CISG: UN Convention on Contracts for the International Sale of Goods

History + Status in NZ:

-Negotiations started in the 1920's and were initially guided by the International Institute for the Unification of Private Law (UNIDROIT) and the Hague Conference for Private International Law, then by the UN Commission on International Trade Law (UNCITRAL) • Binding in NZ by virtue of the Sale of Goods (UN Convention) Act 1994

2. Contract of sale

-The seller is obliged to deliver the goods and transfer ownership to the buyer • The buyer is obliged to pay the price

Validity of a derogation agreement:

: assessed according to Arts. 14 ff CISG or the the PIL of the forum? • Derogation agreement separate from the main sales contract. Arts. 14 ff CISG are only aimed at the formation of the sales contract, see Art. 14(1) ("goods", "quantity", "price") => Art. 14 ff CISG do not cover the formation of choice of law clauses or forum selection clauses => Result: validity assessed according to the PIL of the forum

b) Place of business, Art. 10

If a party uses it openly to participate in trade and if it is not merely temporary and displays a certain degree of independence in the sense of having a certain independent ability to act

(a) Mixed contracts

Mixed contracts • A general principle can be derived from Art. 3(2) to the effect that if one contract contains two or more different elements, the CISG will not apply if the elements which are outside the scope of the CISG form the preponderant part of the contract, Art. 7(2) • Permission to pay in instalments does not make the finance element preponderant

Problem:

The CISG is applicable but the parties plead their case solely on the basis of a domestic legal system => Implicit derogation of the CISG under Art. 6, 1st alternative • The answer depends on how the PIL of the forum (lex fori ) deals with the application of non-domestic law o If the law of the forum requires the parties to actually invoke the application of non-domestic law, then the court will apply domestic law o If the law of the forum applies the principle of "iura novit curia" to the application of non-domestic law, the court should only regard such behaviour by the parties as a derogation of the CISG if there is evidence that the parties knowingly restricted their pleadings to domestic law in order to avoid the CISG, ie that they knew that without their behaviour another set of rules than the domestic law pleaded might apply

Interpretation of the derogation agreement

according to Art. 8 CISG or the interpretation rules of the PIL of the forum? • Courts in a Contracting State should apply Art. 8 and use autonomous standards when interpreting the derogation agreements • Courts in non-Contracting States should apply the rules designated for such purposes by their PIL

c) Derogation from specific CISG provisions

• As the CISG is applicable in principle, the formation and interpretation of such a specific derogation agreement should be governed by Arts. 8, 14 ff CISG

(c) Art. 1(2)

• Burden of proof: on the party that relies on the exception

SUMMARY:

• If the court is in a Contracting State, the first step is the application of Art. 1(1)(a) which will lead to the application of the CISG if both parties have their places of business in a Contracting State • If that is not the case, one has to distinguish further according to whether the forum state has made a reservation under Art. 95: o If the forum state has not done so, the court will have to resort to Art. 1(1)(b) o If the forum state has made a reservation under Art. 95, the court will not apply Art. 1(1)(b), but will look to its PIL in order to find the applicable sales law • If the court is in a non-Contracting State, Art. 1(1)(a) will not be applicable. The court will not directly apply Art. 1(1)(b) either, but resort to its rules of PIL to find the applicable sales law

A. Good faith

• Should not be used to override CISG rules

3. Errors concerning the other party's ability to perform

• Governed by Art. 71 => No "validity" issue within the meaning of Art. 4(a) => Domestic remedies for such cases not applicable

1. Errors concerning the equality or the characteristics of the goods

• The buyer should not be permitted to have recourse to any domestic remedies for errors concerning characteristics or qualities of the goods • In many cases where the goods were defective at the time of contracting, there will also have been an error of the buyer in that respect (otherwise he would not have bought the goods, at any rate not for the normal market price). If one allowed the buyer to have recourse to the right to rescind under domestic law, the restrictions that the CISG imposes on the right to avoid the contract for defects of the goods, e.g. the notice requirement under Art. 39, the exception in Art. 35(3), the fundamental breach requirement in Art. 49 (1)(a), would be undermined. This would also impair the objective of the uniform interpretation of the CISG, Art. 7 (1) • "Validity" within the meaning of Art. 4(a) = only issues that are not positively governed by CISG • The question of whether the buyer can rely on the defects in the goods in order to get out of the contract is one of the core issues of the system of remedies of the buyer, Arts. 45 f, 49

6. Party autonomy, Arts. 6, 12 a) Application of the CISG by virtue of the parties' choice

• The parties to a contract (from non-Contracting States) may choose the law of a Contracting State => The CISG applies as part of the law of this Contracting State Can the parties choose the CISG as the applicable law? • Whether the parties can choose non-state law depends on the PIL of the forum state • Even if it does not allow it, the parties can still incorporate the provisions of the CISG into their contract. The CISG will thus be applicable not as law but as contract clauses • Difference: the contractual incorporation will not shield the CISG from the mandatory rules of the applicable state law (as designated by the PIL of the forum state)

