Convention on International Sale of Goods

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Object of the convention• UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL

SALE OF GOODS (1980) [CISG]

• THE STATES PARTIES TO THIS CONVENTION, • BEARING IN MIND the broad objectives in the resolutions adopted by the

sixth special session of the General Assembly of the United Nations on the establishment of a New International Economic Order,

• CONSIDERING that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States,

• BEING OF THE OPINION that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade,

• HAVE AGREED as follows:

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Application:

1. This Convention applies to contracts of sale of goods between parties whose places of business are in different States:

• (a) When the States are Contracting States; or• (b) When the rules of private international law lead to the application of

the law of a Contracting State.• 2. The fact that the parties have their places of business in different

States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract.

• 3. Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

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Convention prevails over recourse to private international law

• 2. The first issue to be decided before examining the Convention’s substantive, international and territorial sphere of application is that of its relationship to the private international law rules of the forum. This is necessary, as both the Convention and the private international law rules deal with international contracts. According to case law, before resorting to the private international law rules of the forum, courts of Contracting States have to look into whether the Convention applies, in other words, recourse to the Convention prevails over recourse to the forum’s private international law since as a substantive law convention the CISG’s rules are more specific and lead directly to a substantive solution whereas the private international law approach requires a two-step approach (identification of the applicable law and application thereof).

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Contd…• Article 30(chapter II obligation of charter 30-52)• The seller must deliver the goods, hand over any

documents relating to them and transfer the property in the goods, as required by the contract and this Convention.

• Art.53 OBLIGATIONS OF THE BUYER (chp iii- 52-65)The buyer must pay the price for the goods and take

delivery of them as required by the contract and this Convention.

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Contd.• The Convention also covers other types of contracts, such as contracts for the

delivery of goods by installments, as can be derived from article 73 of the Convention, and contracts providing for the delivery of the goods sold directly from the supplier to the seller’s customer. Pursuant to article 29, contracts modifying a sales contract also fall within the substantive sphere of application of the Convention. Article 3 contains a special rule which extends—within certain limits—the Convention’s substantive sphere of application to contracts for the sale of goods to be manufactured or produced as well as to contracts pursuant to which the seller is also bound to deliver labour or services.

• Most courts considering the issue have concluded that the Convention does not apply to distribution agreements, as these agreements aim more at the “organization of the distribution” than at the transfer of the ownership. The various contracts for the sale of goods concluded in execution of the distribution agreement, can, however, be governed by the Convention, even where the distribution agreement was concluded before the entry into force of convention.

• Franchise agreements as well fall outside the Convention’s sphere of application (CLOUT Case no.192…)

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GOODS• It does not define goods. However, pursuant to article 7(1),(• Article 7(1) In the interpretation of this Convention, regard is to be

had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.) the concept of goods should be interpreted autonomously, in the light of the Convention’s “international Character” and “the need to promote uniformity in its application”, rather than by referring to domestic law for a definition.

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Cases on goods: contd

• According to case law “goods” in the sense of Convention are goods that are , at the movement of delivery,

• A) movable and tangible regard less of whether they are solid or not, regardless of whether they are used or new goods, and they are alive or not.

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Software and IPR• Intangible goods, such as IPR, an interest in LLC, or the assignment of

debt are not considered not to fall within the Convention’s concept of goods.

• The convention is appears to also apply to that are not tangible, since the court states that the concept of “goods” is to be interpreted “extensively” (CLOUT case no:281, oberlandsgericht koblenz, germany,17 sept,1993)

• Where as sale of computer hardware falls with in sphere of application of Convention, the same can not be said about software. Some Courts consider only standard software to be goods under the convention, another court concluded that any kind of software is considered a ‘good” even a custom-made software.

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Article 2This Convention does not apply to sales:

• (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;

• (b) by auction; • (c) on execution or otherwise by authority of law; • (d) of stocks, shares, investment securities, negotiable

instruments or money; • (e) of ships, vessels, hovercraft or aircraft; • (f) of electricity.

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Why exceptions? Exclusion of consumer sales, subparagraph (a)

• Subparagraph (a) of this article excludes consumer sales from the scope of this Convention. A particular sale is outside the scope of this Convention if the goods are bought for "personal, family or household use". However, if the goods were purchased by an individual for a commercial purpose, the sale would be governed by this Convention. Thus, for example, the following situations are within the Convention: the purchase of a camera by a professional photographer for use in his business; the purchase of soap or other toiletries by a business for the personal use of the employees; the purchase of a single automobile by a dealer for resale.

