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Reproduced with permission of 4 Canadian International Lawyer (2001) 187

A Seller's Responsibility for Third Party Intellectual Property Claims:
Are the UN Sales Convention Rules Better?
[1]

J. Anthony VanDuzer
Associate Professor
Common Law Section
University of Ottawa

INTRODUCTION

To date only two Canadian cases,[2] one at the appellate level,[3] have referred to the United Nations Convention on Contracts for the International Sale of Goods [4] (CISG). The paucity of case law may be interpreted as demonstrating that the CISG is only rarely relevant in relation to contracts adjudicated in Canadian courts. Part of the explanation for the small number of cases, however, may be a simple lack of awareness of the circumstances in which the Convention applies. Even in the cases in which the CISG was adverted to, the manner in which the arguments were made and the judges' analysis regarding the Convention suggest a wide spread and serious lack of understanding regarding the CISG.[5]

It seems unlikely that this lamentable state of ignorance can continue. The number of countries currently parties to the CISG now stands at 60 [6] representing over 2/3 of global trade. Israel and five former soviet republics are soon to join. Since the CISG came into force in 1988, the pace of adoption has been rapid and it is anticipated that there will be over 100 parties within a few years.[7] In terms of regional trading blocks, all three NAFTA parties and most of the countries of the European Union are parties. In Asia, coverage is less uniform. Japan and India represent the major holdouts.

As the globalization of business continues and more and more countries become parties to the CISG, the CISG will apply to larger and larger numbers of contracts where the parties do not agree to exclude it and one may anticipate that it will become much more popular as an agreed choice of law as knowledge and understanding regarding the Convention gradually improves. Nevertheless, until businesses and their advisors have more familiarity with the CISG, it is difficult to specify whether and in what circumstances it will be advantageous to have the Convention apply instead domestic sales law. Commentators have observed that rather than seeking to identify when the CISG would be the best choice of law, the current practice of lawyers in Canada, the United States and Australia is simply to exclude it altogether.[8] The rationale for this approach is not hard to understand. Until the use and interpretation of the Convention becomes familiar and it has passed the rigours of legal scrutiny and challenge, parties using the Convention run a higher risk of conflict and litigation. Consequently, business people and their advisors should prefer to stay with more familiar domestic legal rules. Most business people do not want to become trend setters in legal matters.

Against these considerations, the advantage of the Convention is that it offers the parties a useful compromise when negotiating the governing law for their agreement. It will often be the case that parties cannot agree on the governing law, each preferring their domestic rules. Prior to the Convention, as a compromise, contracting parties might agree to the choice of a third country's law. Now resort to the Convention may be a practical way to resolve any disagreement. It will have a degree of familiarity to both parties. In addition, unlike many domestic systems, the Convention was drafted so as to mirror as closely as possible the business expectations and practices of traders in the specific context of international sales.[9] An examination of the CISG reveals many provisions which work better, in some contexts, than the corresponding provisions of domestic law.

This paper considers to what extent Article 42 of the CISG is better than the analogous provisions of the Ontario Sale of Goods Act.[10] Article 42 deals with an increasingly important issue: what is the seller's responsibility to the buyer for third party intellectual property claims relating to the goods sold. Article 42 is an example of both the costs and benefits of the Convention: unlike our domestic sales law, this provision of the CISG is specifically adapted to address some of the particular characteristics of international sales but its application raises a number of difficult questions of interpretation which may nevertheless discourage lawyers from recommending it as the rule to govern their clients' contracts. By comparison, the Sale of Goods Act, while more certain in some respects, is critically uncertain in others and is not well adapted to intellectual property or international transactions.

ARTICLE 42 OF THE CISG

(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.

For a seller to be found to be in breach of Article 42, all of the following three questions must be answered in the affirmative:

  1. Is there a "right or claim ... based on industrial property or other intellectual property" within the meaning of the Article?
  2. Is the right or claim one of which the seller "knew or could not have been unaware"?
  3. Is the right of claim not one of which the buyer "knew or could not have been unaware"?

The seller is relieved of liability if the right or claim is a consequence of the seller's use of specifications for the goods provided by the buyer.

