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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 292-297. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 42

Third-Party Claims Based on a Patent or Other Intellectual Property

A. Infringement Claims in Multi-State Settings Patent Claims
B. Evolution of Article 42
      (1) The 1964 Sales Convention: ULIS
      (2) Legislative Process in UNCITRAL
C. Responsibility of Seller
      (1) Knowledge: Locale of claim

§ 267 A. Infringement Claims in Multi-State Settings Patent Claims

In international trade, claims based on patents, copyrights and trademarks can generate problems of considerable complexity. The examination of Article 42 (quoted infra at §269) may be aided by first considering the following illustration:

Example 42A. Seller is located in State S and Buyer in State B. After Buyer purchased goods from Seller, Claimant notified Buyer that use or resale of the goods would infringe Claimant’s patent rights.

In international trade the problem is complicated by the variety of geographical (and legal) settings in which claims based on industrial or other intellectual property may arise. Distinct problems arise in the four settings that follow:

(1) Buyer proposes to use or resell the goods in Seller’s State (State S) and the infringement claim arises under a patent registered in that State.

(2) Buyer proposes to use or resell the goods in its State (State B) and the infringement claim is asserted under a patent registered in that State.

(3) Buyer proposes to use or resell the goods in a third State (State T) and the infringement claim is asserted under a patent registered in that State.

(4) The above three situations involve an infringement claim based on a patent registered in the state of use or resale. However, in the setting described at (2) above, the patent on which Claimant relies may have been registered initially in Seller’s State (State S) (or in a third State (State T)) but claims under the patent may be recognized by the courts of the Buyer’s State (State B) based on rules of private international law or on a treaty providing for the international recognition of patent rights.[1][page 292]

§ 268 B. Evolution of Article 42

(1) The 1964 Sales Convention: ULIS

The 1964 Sales Convention (ULIS) did not address these questions. Article 52 of ULIS (placed in a section entitled "Transfer of Property") gave the buyer protection where "the goods are subject to a right or claim of a third person." Although this language would appear to apply to a "right or claim" based on patents or other types of intellectual property, the preparatory papers and Prof. Tunc’s commentary discuss this provision in terms of third-party ownership claims; on the other hand it has been concluded that an injunction preventing use of the goods violates the buyer’s right under ULIS 33(1)(d) that the goods "possess the qualities necessary for their ordinary or commercial use."[2] However, if infringement claims were decided under such rules relating to the conformity of the goods, whimsical results would flow from the provision of ULIS 35(1) that conformity is to be decided by the condition of the goods "at the time when risk passes." If the goods are subject to a patent restriction only in Buyer’s state (State B), Seller would seem to be responsible under terms quoted "Ex Ship," but not under terms quoted "F.O.B. Port of Loading."

In short, the 1964 uniform law did not face problems of considerable importance and difficulty. Certainly the drafters did not consider the problems that could arise (as in paragraph (3), supra at §267) if the buyer takes the goods to a third State (State T) and encounters difficulties under a patent registered only in that State.

§ 269 (2) Legislative Process in UNCITRAL

These problems were confronted at a late stage in UNCITRAL’s work. In 1976 the Working Group tentatively excluded from the Convention problems arising from "rights or claims which relate to industrial or intellectual [page 293] property or the like."[3] The Comments and proposals that were submitted to UNCITRAL’s tenth session (1977) called for further attention to the problem [4] and a special working group was appointed to deal with the problem. A consensus developed that the ULIS approach was not adequate and that the problem was too important to be left to diverse national rules and to the uncertainties of private international law.[5] A draft prepared during UNCITRAL’s tenth session led to the following provision of the Convention:

Article 42 [6]

"(1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property:

(a) under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or

(b) in any other case, under the law of the State where the buyer has his place of business.