• A rationale for excluding consumer sales from the Convention is that in a number of countries such transactions are subject to various types of national laws that are designed to protect consumers. In order to avoid any risk of impairing the effectiveness of such national laws, it was considered advisable that consumer sales should be excluded from this Convention. In addition, most consumer sales are domestic transactions and it was felt that the Convention should not apply to the relatively few cases where consumer sales were international transactions, e.g. because the buyer was a tourist with his habitual residence in another country or that the goods were ordered by mail.

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Contd…..• . If the goods were purchased for personal, family or household use,

this Convention does not apply "unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use." The seller might have no reason to know that the goods were purchased for such use if the quantity of goods purchased, the address to which they were to be sent or other aspects of the transaction were those not normal in a consumer sale. This information must be available to the seller at least by the time of the conclusion of the contract so that he can know whether his rights and obligations in respect of the sale are those under this Convention or those under the applicable national law.

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Auction• The exclusion in Article 2(b) and (c) shows consideration for the

special domestic laws governing these transactions. Since auction sales customarily are concluded immediately at the auction location, an exception in deference to any easily determined domestic law does not significantly impair the unification of law. The exception for auction sales can also be justified by the fact that most jurisdictions accept the domestic law of the auction site as controlling. The exception for forced or judicial sales in Article 2(c) corresponds to Article 6(1)(d) of ULIS.

• Subparagraph (b) of this article excludes sales by auction from the scope of this Convention. Sales by auction are often subject to special rules under the applicable national law and it was considered desirable that they remain subject to those rules even though the successful bidder was from a different State.

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Exclusion of sales on execution or otherwise by authority of law:

• Subparagraph (c) of this article excludes sales on judicial or administrative execution or otherwise by authority of law, because such sales are normally governed by special rules in the State under whose authority the execution sale is made. Furthermore, such sales do not constitute a significant part of international trade and may, therefore, safely be regarded as purely domestic transactions.

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Securities • The exception for shares, investment securities, negotiable

instruments, and money (Article 2(d)) can also be found in ULIS Article 5(1)(a), and takes into consideration that international securities and currency transactions are governed by their own rules and laws which are often compulsory.Sales contracts which name a document as the subject of sale, because the document controls the delivery of goods, are considered to be within the sphere of application of the Uniform Law for International Sales, even though some domestic regulations would characterize these as negotiable instrument transactions.

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• This subparagraph excludes sales of stocks, shares, investment securities, negotiable instruments or money. Such transactions present problems that are different from the usual international sale of goods and, in some legal systems such commercial paper is not considered to be "goods". Without the exclusion of the sales of such paper, there might have been significant differences in the application of this Convention.

• This subparagraph does not exclude documentary sales of goods from the scope of this Convention even though, in some legal systems, such sales may be characterized as sales of commercial paper.

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Aircraft and hovercraft• The exception for ships and aircraft in Article 2(e) of the Convention and Article 5(1)(b) in ULIS

was retained, although forceful arguments for its elimination were again raised in Vienna.• In ULIS the exception is restricted to registered ships or to ships that are required by law to be

registered, but that restriction was dropped in the Convention because domestic registration requirements differ greatly from country to country. In the ULIS version, uncertainty about the application of the uniform sales law can also arise, such as, for example, when it has not been determined which domestic law controls the duty to register.] Some legal systems characterize the sale of a ship as a real-estate transaction and establish special rules not only for the transfer of title but also for the effective formation of the contract (formal requirement) With the elimination of the registration criterion, it has, however, become uncertain whether and to what extent smaller boats - row boats, canoes, dinghies and yachts - belong to the subject matter excluded from the application of the Convention.

• The function and reason for the exception - recognition of special rules for transactions involving ships - suggest that the exception should not be extended to boats (although no distinction is feasible in regard to aircraft). Delimiting the application of this exception will of course be difficult, for example, with small fishing boats or high sea yachts. In such cases, one will consult domestic law to learn whether such boats come under the special rules applicable to ships. If they do, the sense and purpose of Article 2(e) is that the exception should then apply. In many cases, the duty to register will therefore remain an important criterion. As a whole, the rule is probably only acceptable because it increases the willingness of states to join the Convention.

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Contd….• Under another view, the exclusion of sales of ships,

vessels and aircraft was justified on the ground that: • (a) In many legal systems, ships and aircraft, once

registered, are assimilated to immovables; (b) Article 4(e) of the Convention on the Limitation Period excludes such sales from the scope of the Convention and a proposal made at the Conference of Plenipotentiaries at which that Convention was adopted to include such sales had been rejected.