A FACT SITUATION

To illustrate the application of Article 42 in a tractable way, consider the following hypothetical situation.[11] Zotz Electronics Inc. (Zotz Electronics) is a major producer of consumer electronics products. Its place of business is in Canada and it sells through a network of national distributors in 10 countries. It sells its goods under its "Zotz" trademark which is registered in Canada and each of the 10 countries in which it has distributors. It has never sold goods in Poland or to a Polish customer and its trademark is not registered in Poland.

In March 2001, Zotz Electronics receives an order for goods worth $100,000 from Electropol Ltd. (Electropol), which operates a chain of retail electronics stores exclusively in Poland. Electropol found out about Zotz Electronics from the latter's web site. Zotz Electronics ships the goods in April. Electropol is very happy with the goods which sell well in its stores until it gets a letter from Zotz Dairy Products Inc. (Zotz Dairy) a large producer of cheese, whose products may be found in every grocery store in Poland. In the letter, Zotz Dairy claims that the Zotz Electronics products infringe its trademark "Zotz" which is registered in Poland in association with all dairy products, demands that Electropol cease selling the products and threatens legal action if it does not. Electropol obtains legal advice that the Zotz Dairy claim is unfounded and would ultimately be dismissed since there is little likelihood that the products of Zotz Electronics and Zotz Dairy will be confused in the marketplace. Electropol's lawyers go on to warn that a law suit could nevertheless represent an expensive and time consuming disruption of its business. Wanting to avoid these problems, Electropol gives notice to Zotz Electronics that it is avoiding the contract based on a violation of Article 42 of the CISG.[12]

APPLICATION OF ARTICLE 42 AND ONTARIO SALE OF GOODS ACT TO FACT SITUATION

- Is Zotz Dairy's claim a right or claim within the meaning of Article 42?

CISG Analysis

Article 42 protects the buyer against a third party "right or claim ... based on industrial property or other intellectual property." A right or claim based on trademark meets this standard, as would any right or claim based on the other conventional categories of intellectual property: copyright, patents, industrial designs, geographical indications and integrated circuit protection. Trade secrets are sometimes not considered intellectual property but are likely included as well.[13] Article 42 specifically indicates the relevant set of intellectual property rules for determining the existence of a right or claim. The right or claim must exist under the law of the state where the goods will be resold or used as contemplated by the parties, or in the absence of such contemplation, the buyer's state. Applying this provision to the facts in the example, it is clear that the relevant law for assessing whether the right or claim would be a violation of the seller's Article 42 obligations is Polish law.

Several commentators have suggested that the seller's responsibility under the Article extends to any right or claim, even a claim which is unfounded under the relevant law, such as Zotz Dairy's. Indeed, they argue that even frivolous claims and rights which have not been asserted are caught.[14]

With respect to unasserted rights, the rationale for protecting the buyer is that such a right represents a sword of Damocles over the buyer's head which may fall in the future. Such a situation is commercially untenable for the buyer. Not only the buyer but also any customer to whom it sells the goods is at risk of being sued. If the buyer had a right to recover damages or seek other relief against the seller which arose only when the third party invoked its right, the buyer would bear the risk that the seller will become insolvent and unable to pay prior to the right being asserted.

Regarding unfounded and frivolous claims, the buyer has a interest in being free of the risk of expending time and money defending such claims. As well, often the seller will be in a better position to both assess and defend against such claims though how much better will depend on a variety of factors. The seller will be in a much better position where, for example, (i) the claim relates to a patent, (ii) is in a technologically complex product and (iii) the buyer has no relevant technical expertise such as where the buyer is simply a retail seller. In such a case, only the seller will be able to determine whether the claim has any merit and have the necessary understanding of the product to defend against the third party claim effectively. On facts like those in the example, however, the buyer may be in as good a position as the seller to assess and defend the trademark claim.

Several prominent commentators have taken the position that the seller's obligation extends only to claims that have some merit.[15] It may make some logical sense to distinguish between claims which have some merit from those that are wholly unfounded or frivolous for the purpose of imposing liability on the seller, though such a distinction will be hard to make in practice. While this point will be discussed in more detail in the following section, holding the seller liable only for claims with some merit may be supported on the basis that it is more reasonable to expect the seller to be able to foresee these claims. Wholly unfounded or frivolous claims cannot be specifically foreseen, even though it is foreseeable that some such claims may be made. The argument for holding the seller liable for unfounded and frivolous claims would seem to reduce to asserting that the balance of convenience tilts in favour of holding the seller responsible for frivolous litigation. It is not obvious, however, that this will always or even often be the case since any litigation relating to the third party claim will typically occur in the buyer's jurisdiction.