Personal injury, Art. 5

• The purpose of Art. 5 is to avoid conflicts between the CISG and domestic legal systems of product liability • If Art. 5 applies, it will be for the PIL of the forum to determine the applicable law

7. Standard terms

• The question whether standard terms have been effectively incorporated into the contract is governed by Art. 8 CISG • The question whether standard terms are valid (e.g. a control of their content according to standards of fairness) will be governed by the applicable domestic law In what language are the referring clause and the standard terms to be drafted in order to be incorporated? • The salient point is whether the recipient understood or was at least under the circumstances of the case required to understand the language used, Art. 8 o The language in which the negotiations were made (+) o The use of the recipient's language (+) • When the standard terms have been effectively incorporated into the contract, the issue may arise whether their contents should be subjected to some form of control according to standards of fairness => This is an issue of validity within the meaning of Art. 4(a) => Governed by the applicable domestic law

B. Interpretation of declarations of the parties, Art. 8 . First step: subjective test, Art. 8(1)

• The subjective intent of the declaring party will be relevant in two situations: o The other party knew it ("subjective meeting of the minds") => If both parties mean the same thing although objectively used the wrong expression, the common intention prevails, irrespective of what an objective outsider might have understood ("falsa demonstratio non nocet") o The other party could not have been unaware of it (gross negligence)

Connection to a Contracting State (a) Autonomous mechanism, Art. 1(1)(a)

• The two states where the parties have their places of business must both be Contracting States • Art. 1(1)(a) will only apply if the court is in a Contracting State (as a court in a non-Contracting State will not have to look at Art. 1) • Contracting State = where the CISG has entered into force

2. Fraud

• Where the buyer has been induced to conclude the contract by fraud, the domestic fraud remedies are applicable, even if the fraud is related to the characteristics of the goods, because the fraudulent seller does not deserve the protection of the CISG

(c) Private use, Art. 2(a)

• Burden of proof: on the buyer • The CISG only applies where the buyer has bought the goods for business or professional use => Excludes typical consumer sales from the CISG • By way of exception (to be proven by the seller), the CISG can apply to purchases for private use if the seller neither knew nor ought to have known (was grossly negligent) that the goods were bought for such use

(b) Sale of a company, Art. 2(d)

• Even if the company is not sold by way of its shares, but by way of its assets (asset deal), the preponderant part of the assets still consists of intangible rights or immovable property => The entire contract falls outside the scope of the CISG.

4. Initial impossibility

• Example: S sells B a used machine which has already been destroyed at the time of the conclusion of the contract • Governed by the CISG rules on non-performance => Any domestic provisions which regard a contract as invalid in cases of initial impossibility not applicable • Under contracts governed by the CISG, initial impossibility is not a ground for invalidity, but only one of the instances that may give rise to remedies under the CISG REMEDIES

(b) Contracts with a service element, Art. 3(2)

• Examples: to install the sold machine, to instruct the buyer's personnel in its use, to provide adequate documentation • Burden of proof: on the party claiming that the CISG does not apply because the service part is the preponderant part of the contract • Art. 3(2) only applies if there is one single contract which contains both the obligation to furnish the goods and the service (labour) obligation • If there are two separate contracts, one concerning the goods, the other concerning the services, Art. 3(2) will not apply => In these cases the sales contract will be governed by the CISG, the service contract by the applicable domestic law as determined by the PIL rules of the forum • Whether delivery and services are contained in one contract or in two is primarily a matter of interpretation of the contract(s): Did the parties agree on one global prize? Were all the agreements contained in one document?

IV. Scope of application, Arts. 1, 100 A. Contracts for international sale of goods between private businesses

• Excludes: o sales to consumers, Art. 2(a) o sales of services o sales of certain specified types of goods, Art. 2(d)-(f) • Goods in the sense of the CISG = moveable, tangible objects • The CISG will not cover the sale of know-how which is not in any form incorporated in a physical or electronic medium

International character, Art 1(1), (2)

• For the CISG to apply, the parties to a contract must have their place of business in different states + these states must be Contracting States OR the PIL must lead to the application of the law of a Contracting State, Art. 1(1) • Note that the CISG does not refer to the place of the conclusion of the contract nor the place of performance

V. Interpretation of the CISG, Art. 7(1)

• Has to be interpreted autonomously => CISG meaning o Phrases should not be regarded as having the same meaning as identical phrases that may exist in the domestic order o Having said that, the autonomous interpretation may lead to the result that the CISG-term actually has the same meaning as the corresponding domestic term • There is no supranational court having the power to decide on the correct interpretation of the CISG • National rules of interpretation do not apply, instead Art. 31 Vienna Convention on the Law of Treaties, i.e. the wording, the negotiating history, the purpose, systematic approach, comparative legal analysis • National courts should take into account foreign case law and academic writings as persuasive authority when interpreting the CISG

