The United Nations Convention on Contracts for the International Sale of Goods (CISG)

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1 Rechtswissenschaftliche Fakultät Institut für Zivilrecht Wintersemester 2017 KU UN-Kaufrecht Uniform Sales Law The United Nations Convention on Contracts for the International Sale of Goods (CISG) José Angelo Estrella Faria

2 The United Nations Convention on Contracts for the International Sale of Goods (CISG) Part I: Basic Principles, Scope of Application and Interpretation of the CISG Geographic scope of application Notion of contract of sales Location of parties Choice of CISG as applicable law Exclusion of CISG as applicable law Material scope of application Material scope of application: grey zone contracts Commissioning and services contracts Excluded matters Interpretation of the CISG Rules of interpretation Gap-filling

3 The United Nations Convention on Contracts for the International Sale of Goods (CISG) Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Contract formation: offer and acceptance Basic rules on contract formation Conditions for effectiveness of an offer Open-price contracts Revocability of offer and acceptance Expression of acceptance Counter-offer and modified acceptance Contract interpretation and gap-filling Contract interpretation: subjective and objective elements Binding nature of usages and custom

4 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Territorial scope of application Article 1 Article 1 (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.

5 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Territorial scope of application Article1 Contracts of sale of goods Sales contract is understood as the exchange of goods for money, regardless of whether domestic law treats it as commercial or civil contract, including partial sales (instalments), direct sales to buyer s customers, sale of goods to be installed on land, sale of goods not intended to be resold Goods not defined, but generally covers all moveable, tangible goods regardless of their shape and whether they are solid, used or new, inanimate or alive.

6 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Territorial scope of application Article1. between parties whose places of business are in different States: when the States are Contracting States (at the time of the sale) or when the rules of private international law (of the forum) lead to the application of the law of a Contracting State (However, 7 States made reservations to this provision: Armenia, China, Czech Republic, Saint Vincent and the Grenadines, Singapore, Slovakia, United States)

7 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Choice of CISG as applicable law Generally possible in arbitration As contract provisions incorporated by reference or As rules of law applicable by the tribunal Apart from express incorporation by reference, choice of CISG generally not possible in court proceedings, at least not before courts that have to apply either the 1980 Rome Convention on the Law Applicable to Contractual Obligations or the 1955 Hague Convention on the Law Applicable to International Sales

8 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Exclusion of CISG as applicable law Article 6 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.

9 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Exclusion of CISG as applicable law Article 6 Parties may avoid the CISG entirely (exclusion) or specific provisions in whole (derogation) or in part (variation), but may not displace a form requirements in States that made a declaration under Article 95 Express exclusion can be effected in the contract itself or by incorporation of general conditions that expressly exclude the CISG Implicit exclusion also possible, notably when the parties choose the law of a non-contracting State as the applicable law However, when parties choose the law of a contracting State (e.g. German law, Austrian law ) CISG applies unless parties expressly refer to domestic law only (e.g. ABGB, Code Civil, articles 1582 et suivants )

10 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Material scope of application Article 2 Article 2 This 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.

11 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Material scope of application Article 2 CISG Art. 2(a) generally excludes consumer contracts, but CISG does not use the term consumer Sales of goods in auctions and forced sales remain subject to their specific regimes under domestic law Negotiable instruments, stocks, shares: often qualified as instruments incorporating intangible assets (rights) and are subject to specific regulatory concerns Ships, vessels, hovercrafts, aircraft: often treated by domestic laws as immoveable property (However, CISG covers sales of components and parts) Electricity (intangible)

12 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Material scope of application: grey zone contracts CISG does not apply to distribution agreements or framework agreements, but can apply to contracts for the sale of goods concluded under a distribution agreement Franchise agreements also fall outside the Convention s sphere of application. Courts and scholars still divided as to whether CISG applies to barter transactions Turn-key contracts are not governed by the Convention

13 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Commissioning and services contracts Article 3 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.