In short, while rights, asserted or not, and claims with some merit are the seller's responsibility under Article 42, there is no consensus regarding whether the seller should be liable for unfounded and frivolous claims. From a policy point of view, sometimes the seller will be in a better position to assess and defend such claims but not in others.

Even though we cannot make reliable generalizations about some aspects of the scope of Article 42, it is possible to determine the outcome of its application to the facts of the example. Applying the broadest conception of "right or claim" suggested by commentators, the unfounded claim of Zotz Dairy would be caught. It is less clear whether the seller would be liable if a "claim" was required to have some merit. On the facts we only have a legal opinion regarding the merit of the claim, not a judicial determination. Nevertheless, since the third party does have a registered trademark for Zotz, it seems likely that Zotz Dairy's claim would meet this threshold for seller liability.

Ontario SGA Analysis

By comparison, the buyer's protection under Ontario's Sale of Goods Act appears to be weaker than under Article 42. The SGA contains no specific provision dealing with the seller's responsibility for third party intellectual property claims and there are few reported cases in which such claims have been considered. It was held in Niblett Ltd. v. Confectioners' Materials Co. Ltd.,[16] that where the goods subject of the contract infringe a valid third party intellectual property right at the time of the sale, the seller is in breach of the implied condition that the seller have the right to sell the goods under section 13(a) of the Sale of Goods Act. A seller is in breach of section 13(a) if a valid intellectual property right existed at the time of the transaction, regardless of whether the third party had asserted the right or not. If there was only an unfounded or frivolous claim outstanding at the time of contracting, however, the seller would still have the right to sell the goods so there would be no breach of section 13(a). Since Zotz Dairy's claim is unfounded, Electropol could not rely on section 13(a) as a basis for seeking relief against Zotz Electronics in this case.

It has been held that if the goods did not infringe at the time of the sale but the third party right arose and was successfully asserted against the buyer subsequently, there is no breach of section 13(a). In these circumstances, however, the seller would be in breach of its implied warranty under section 13(b) that the buyer will receive quiet possession of the goods.[17] In Microbeads AG v. Vinhurst Road Markings Ltd. a third party was issued a patent covering the goods subject of a contract of sale after the sale had been concluded. The court held that because the goods in the possession of the buyer were now infringing, the seller was in breach of its section 13(b) obligation.[18]

It seems doubtful that an unasserted right would be considered to disturb the buyer's quiet possession.[19] It is less doubtful that a court would find that the buyer's right to quiet possession was violated by a letter such as was received by the buyer in the example. In Gencab of Canada Ltd. v. Murray-Jensen Ltd. [20] an Ontario court held that a buyer did not have to wait until a court had ruled on the validity of a third party patent claim; the buyer was granted relief for breach of section 13(b) based on the threat of litigation. In that case, the buyer had a legal opinion that the patent claim was likely to succeed.[21] Since the legal advice from Electropol's lawyers is that the claim will be unsuccessful, there remains some doubt as to whether Zotz Dairy's letter would be sufficient. If Zotz Dairy took the next step and commenced litigation against Electropol, the litigation might be considered a violation even if the litigation was ultimately unsuccessful. Even unsuccessful litigation may be a significant disturbance in a popular sense. No case has addressed this issue and one cannot, with confidence state when a claim will be considered a breach of section 13(b) unless there is some evidence that the claim is based on a valid third party right.

In contrast to Article 42, it is not obvious how one would determine the relevant intellectual property law to assess the validity of a third party's right. If under the relevant conflicts of laws rules, the law of Ontario were the proper law of the contract, would it be a breach of sections 13(a) or 13(b) if the goods infringed a trademark only under Polish law and not under Canadian law? There is some judicial support for the view that the seller's obligation under section 13(a) does not require the seller to have the right to sell in a foreign country and as such, the buyer would have no protection at all under this provision. No case has considered whether quiet possession includes freedom from claims based on foreign law which could not be made under Canadian law.[22] The certainty of the CISG on this issue is clearly preferable.

