Lexis nexus complexus: comparative contract law and international accounting collide in the IASB-FASB revenue recognition exposure draft.

Author:Schulzke, Kurt S.
Position:III. ED Applied to Pratt & Whitney - Malev through V. Conclusions and Recommendations, with footnotes, p. 549-580 - International and Financial Accounting Standards Boards

    This Part of the Article presents an actual transaction involving a purported contract for the sale of jet engines, parts, related services, and financing. The Article tests the purported contract for revenue recognition purposes using the ED's analytical process presented in Part II.

    1. Fact Scenario: Jet Engine Transaction

      Pratt & Whitney's (P&W's) 1990 (157) attempt to sell jet engines and related services to Hungary's national airline, Malev, illustrates how an open or uncertain price term may result in either a binding contract or no contract depending on applicable law and its judicial interpretation.

      In the fall of 1990, P&W entered into negotiations with Malev for the purchase of jet engines for two or three new airliners to be manufactured by either Boeing or Airbus and replacement engines for Malev's aging, Russian-built Tupolev airliners. (158) On December 4, 1990, the parties signed a letter of intent for the replacement engine component of the transaction, contingent on the signing of the new airliner component.

      During a meeting on December 14, 1990, P&W presented Malev officials a detailed, fifteen-page proposed "Purchase Agreement" (159) (the Proposal) according to which Malev would purchase (a) engines for two new airliners and a call option (160) on engines for a third; (b) one spare engine plus a call option on an additional spare; and (c) a related service, maintenance, and spare parts "support" package. (161) The Proposal also detailed credit terms that would accompany Malev's engine purchase. (162)

      Because Malev had not yet chosen between Boeing and Airbus planes, the Proposal specified per-engine prices for each of three alternative engine configurations: (1) for Boeing planes, the PW 4056 at $5,847,675 per engine; and (2) for Airbus planes, either the PW 4152 at $5,552,675 per engine, or the PW 4156/A at $5,847,675 per engine. (163) The quoted prices, however, omitted the engine nacelle (164) and other parts that would be required if Malev were to choose Airbus. (165) On December 21, 1990, P&W extended the PW 4056 quote to the PW 4060 engine, should Malev choose Airbus over Boeing. (166)

      Subsequently, on December 21, Malev responded to the Proposal with a detailed written declaration of acceptance to the effect that Malev would power its new airliners with PW 4000 series engines. (167) As of December 21, however, Malev had not decided between Boeing and Airbus. (168) Eight days later, on December 29, Malev announced its decision to buy Boeing planes. (169)

      Through February 1991, the parties continued to dialogue regarding sale-related advertising, choice of a Hungarian engine-maintenance partner, and spare parts. (170) On March 25, Malev abruptly reversed its P&W jet purchase decision, sending P&W a letter characterizing it as "not likely" that Malev would purchase P&W engines. (171) After negotiations broke down, P&W sued to enforce the agreement. (172)

      The Proposars choice-of-law clause designated the Connecticut Uniform Commercial Code (UCC) as the law governing the contract. (173) This clause, coupled with Hungarian law upholding contractual choice-of-law clauses, (174) might seem to require application of the Connecticut UCC. (175) However, prior to a September 20, 1991, hearing before the Metropolitan Court of Budapest, P&W voluntarily abandoned the Connecticut UCC in favor of the UN Convention on Contracts for the International Sale of Goods (CISG). (176) Why P&W chose the CISG over the Connecticut UCC is unclear. Whatever the rationale, the choice appears to have doomed P&W's breach-of-contract claim against Malev.

    2. Contract Analysis: Legal Enforceability

      Revenue recognition analysis of the P&W-Malev transaction must begin by determining whether it presents a contract enforceable under applicable law. In discussing applicable law, this Article will refer to both substantive and procedural law. Substantive law defines the contract rights and obligations of the parties. Procedural law defines the legal process by which the parties' substantive rights and obligations may be enforced if a party breaches.