14 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Commissioning and services contracts Article 3 The mere fact that the supply of goods requires or is combined with the provision of services such as where the seller undertakes to install, dismantle or maintain the goods, to train personnel, or to design the goods, does not preclude CISG application as long as these additional obligations are only ancillary to the primary obligation to deliver goods Preponderance test: the economic value of the obligations relating to the supply of labour and services must exceed the economic value of the obligations regarding the goods Thus, as a rule, CISG does not apply where the obligation regarding the supply of labour or services amounts to more than 50% of the value of the seller s obligations Supply of intellectual work (e.g. a market study, a custom-made software) does not become sale of goods merely because the results are recorded on a tangible medium (e.g. a printed report, a DVD), although off the shelf products (e.g. standard Software) may fall under the CISG for relevant matters (e.g. conformity of goods, performance, damages)

15 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Excluded matters Article 4 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.

16 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Excluded matters Article 4 The applicable domestic law governs, for instance: Capacity to contract, Agency Illegality The consequences of mistake, duress and fraud Misrepresentation and negligence Domestic law also determines when the buyers becomes the owner of the goods, i.e. whether: By contract ( consensual transfer, or French system ) By delivery ( transfer by tradition, or German system )

17 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Excluded matters Article 5 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. Debate as to whether CISG covers redress claims for death or personal injury (e.g. of buyer s customers) by virtue of Article 74 (damages) No doubt that CISG covers claims for property damage caused by non-conforming goods

18 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Rules of interpretation Article7 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.

19 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Rules of interpretation Article 7(1) Partial relevance of general rules on treaty interpretation (Vienna Convention on the Law of Treaties, Articles 31-33) The international character of the CISG requires courts and arbitrators to consider comparative law and avoid homeward trend Need for uniformity calls for consideration of foreign decisions (but does not elevate them to binding precedents) Observance of good faith in international trade is a rule of interpretation of the CISG but not a source of individual obligations for contract parties ( Auslegungsgrundsatz but no Rechtsgrundsatz )

20 Part I: Basic Principles, Scope of Application and Interpretation of the CISG Gap-filling Article 7(2) Matters covered but not fully addressed by the CISG ( internal gaps) must first be resolved in the light of the CISG own general principles, for example Party autonomy and freedom of form Observance of good faith in international trade Estoppel Preservation of contract Full compensation of damages Duty to mitigate losses Filling of internal gaps by reference to domestic law only a last-resort option Matters outside the scope of the CISG ( external gaps) to be addressed in accordance with the applicable law

21 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Basic rules on contract formation Articles 23, 15 and 24 Article 23 A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention. Article 15 (1) An offer becomes effective when it reaches the offeree. [ ] Article 18 [ ] (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. Article 24 For the purposes of this Part of the Convention, an offer, declaration of acceptance or any other indication of intention reaches the addressee when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address, to his habitual residence.

22 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Basic rules on contract formation Articles 23, 15 and 24 Classical paradigm of contract formation at a distance (inter absentes), applying the reception rule for the effectiveness of communications CISG also applies to contracts concluded by other means (with specified closing date, by electronic means, calls form tenders, internet auctions or in commodity exchanges) CISG does not govern pre-contractual liability (culpa in contrahendo) CISG does not deal with avoidance of contract or its clauses for violation of public policy rules (e.g. unconscionability, illegality, immorality). Unanswered commercial letters of confirmation ( Kaufmännisches Bestätigungsschreiben ) do not suffice if they are not acknowledged as a trade custom in both parties countries

23 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Conditions for effectiveness of an offer Article 14 Article 14 (1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. (2) A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal.

24 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Conditions for effectiveness of an offer Article 14 Quantity may be expressed as a range or variable ( 700 to 800 tons, up to 250,000 pounds ), if range is acceptable in the trade concerned or reasonably understood by the other party ( three truck loads of eggs, 20 truck loads of tinned tomato concentrate understood to mean that the trucks should be filled to their full capacity) or may be even open-ended ( a greater number of Chinchilla furs ) where buyer accepts delivery without objection Offer does not need to include all the terms of the proposed contract, in particular where the Convention has default rules (e.g. quality, place of delivery, the period of delivery, the mode of transportation) Offers to the public are treated as invitations to treat (invitatio ad offerendum), and not as binding offers

25 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Open-price contracts Article 55 Article 55 Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned.