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Contd….• Under one view, these sales should fall within the scope of the

Convention because: • (a) The ground invoked for exclusion of these sales, namely, that

vessels and aircraft are subject to special registration requirements, was not convincing since these requirements had little to do with the relations between buyer and seller. In this connection, it was noted that the sale of pleasure craft had, in recent years, gained in importance on the international level and could, from a legal point of view, be assimilated to the sale of motor-vehicles which, though subject to registration, did fall within the scope of the Convention; (b) The sale of large vessels and aircraft was usually made subject to special conditions of sale and would, under article 5, to that extent be taken out of the Convention.

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Contd…• At the request of India, hovercraft were included in the list of exceptions. On the

basis of the argument advanced by the Indian delegation that such craft are treated in Indian law the same as ships or aircraft, one may conclude that this exception includes only hovercraft that can be used as boats and not other kinds of vehicles or vessels that operate on the principle of the pneumatic cushion.

• Finally, by tradition, sales contracts concerning the supply of electricity are excluded from the Convention's sphere of application in Article 2(f) and of that ULIS in Article 5(1)(c). The exclusion seems to conflict with the need for consistency. However, the electricity-producing industries, which should be the only ones affected by it, elaborate their transnational agreements in such detail, that there is seldom any need to consult the applicable law.

• In sum, the exceptions listed in ULIS were maintained in the Convention. Attempts to exclude other goods from the Convention's sphere of application were averted by the use of the argument that the parties always have the right to exclude the goods if they wish by choosing a different applicable law.

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Exclusion of sales of electricity

The Committee considered two proposals: • (a) That subparagraph (f) be deleted so that the sale of electricity would be within the

scope of the Convention; and (b) To exclude from the scope of the Convention also the sale of gas.

The Committee did not retain the proposal for deletion of subparagraph (f). It noted that, in many legal systems, electricity was not considered to be a corporeal movable and that, consequently, the deletion of the subparagraph would not necessarily bring the sale of electricity within the Convention but might, on the contrary, give rise to uncertainty.

• The Committee also did not accept the proposal that the sale of gas be assimilated to the sale of electricity and thus be excluded from the scope of the Convention. It was noted that since a considerable number of both simple and compound bodies existed in either gaseous, liquid or solid state, the sale of these goods would be excluded under the proposal or, at least, present borderline cases. The Committee was of the view that the drawing up of a list of all borderline classes would be a lengthy process and would be inadvisable. In cases where the application of the Convention to the sale of gas was not desired, the parties could, under article 5, vary the effect of any of its provisions. The Committee was therefore agreed to maintain the present wording of subparagraph (f).

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Contracts governed by the Convention

• The Convention applies to contracts for the sale of goods. Although the Convention does not provide any definition of this type of contract, a definition can be derived from articles 30 and 53. Thus, the contract for the sale of goods covered by the Convention can be defined as a contract “pursuant to which one party (the seller) is bound to deliver the goods and transfer the property in the goods sold and the other party (the buyer) is obliged to pay the price and accept the goods”. Thus, as one court put it, the essence of the contract lies in goods being exchanged for money.

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Article 3

• (1) Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.

• (2) This Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.

• Article 4• This Convention governs only the formation of the contract of sale and the rights and obligations

of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:

• (a) the validity of the contract or of any of its provisions or of any usage; • (b) the effect which the contract may have on the property in the goods sold. • Article 5• This Convention does not apply to the liability of the seller for death or personal injury caused by

the goods to any person. • Article 6• The parties may exclude the application of this Convention or, subject to article 12, derogate

from or vary the effect of any of its provisions.

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ICC Arbitration Award Case No. 8786 of January 1997Facts.

• The Respondent clothing retailer [buyer] placed a number of orders with the Claimant clothing manufacturer [seller]. One month prior to delivery, the [seller] sent a number of samples to the [buyer]. [Buyer] returned its criticisms of all but two of the samples twelve days later. In response to the criticisms, [seller] sent new samples to [buyer's sub-agent, who in turn advised [seller] that the samples were acceptable. Ten days prior to delivery, the order was cancelled by [buyer's sub-agent. [Seller] initiated this arbitration requesting damages for accessories it could not otherwise use as well as loss of profit and costs. [Buyer] replied that the orders were seasonal and, as such, timely provision of acceptable samples and finished product was required.

• Upon being advised by [seller] that it could not deliver on time, [buyer] requested a reduction of price and a commitment from [seller] that it would deliver on time. When neither was forthcoming, [buyer] advised [seller] that the [buyer] would be canceling the order due to [seller]'s fundamental breach.

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