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Cite as Khoo, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 41-43. Reproduced with pennission of Dott. A Giuffrè Editore, S.p.A.

Article 3

Warren Khoo

1. History of the provision
2. Meaning and purpose of the provision
3. Problems concerning the provision

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.

1. History of the provision.

     1.1. - Article 3(1) has its antecedent in both ULIS (Article 6) and ULFC (Article 1(7)) except that in the reference to «essential and substantial part» of the materials supplied, the word «essential» has now been deleted. Article 3(2) is new and is based on Article 6(1) of the 1974 Limitation Convention. Indeed, in line with the general policy of UNCITRAL, the entire article is pari materia with Article 6 of the 1974 Limitation Convention, with the major exception of the order of the two paragraphs being reversed.

     1.2. - Paragraph (1) began its life in the Working Group with the words «essential and substantial» (Yearbook, II (1971), 64). Later, the word «essential» was dropped. The decision to delete this word, however, is not well documented in the Yearbooks.

     1.3. - Article 3(2) first appeared in the following form:

The present Law shall not apply to contracts where the obligations of the parties are substantially other than the delivery of and payment for goods (Yearbook, III (1972), 79).

     1.4. - In 1975, following the adoption of the 1974 Limitation Convention, the Working Group decided to adopt the same wording as in that Convention as follows: [page 41]

This Convention shall not apply to contracts in which the preponderant part of the obligations of the seller consists in the supply of labour or other services (Yearbook, VI (1975), 51).

     1.5. - At the Vienna Conference the word «seller» was replaced by the phrase «the party who furnishes the goods», to overcome the logical difficulty of referring to a seller when the transaction is not regarded as a sale.

2. Meaning and purpose of the provision.

     2.1. - Article 3(1) states the basic rule that the Convention applies to contracts for the manufacture and production of goods, unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for their manufacture or production. If the «buyer» supplies a substantial part of the materials, the contract is more akin to a contract for the supply of services or labour, and is therefore excluded from the scope of the Convention.

     2.2. - Article 3(2) lays down the rule that where the preponderant part of the obligations under a contract is the supply of labour and services, such a contract is not governed by the Convention.

Under paragraph (1), unlike the parallel provision in ULIS, the materials supplied need not be essential for the manufacture or production. Nor is it sufficient to take the transaction out of the Convention that the material supplied is an essential part. It must be a substantial part. What is substantial is a matter of degree. Certainly, it does not need to be a major part; if it is a considerable part, it would qualify to be considered as a substantial part.

     2.3. - In contrast, paragraph (2) refers to «the preponderant part». In the ordinary meaning of the word, it signifies that in order for the contract to be excluded from the Convention, the provision of labour and services must form a major part of the obligations under the contract. [page 42]

3. Problems concerning the provision.

     3.1. - Apart from the problems arising from the determination of what constitutes substantial and preponderant in these two paragraphs, the most likely source of difficulty with this article is the case in which a contract governs a transaction consisting of the supply of goods and of services. Such a transaction sometimes could be encompassed in two different contracts. In this case, it might be argued that the Convention applies only to the contract for the supply of goods but not to the one dealing with the supply of services. In the absence of a clear indication in the Convention, national courts may well adopt different answers to this problem, although the expectation is that where the contracts for the supply of services and supply of goods are closely connected with each other, they will be treated as one as far as possible. [page 43]


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