It is conceivable that goods infringing a third party right at the time of contracting could be found to be unfit for the purpose for which they were intended to be used in breach of section15.1 of the Sale of Goods Act or unmerchantable in breach of section 15.2. There is no case law on the use by a buyer of section 15.1 to seek relief for a third party intellectual property claim but two of the law lords in the Niblett case referred to above determined that trademark infringing labels on a product made it unmerchantable.[23] Gerald Fridman has suggested that goods are merchantable in accordance with section 15.2 of the Ontario Sale of Goods Act if they may be sold freely in some national jurisdiction.[24] If this is right, the goods in our example would be merchantable because they could be sold in Canada and elsewhere, though not in Poland. Thus, sections 15.1 and 15.2 would not appear to assist Electropol in this case.

- Is the Zotz Dairy claim one of which seller knew or could not have been unaware at the time of conclusion of contract within the meaning of Article 42?

CISG Analysis

The knowledge requirements in Article 42 are imposed for the purpose of recognizing that a seller should not be held liable for all rights and claims in foreign jurisdictions with which the seller may have no experience. They balance the potentially broad reach of Article 42 as described in the previous section.[25]

Zotz Electronics did not have any subjective knowledge of a claim by Zotz Dairy but can it also successfully assert that the second knowledge standard is not met? The answer turns on whether the "could not have been unaware" standard imposes a duty on the seller to investigate as to the risk of intellectual property claims and, if it does, what such a duty requires? There is no case law addressing this point. In some other provisions of the Convention, the expression "ought to have known" is used.[26] This standard is generally thought to impose a duty in investigate. Since the level of knowledge required of the seller in Article 42 is higher, it may be argued that no obligation to investigate is imposed, unless the seller has some information which should put it on notice. In other words, wilful blindness may characterize the standard most accurately. This issue is not settled in international jurisprudence and commentators are divided.[27]

If there is a duty to investigate, what would it involve? If only rights and claims with some merit are caught by Article 42, then a search of the public registers maintained for the relevant types of intellectual property may be required. Patents only come into existence when they are issued by the appropriate national authority and must be listed in a publically available register. A patent search would disclose virtually all relevant patent rights.[28] In the case of trademarks, it may be necessary to make further enquiries regarding marks used by businesses operating in the market because trademark rights may arise upon use without registration. Copyrights may but need not be registered. Unlike trademarks, however, often copyrights are not registered and are unlikely to be disclosed by simple searches of business directories and other sources which may disclose trademarks. So it is not obvious what a duty to investigate would involve for copyrights. If frivolous claims are caught it is hard to see what kinds of additional enquiries could be required of the seller since no enquiry would be likely to turn up such claims.

One could also argue that the imposition of a duty should depend also on the circumstances of the seller. For example, if the seller has sold goods into a national market previously, without any problem arising, it may be that it would be reasonable for the seller not to make any enquiries. On the other hand, one could counter that it is more reasonable to impose an obligation to investigate on a seller who is active in a market, as opposed to a seller making a first sale into a market.

Should there be a duty to investigate? The answer may depend on the type of intellectual property. Trademark searches are simple, relatively inexpensive and likely to disclose potential trademark claims but, in most cases, the buyer will be in as good a position as the seller to conduct such searches. Indeed the buyer may be in a better position since it knows its domestic market better. With respect to patents, in most cases, the seller will be in the best position to do searches of public registers because they will know their technology and their intellectual property rights better than the buyer. Patent searches are expensive but are likely to disclose most competing patent claims. Such searches will not disclose bases upon which any patent held by the seller may be invalid. For copyrights, searches of public registers are unlikely to disclose potential copyright claims. Consequently, it is hard to argue that there should be a duty to investigate in relation to copyrights. For all types of intellectual property, the burden of a duty to investigate will vary depending on the nature of the sales transactions and the seller's involvement in the buyer's market. If the seller is engaged in extensive sales in a foreign national market, the costs associated with any investigation will be small in relation to total sales. At the other end of the spectrum, the cost may be quite high in relation to a small, first time sale.