      Most jurisdictions generally permit parties to choose the law governing their contract and the forum in which disputes should be decided. (177) However, if the parties do not choose or if enforcement of their choice would be unreasonable, unjust, or would contravene a strong public policy of the dispute resolution forum, applicable law will typically be chosen for the parties by treaty, statute, court, or arbitrator using principles of private international law or conflicts of law. (178)

      In most jurisdictions, substantive legal enforceability requires presence of the basic elements of a valid contract (179) and absence of valid defenses against the contract's enforcement. (180) Once substantive legal enforceability is established, further questions arise in relation to procedural and practical enforceability. In jurisdictions lacking the necessary legal infrastructure, it is possible that a legally enforceable contract may be practically unenforceable because judicial or enforcement capacity or willpower is lacking. (181) Similarly, a court judgment or arbitral award has no economic value if assets are unavailable to satisfy it. A detailed analysis of procedural and practical enforcement issues goes beyond this Article's scope; however, it is important to note that legal enforceability is only the first step along a winding, uncertain path toward contract enforcement through legal process.

      For the contract-analysis portion of this Article, jurisdictions were chosen to demonstrate differences in contract law (a) among fellow states of the European Union (represented by France, Germany, and Italy), (b) between the European Union and the Americas (represented by the United States and Colombia), (c) between individual country laws and international law (represented by the CISG), and (d) between conflicting interpretations of international law rendered by different courts of the same country (represented by the opposing decisions of the Metropolitan Court of Budapest and the Hungarian Supreme Court).

      The selected jurisdictions share a common political pedigree, as current members of the European Union or former colonies of current EU members. Nevertheless, their shared political heritage belies differences in substantive contract rights and obligations, as well as procedural law governing their judicial vindication. The differences stem from a variety of historical factors including (a) the English Civil War, the aftermath of which strengthened the legislative power of English courts; (b) the Napoleonic backlash against the judiciary, which stripped French courts of legislative power; (c) the dissemination of Napoleonic civil law over much of Continental Europe; and (d) the spread of English-style common law (182) throughout the former British Empire. (183)

      An example of procedural law with potentially substantive consequences is the variously observed tradition among civil-law jurisdictions, unlike common-law ones, (184) that courts generally lack the authority to create law by establishing binding precedent. (185) For example, France's Supreme Court (Cour de cassation) technically does not possess precedent-setting authority. (186) Nevertheless, a decision by the Cour de cassation (especially the rapport objectif written by the justice chosen as case rapporteur) is viewed as persuasive guidance that, despite its technically nonbinding status, lower courts tend to follow in order to avoid reversal on appeal. (187)

      Whatever their genesis, the presence of these legal differences among modern European countries and their political descendants suggests that even greater differences prevail between Euro-centric jurisdictions and non-European ones. Some of these differences will be discussed in the following paragraphs.

      1. European Union

        Comparative law scholars regard German and French law as the two pillars of the civil-law system, (188) around which the other members of the civil-law family have evolved. (189) While Germany and France are both known as civil-law jurisdictions, their laws have developed differently, sometimes even in opposition to each other. (190) German and French law, in contrast to English common law, are derived to some degree from Roman law. (191) The French Civil Code merged the droit ecrit (written law derived from Roman law) and existing coutumes (customary law), (192) and reflects strong moral and ethical values. (193) It is praised for its conceptual clarity and elegant style, in part because Napoleon Bonaparte wanted the Code written for the people in a manner that lay people could understand. (194)

        In contrast, the Burgerliches Gesetzbuch (BGB) was written for experts by experts (195) steeped in the German legal tradition, which was influenced by the nineteenth-century Pandectist movement, which itself was rooted in Roman law. (196) The resulting law is conceptual, systematic, and largely free of ethical, moral, or religious considerations. (197) The BGB differs markedly from the French Civil Code in style, structure, and sometimes substance, as the following survey of the law on open-price terms illustrates.

        1. France

          Under the French Civil Code, Malev's acceptance letter would not have created an enforceable contract on December 21, 1990, but arguably would have done so on December 29, 1990. It would not have been enforceable on December 21 because the P&W Proposal on which Malev's acceptance was based did not adequately specify the price of the engine nacelle or other parts that would be required if Malev were to choose Airbus over Boeing. This pricing ambiguity was effectively cured on December 29, 1990, when Malev, without renouncing its December 21 acceptance, chose Boeing planes, thereby rendering the price of the transaction objectively determinable.

          The French Civil Code requires four conditions for...

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