minds before contracts were concluded.  American contract jurisprudence has subsequently replaced reliance on largely unverifiable subjective intentions with more objective measures, as evidenced by the Restatement (2d) of Contracts reference to “manifestations” of a party’s intent rather than to the intent itself.  One underlying rationale is that it is less costly for the idiosyncratic actor whose subjective meaning or hidden intentions deviate from normal expectations of counterparties to explain his or her actual intentions than for each actor to attempt to discern the actual meaning of his or her counterparty.  The judicial references to the CISG’s elevation of the subjective view therefore suggests a view of contract more concerned with protecting the autonomous intentions of commercial actors than with reducing the transactions costs.

But these references to the primacy of subjective intent in Article 8(1) appear to misunderstand the scope of its application.  Article 8(1) does, of course, make subjective intent the measure of a party’s meaning, whether to determine the existence of a contract or to interpret its terms.  But it does so only when the other party could not have been unaware of that subjective intent.  A well-hidden, subjective intent of which the counterparty neither was nor should have been aware plays no role in the process.  An expression of desire to enter into a contract that commercially reasonable actors would take as sincere is not undermined by a subsequent claim that the speaker had private reservations.  Nor should it be.  Transactions costs would increase dramatically if actors had to discern the secret, if honestly held, beliefs of counterparties rather than rely on what reasonable actors would infer in the circumstances.

This does not mean that subjective intent is irrelevant.  Rather, it means that the circumstances matter.  Under Article 8(1), if the circumstances reveal that I understand your offer to me is, in your mind, insincere or incomplete, then no contract will be concluded by my purported acceptance, even if some third party would infer just the opposite from your manifestations.  The result is fully consistent with the standard understanding of American contract law.  Take the classic example of Lucy v. Zehmer¸ to which the court in MCC-Marble referred as the model of the American approach. In that case, the court famously observed that a binding contract existed even if an offeree signed a proposed contract in jest, as long as the context allowed the offeror to conclude that the acceptance was serious.  But the court was equally clear that if all parties had or should have understood that the offer was in jest, the act of accepting it would not create a contract.  In the language of the court in Lucy, subjective intent prevails notwithstanding objective manifestations if the personal meaning “is known to the other party.”  Article 8(1) limits the application of subjective intent to those same circumstances when it provides that statements and conduct are to be interpreted according to the actor’s intent “where the other party knew or could not have been unaware of what that intent was.”  American courts should be more cautious about proclaiming an expanded scope for subjective intent in international sales law.

Clayton P. Gillette

Professor Gillette is Max E. Greenberg Professor of Contract Law at New York University School of Law

The Center for Transnational Litigation and Commercial Law aims at the advancement of the study and practice of international business transactions and the way to solve related disputes either through litigation or arbitration. As commercial transactions become increasingly international, it is vital to the legal and business communities to understand and analyze the practices and legal principles that govern relationships between firms and between firms and consumers in the international arena