"(2) The obligation of the seller under the preceding paragraph does not extend to cases where:

(a) at the time of the conclusion of the contract the buyer knew or could not have been unaware of the right or claim; or

(b) the right or claim results from the seller’s compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer."[page 294]

§ 270 C. Responsibility of Seller

(1) Knowledge; Locale of claim

The seller’s responsibility is limited by this general rule: Under Article 42(1) the buyer is protected with respect to only those rights or claims of which "the seller knew or could not have been unaware" when the contract was concluded.[7] "Could not have been unaware" seems to set a standard close to actual knowledge, in contrast to "ought to have known" which can imply a duty to inquire. (See the fuller discussion of these standards at §229, supra.)[8] The seller’s responsibility for defects in the goods under Article 35 (§§223225 supra) and for third party claims to the property under Article 41 (§262 supra) is subject to no comparable restriction: Under these articles the seller’s lack of knowledge of the defect in the goods or of the third-party claim is irrelevant.

The protection that Article 42 affords to buyers is also restricted since the seller may only be responsible for rights or claims that are based on the law of specified places. Under paragraph (1)(a), if the parties contemplated that the goods would be resold or otherwise used in a specified State the seller may be responsible only for a right or claim asserted under the law of that State. If the transaction did not contemplate where the resale or other use would occur, under paragraph (1)(b) the seller may be responsible only for a right or claim asserted under the law of the State where buyer has its place of business. In the usual (but possible) situation in which the parties contemplate that a foreign buyer will resell or otherwise use the goods in the seller’s State, limiting the seller’s responsibility to claims of which "the seller knew or could not be unaware " seems surprising and, in view of the unusual nature of the case, may have been unintended.

Paragraph (2) adds further restrictions but these are of less importance. Sub-paragraph (2)(a), denying protection to a buyer "who knew or could [page 295] not have been unaware of the right or claim", is similar to Article 35(3), supra at §222. Sub-paragraph (2)(b), relieving the seller of responsibility where the buyer furnishes the specifications, is of limited scope and calls for little comment. A similar restriction appears in (U.S.A.) UCC 2-312(3). A statutory provision of reasonable length can scarcely deal adequately with claims based on the various types of industrial or intellectual property in all of the legal settings that may arise in an international sale. In situations where patent, copyright, or trademark claims can be expected, the parties would be well advised to provide specific answers to the problem in the contract.

Article 42, like Article 41 (§§264266, supra) provides that the buyer is entitled to receive goods that "are free from any right or claim of a third party", and thus protects the buyer from both rightful and contested claims. Litigation problems in connection with contested ownership claims (Art. 41) were considered supra at §266. Similar problems are generated by third-party claims based on patents or other types of intellectual property.

As has been noted (§266), when the buyer does not find it desirable or practicable to escape from the difficulty by avoiding the contract, the only effective protection for the buyer will be for the seller to take over the responsibility and expense of resisting the claim. The seller may voluntarily do this because of its interest in the further salability of its product. If the seller should fail to respond the buyer will need to consider the resources provided by the remedial provisions of the Convention and by domestic procedural law.

A strong premise for effective legal action is provided by CISG 46(1): "The buyer may require performance by the seller of his obligations...". As has been noted, vindication of the buyer’s right to protection from third-party claims may require defense of the claim by the seller. The buyer would hope that the seller has sufficient commercial contacts with the State of the forum in which the third party claim is brought so that this forum has jurisdiction to require the seller to defend the action. If jurisdiction may not be based on such contacts the buyer will wish to explore whether the forum has rules like those developed by common law courts to deal with similar problems presented by the large number of separate jurisdictions in the United States.[9] This common-law procedure was broadened and codified by the Uniform Commercial Code, Section 2–607:[page 296]

"(5) Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over

(a) he may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does not come in and defend he is so bound.

(b) if the claim is one for infringement or the like (subsection (3) of Section 2–312) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred."

In important transactions in which third-party claims are possible, the buyer should insist on contract provisions that clearly state the protection that the seller provides in the case of third-party claims (for the limitations on this protection see §270, supra), including the responsibility to defend (or "hold the buyer harmless" from) such claims. See the Annotated Export Contract, Art. 10—Patent Indemnity, Kritzer Guide 570 (also gives buyer stronger substantive protection than Article 42 of the Convention. See also Kritzer Manual, Ch. 12 (explanation and alternative forms).