26 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Open-price contracts Article 55 Liberal interpretation: a contract for sale of goods whose price is not fixed or determinable pursuant to article 14 is nonetheless effective owing to the subsidiary method of price determination set forth in article 55 (cases often involved contracts whose performance had been commenced by the parties) Restrictive interpretation: Gives precedence to article 14 over article 55, concluding that the contract had not been formed since no price had been specified by the parties Neutral interpretation: the validity of a contract without a price is governed by the applicable domestic law, in accordance with CISG article 4 In any event, the intent of the parties is the paramount factor

27 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Revocability of offer and acceptance Articles 15 and 22 Article 15 [..] (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. Article 16 (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. (2) However, an offer cannot be revoked: (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Article 22 An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.

28 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Revocability of offer and acceptance Articles 15 and 22 CISG reaches a compromise between binding (Germanic and Scandinavian jurisdictions) and non-binding nature of offer (Romanic civil law and common law jurisdictions) Fixed time for acceptance (option contract) entails a rebuttable presumption of irrevocability 16(2) reflects principle of estoppel

29 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Acceptance Article 18 Article 18 (1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance. (2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. (3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph.

30 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Expression of acceptance Article 18 An offeree s silence or inactivity does not amount to an acceptance, but prior course of dealing may require offeree to promptly reject an offer so that delay in objecting may constitute acceptance Examples of conduct found to indicate assent include: buyer s acceptance of or payment for goods, or issuance of bank transfer as an advance payment seller cashing a cheque, accepting a bank guarantee, or starting-up of production of the goods; buyer s or a third party s taking delivery of goods; issuance of letter of credit or signing invoices to be sent to a financial institution with a request that it finance the purchase; drawing up and issuing a pro forma invoice or sending invoices and packing lists, sealing and sending back the purchase order a handshake by the representatives of the parties

31 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Counter-offer and modified acceptance Article 19 Article 19 (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

32 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Counter-offer and modified acceptance Article 19 Article 19 (3) comprises a rebuttable presumption of materiality: modifications are not material if the parties do not treat them as such or in the light of usages and course of dealing Battle of forms, or exchange of conflicting standard terms and conditions Several decisions have included those terms on which the parties substantially agreed, and replace the conflicting terms with the default rules of the Convention ( knock-out rule); Several other decisions have given effect to the standard terms of the last person to make an offer or counter-offer that is then deemed accepted by subsequent performance by the other party ( last-shot rule)

33 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Freedom of form and contract modification Articles 11 and 29 Article 11 A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses Article 29 (1) A contract may be modified or terminated by the mere agreement of the parties. (2) A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.

34 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Freedom of form and contract modification Articles 11 and 29 Article 11 admits purely oral or contracts concluded through exchanges other than writing However, Article 96 allows Contracting States to declare that any provisions that allows a contract of sale or its modification or termination by agreement or any offer, acceptance, or other indication of intention to be made in any form other than in writing, does not apply where any party has his place of business in that State (Argentina, Armenia, Belarus, Chile, Paraguay, Russia, Ukraine and Vietnam ) No place for parol evidence rule, but merger clauses are admissible, except promissory estoppel

35 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Contract interpretation Article 8 Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

36 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Contract interpretation: subjective and objective elements Article 8 (1) recognizes subjective criteria for interpretation, when the true intent of the parties was known or could not have been ignored by them Where the terms of the contract are clear, they are to be given their literal meaning, so parties cannot later claim that their undeclared intentions should prevail A party who negotiates or accepts an offer in a foreign language must bear the risk of understanding the intricacies of the meaning of the foreign language (article 8) Where a contract term is ambiguous, preference is given to an interpretation against the party that supplied that term (interpretation contra proferentem) Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect (favor negotii interpretation)

37 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Binding nature of usages and custom Article 9 Article 9 (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are considered, unless otherwise agreed, 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.

38 Part II: Contract Formation, Essential Elements and Gap-Filling under the CISG Binding nature of usages and custom Article 9 The parties agreement to a custom or usage may be expressed by conduct and need not be explicit If parties do not want to be bound by the practices established between themselves, they need to expressly exclude them Examples of estoppel principle: a seller may be required to deliver replacement parts promptly because that had become normal practice between the parties a seller may not rely on article 18 (silence does not amount to acceptance) because the parties had established a practice in which the seller filled the buyer s orders without expressly accepting them a buyer who repeatedly signs the faxed copy of the order confirmation containing standard contract forms may be seen as tacitly accepting them

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