Turning to the facts of the example, if Zotz Electronics had searched the Polish trademarks register, it would have found that there was a trademark identical to its own registered by Zotz Dairy. The existence of a trademark identical to the seller's may be thought to be sufficient to put the seller on notice and, therefore, render it reasonable to hold the seller liable on the ground that it could not have been unaware that there was a risk of a claim being made even if it had concluded, like Electropol's lawyers, that the likelihood of a successful trademark infringement action was remote. It is not clear, however, whether Article 42 imposes or should impose a duty on Zotz Electronics to conduct such a search.

Ontario SGA Analysis

Unlike the CISG, under Ontario's Sale of Goods Act, the seller's knowledge is simply irrelevant. The allocation of risk is clear: if a valid right exists, the seller is liable. To manage this liability risk, the seller would have to conduct searches to determine if any right existed which would be infringed by the seller's goods. This obligation would seem to be especially onerous on a seller selling goods over the internet all over the world and in relation to copyright where all rights are not listed in public registers or otherwise searchable.

As well, the seller's obligation under the Sale of Goods Act are made more onerous because it extends to rights and at least some category of strong claims arising after the time of contracting. It appears that the seller is at risk on an ongoing basis under section 13(b) whereas under Article 42 liability is limited to rights and claims of which the seller had sufficient knowledge at the time of contracting, a much more manageable situation for the seller.

- Can the seller, Zotz Electronics, argue that it should be relieved of liability because Electropol knew or could not have been unaware of the right or claim at the time of the conclusion of the contract?

CISG Analysis

A key qualification to the burden on the seller under Article 42 is the exclusion of liability where, at time of conclusion of the contract, the buyer knew or could not have been unaware of the third party right or claim. The standard of knowledge is expressed in precisely the same terms as that applicable to the seller. The effect, however may be different because the buyer will almost always have better knowledge of possible third party intellectual property rights than the seller in the local markets where the buyer operates and so this provision might be thought to significantly curtail the seller's exposure.[29] Indeed, if the buyer's and the seller's knowledge requirements are the same, liability of the seller under Article 42 will be rare. Responding to these concerns, some have suggested that it would be paradoxical and unduly onerous to impose the same burden on the buyer as on the seller notwithstanding the language used. Instead they argue that the buyer has no duty to investigate but rather only a duty not to ignore intellectual property rights which are well known or in relation to which they had "serious reasons to believe that a right may exist."[30] From a policy point of view this seems reasonable, but it is hard to square with the drafting of the Convention.

Turning to the example, it is quite likely that the buyer's personnel would have knowledge of the operations of the third party, Zotz Dairy, including its use of the "Zotz" mark, given its widespread commercial activities in Poland. Would this be sufficient to put Electropol on notice of a possible trademark infringement claim in relation to the goods of Zotz Electronics? Should knowledge of use of an identical mark for unrelated products in a manner unlikely to form the basis for a successful infringement claim be sufficient to allow the seller to escape liability? While there is not yet a clear understanding of the precise nature of the buyer's knowledge requirement, the buyer's knowledge in this case may be sufficient to relieve the seller from liability under the standard suggested above.

On the facts in the example there is no basis for the seller to avoid liability on the basis that the right or claim results from the seller's compliance with technical drawings, designs, formulae or other specifications of the buyer as provided for in Article 42.

Ontario SGA Analysis

The Ontario Sale of Goods Act does not impose any specific duty or knowledge standard on the buyer in relation to intellectual property rights. In cases interpreting section 13(a) outside of the intellectual property context, however, it has been held that the buyer cannot rely on a defect in the seller's title of which it was aware at the time of contracting.[31] Because the seller is absolved of liability only where the buyer had actual knowledge of the right, the extent to which the knowledge of the buyer reduces the scope of the seller's liability is more restricted under the Sale of Goods Act than under the CISG, though, arguably, more certain. Since Electropol had no actual knowledge of the Zotz Dairy claim, it is not prevented from relying on section 13(a) on that basis. Similarly, with respect to section 13(b), a buyer will only be prevented from relying on this provision where it had actual knowledge of a right which could disturb its possession at the time of contracting.[32]

It is possible that if the buyer were to allege that a third party claim rendered the goods unfit for the purposes for which they were intended to be used in breach of section 15.1 of the Sale of Goods Act, a buyer's prior knowledge of the existence of the third party claim could be used to try to defeat the buyer's claim under section 15.1, on the basis that the buyer could not have relied on the seller's right to use the trademark. Reliance by the buyer is a precondition to the seller's liability under section 15.1.