Decision on Intellectual Property: (semble): NETH. Arr. Rb. Zwolle, HA ZA 92-1180, 1 March 1995. Claim by Dutch B v. Italian S, based on suit by third party (T) against B, claiming that textiles S had delivered to B violated T’s copyright on the design of the textiles. The court: CISG 42 required that B prove that S "knew or could not have been unaware" of T’s intellectual property rights. (Basis not clear.) UNILEX D.1995–7.1.

See: Schlechtriem, Com.(1998) 334–343 (Schwenzer).[page 297]

FOOTNOTES: Chapter on Article 42

1. The treaty may provide for (and require) simplified registration in additional states (e.g., State B). See, e.g. International Convention for the Protection of Industrial Property, Paris 1883, and Lisbon Revision of 1958, 13 U.S.T. & D.I.A. T.I.A.S. No. 4931. For a broad definition of "intellectual property" see The Convention Establishing the World Intellectual Property Organization (1967), Art. 2(viii). See also R. Gadbaw & T. Richards, Intellectual Property Rights (1988); Ladas, Patents Trademarks and Related Rights, National and International Protection (1975).

2. Schlechtriem, 1986 Commentary 73 (both ULIS and German Civil Code); (U.K.) SGA (1893) 12; an implied condition of a "right to sell the goods" was violated when sale was enjoined based on a trademark violation resolved by removal of the labels. See Niblett v. Confectioners’ Materials, [1921] 3 K.B. 387, Benjamin §§236, 252. UCC 2–312(3) gives protection against "the rightful claim of any third person by way of infringement or the like". See White & Summers, §9–12; Robertson, 44 Mich. L. Rev. 934 (1946).

3. W/G 7, Annex I (Art. 7(2)), VII Yearbook 90.

4. Rep. S-G, "Analysis of Comments by Governments," Art. 7 paras. 4–7, VIII Yearbook 147. These comments are reproduced in VIII Yearbook 110 (Australia), 115 (Finland), 116 (F.R.G.), 120 (Norway), 130 (U.S.S.R.).

5. UNCITRAL X paras. 210–229, VII Yearbook 40–41, Docy. Hist. 333–334. See also the Summary Records of this session of UNCITRAL, A/CN.9(X)/C.1 SR. 11 paras. 32–33 (appointment of working group) and SR. 29, 30 and 32.

6. Art. 42 is substantially the same as paragraphs (1) and (2) of Art. 40 of the 1978 Draft. The substance of paragraph (3) of the 1978 Draft, dealing with notice to the seller, became Art. 43(1), infra. For action at the Diplomatic Conference see O.R. 9, 36–37, 324–328, 427, 109–111, 159, 208; Docy. Hist. 386, 426–427, 398–399, 545–549, 648, 681–683, 718, 743.

7. This restriction on the seller’s responsibility is criticized in Huber, 43 Rabels Z 413, 503 (1979). Under (U.S.A.) UCC 2–312(3) a merchant seller "warrants that the goods shall be delivered free of any rightful claim of any third person by way of infringement or the like": whether the seller knows of the claim is irrelevant.

8. On the other hand, a duty of inquiry under Article 42 is suggested in the Secretariat Commentary (draft Art. 40 at para 6): The seller is responsible for knowledge "of a patent application or grant which has been published in the country in question". O.R. 37, Docy. Hist. 427. Perhaps this conclusion is based on a rule of "constructive knowledge" imposed by the statute or treaty. Compare Schlechtriem, 1986 Commentary 74: seller "must inform himself", but citing Huber for a much lighter standard. See also O.R. 78 (draft Art. 40 at §5), Docy. Hist. 399.

9. These rules, called "vouching in the warrantor" were developed at an early day to cope with jurisdictional problems arising from the liability of prior parties to a negotiable (money) instrument, such as the liability of the maker of a note to an endorser who was sued by a holder of the instrument. See White & Summers §9–12 at note 12, citing S. Williston, Contracts §980 (ed. 1964).

Pace Law School Institute of International Commercial Law - Last updated February 25, 2005
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