(a) Examples

• If two parties with their places of business in France conclude a contract for the sale and shipment of goods from China to Spain, the CISG will not apply • If a party with its place of business in China contracts with a party with its place of business in Spain for the sale and shipment of goods from Paris to Bordeaux, the CISG will apply

B. Subject matters covered/excluded, Art. 4

• Part II: formation of the contract, which is concluded by the exchange of offer and acceptance • Part III: obligations of the parties to the contract, including remedies for breach of contract • The validity of the contract and the effect of the contract on the property in the goods sold fall outside the scope • Formation = external consensus (offer and acceptance) • Validity = internal consensus (vitiating elements)

III. Relation to PIL and existing domestic law

• The CISG applies only to international transactions and avoids the recourse to rules of PIL for those contracts falling under its scope of application • International contracts falling outside the scope of the CISG, as well as contracts subject to a valid choice of other law, would not be affected by the CISG • Purely domestic sale contracts are not affected by the CISG and remain regulated by domestic law

(c) Sale of software

• The CISG applies to the sale of software that is materialised in some form (CDs, external drives) • It does not make sense to make a distinction to the sale of software that is transmitted electronically • The CISG applies to standard software as well as individually tailored software, Art. 3(1) • The CISG can only apply if the intention of the parties is to transfer ownership in the software to the buyer, and not merely to grant a licence on terms to use the software for a certain period of time. The latter would not fall under the CISG

(a) Goods to be manufactured, Art. 3(1)

• The CISG does not only govern the sale of the end product but also applies where the seller has to produce the goods, Art. 3(1) • No contract of sale within the meaning of the CISG where the material needed for that process is in "a substantial part" to be furnished by the buyer • "Substantial part" = the relevant criteria are the economic value of the buyer's contribution, its volume and the importance of its contribution for the end product • "Materials necessary for such manufacture or production" = raw materials; not material provided for the packaging of the goods • Burden of proof: on the party claiming that the CISG does not apply • No contract of sale within the meaning of the CISG where the one party simply performs services or work on the other party's goods, e.g. repairing his machine, converting his crude oil into petroleum • This result will not change if the services undertaken imply that he inserts some material of his own into the other party's product (e.g. exchange of spare parts in the course of the repair of the machine)

(b) Arts. 1(1)(b), 95

• The application of the PIL rules of the forum will lead to the designation of the sales law of one particular state => Is this state a Contracting State of the CISG? => If yes, the CISG applies to the contract (and not the domestic sales law of the designated state) • The courts in a Contracting State (which has not declared the Art. 95 reservation) will apply Art. 1(1)(b) • If the forum is in a non-Contracting State, the court will not apply Art. 1(1)(b). It will instead apply its own rules of PIL will designate the applicable domestic sales law => At this point, Art. 1(1)(b) can come into operation o If the applicable sales law is the law of a Contracting State, the contract will not be subject to the domestic sales law of that state, but to the CISG. As a consequence, the court in the foreign non-Contracting State will end up applying the CISG as part of the law of the Contracting State, ie as foreign la w o The forum state via its PIL "sends the contract away" to another state and therefore accepts the application of the rules that this other state provides for (international) sales

II. Purpose

• The contract of sale is the private law side of international trade • To provide a uniform regime for contracts for the international sale of goods => Otherwise, the rules of PIL would need to determine the law applicable to the contract => Uncertainty => Transaction costs for legal advice (notably an issue for small and medium-sized enterprises as well as traders located in developing countries) • To strike a balance between the interests of the buyer and the seller => Neutral body of rules (as opposed to national contract law)

5. Consideration

• The mere agreement of the parties to conclude a contract is not valid in common law systems unless some "consideration" has been offered given in return • Both formation rules (Arts. 14 ff) and the rules on form (Arts. 11 ff, 29) demonstrate that consideration is not required for either formation or variation under the CISG • It would not be correct to treat the consideration requirement as a validity issue and submit it to the domestic law according to Art. 4(a)

(b) Derogation agreement

• The parties may also exclude the CISG, Art. 6 => In this case, the PIL of the forum will have to designate the applicable law • Implicit derogation agreement when the parties to a contract o choose the law of a non-Contracting State o choose the law of a Contracting State + indicate in the choice of law clause that the domestic law of that state should apply (e.g. NZ domestic law, Australian law excluding the CISG, French Civil Code, California Commercial Code) • Not an implicit derogation agreement when the parties to a contract choose an Incoterm o Because: the Incoterms do not offer a complete sales regime but simply standardise certain party agreements on details concerning the place of performance, transport costs and risk etc. => By agreeing on one of the Incoterms, the parties modify particular CISG provisions (Art. 6, 2nd alternative), but they do not exclude the CISG altogether • A derogation agreement need not designate the law that should apply instead => The PIL of the forum will have to designate the applicable law