There is no analogue in s. 13 of the Sale of Goods Act to the provision of Article 42 relieving the seller from responsibility where the claim relates to specifications supplied by the buyer. In case law under section 15.1, it has been held that if the buyer provides the specifications for a product, the seller is not liable for any injury caused by the specifications being deficient.[33] Presumably, this exception to the seller's liability would be extended to third party intellectual property claims relating to specifications provided by the buyer.

CONCLUSION

The foregoing discussion does not represent an attempt to provide an exhaustive analysis of the application of Article 42 even to the specific facts proposed in the example.[34] What it does seek to show is that Article 42, like many provisions in the CISG, is intended to be responsive to the exigencies of international business transactions in a way that many domestic sales law rules, such as the Ontario Sale of Goods Act, are not. At the same time, by introducing a complex structure of novel rules, the application of the provision is far from predictable. One may make a strong case for excluding this provision of the CISG based on its uncertainty. Nonetheless, Article 42 does have potential advantages, from both a buyer's and a seller's point of view.

From the buyer's perspective the range of claims for which the seller is responsible extends to all rights, asserted or not, and all claims which have some merit and maybe even frivolous and unfounded claims under the intellectual property laws of the buyer's state or any other state [35] in which the parties contemplated that the goods would be used or sold, a heavier burden on the seller than would exist under Ontario law. With respect to section 13(a) of the Sale of Goods Act, the buyer is only protected against rights, asserted or not. Section 13(b) protects against only rights which have been asserted and probably all claims where some likelihood of success can be demonstrated. Much more significant is failure of the Sale of Goods Act to clearly address the relevant law for the purposes of determining whether there is a third party right or claim giving rise to liability. This failure creates significant uncertainty regarding the nature of the obligation under the Act as compared to the CISG. Indeed, there is some judicial support for the view that sections 13(a) and (b) provide no protection at all against rights under foreign law which could not also be asserted in Ontario.

On the other hand, the CISG has important protections for the seller. The seller is only responsible for third party rights and claims about which it knew or could not have been unaware at the time of contracting and will not be responsible for rights and claims about which the buyer knew or could not have been unaware. These requirements attempt to recognize that it will not be practical for the seller to provide the buyer with complete protection against all third party claims in multiple jurisdictions about which it may know little and that the buyer may be in a better position to know about potential local intellectual property problems and, where it is, the seller should not be responsible. Such a rationale may be especially compelling where the seller has no connection with or experience in a jurisdiction which will often be the case in internet sales. The Sale of Goods Act does not acknowledge that the seller's limited knowledge should limit its liability. While the buyer's knowledge is relevant under the Act, only the buyer's actual knowledge of third party rights is taken into account, a more limited qualification to the scope of the seller's liability than exists under the Convention. As well, section 13(b) imposes liability on the seller in relation to the rights and some claims arising after the time of contracting which the CISG does not.

The conclusion that I hope you will draw from the foregoing discussion is that the CISG bears closer study because it creates an allocation of risk for your clients which is different from that struck under the Sale of Goods Act. In particular circumstances, despite its uncertainty, this allocation may be preferable to your clients and it may become attractive to choose or allow the CISG to be the law governing the contract. Even when one is drafting specific provisions relating to intellectual property rights and claims, there may be some situations where the CISG represents a better gap filling solution that domestic law, which, as the foregoing discussion illustrates, is itself often uncertain when it comes to the seller's liability for intellectual property claims. Perhaps more importantly, it is hoped that this paper has shown that express contractual provisions are necessary to address the deficiencies in both the CISG and the Ontario Sale of Goods Act. In the result one cannot say definitively whether the CISG or the Sale of Goods Act is better when it comes to determining whether the seller should be liable for third party intellectual property claims. One can say that neither is very good.


FOOTNOTES

1. Earlier versions of some sections of this article were presented at the 2001 Annual Conference of the Canadian Bar Association, International Section.

2. Nova Tool & Mold Inc. v. London Industries Inc., [1998] O.J. No. 5381 (QL), 84 A.C.W.S. (3d) 1089 (Sup. Ct. J.) and La San Giuseppe v. Forti Moulding Ltd., [1999] O.J. No. 3352 (Sup.Ct. J.)(QL). There have been more than 550 cases globally (see Pace University Institute of International Commercial Law (http://www.cisg.law.pace.edu/cisg/text/database.html)).

3. Nova Tool & Mold Inc. v. London Industries Inc., [2000] O.J. No. 307 (C.A.)(QL); affirming the trial decision, ibid., though reducing the damages awarded.

4. Done at Vienna, 11 April 1980, UN Doc. No. A/conf. 97/18 (Annex I) 1980, (1980) 19 I.L.M. 671 (hereafter the CISG). The Convention came into force in certain countries, on January 1, 1988, and in Canada and all its provinces on May 1, 1992 (and subsequently its territories). It is implemented in Ontario by International Sale of Goods Act, R.S.O. 1990, c. I.10.

5. In the trial decision in Nova Tool, supra note 2, various provisions of the CISG were simply mentioned and the decision based on domestic sales law without explanation. In La San Giuseppe, supra note 2, Swinton J.'s analysis was much more rigorous, though not entirely consistent with the Convention either. See J. Ziegel, "Canada's First Decision on the International Sales Convention," (1999) 32 Can. Bus. L. J. 313. Ziegel provides evidence that the CISG is not well understood by American courts either.

6. The following countries were party to the Convention as of August 20, 2001: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, People's Republic of China, Columbia, Croatia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Guinea, Hungary, Iceland, Iraq, Italy, Kyrgyzstan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, the Netherlands, New Zealand, Netherlands, Norway, Peru, Poland, Romania, Russian Federation, St. Vincent and the Grenadines, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, U.S., Uruguay, Uzbekistan, Yugoslavia, and Zambia.

7. The pace of ratifications has been comparable to that of one of the most successful international commercial instruments, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, 10 June 1958, UN Doc No. E/conf. 26/9 Rev. 1; 330 U.N.T.S. 3 and popularly known as the New York Convention.

8. Ziegel, supra note 5; B. Zeller, "The UN Convention on Contracts for the International Sale of Goods (CISG) - a leap forward towards unified international sales laws," (2000) 12 Pace Int'l L. Rev. 79.

9. It is important to note that the Convention does not replace what would otherwise be the proper law of the contract in all respects. Even if the Convention applies, the parties must still consider which law should govern in respect of issues outside the Convention's scope, such as the validity of the contract and title to the goods (see CISG Art. 4).

10. R.S.O. 1990, c. S.1.

11. This example is based on the fact situation used at the 2001 Willem C. Vis International Commercial Arbitration Moot.

12. For the purposes of the example, assume that the parties' contract did not contain a choice of law clause excluding the CISG. Based on this assumption, the CISG would apply because the buyer's and seller's places of business are in different states both of which are parties to the CISG (Art. 1).

13. The phrase "industrial property or other intellectual property" was adopted at the diplomatic conference on the Convention at the suggestion of the World Intellectual Property Organization (WIPO). WIPO defines intellectual property broadly to include "all...rights resulting from intellectual activity in the industrial, scientific, literary, or artistic fields" in Art. 2 of the Convention Establishing the World Intellectual Property Organization (done at Geneva, 14 July 1967, 828 U.N.T.S. 3, 11). It may be that domain names which are not specifically identified in this agreement should also be considered intellectual property.

14. E.g. C. Rauda & G. Etier "Warranty for Intellectual Property Rights in the International Sale of Goods" (2000) 4 Vindobona J. of Int'l. Comm. L. & Arb. 30 at 36.

15. Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the Secretariat A/Conf. 97/5 (14 March 1979), reprinted in O.R. (Secretariat Commentary), at 104 2, 3, 4; P. Schlechtriem, Uniform Sales Law - the UN Convention on Contracts for the International Sale of Goods (Vienna: Manz, 1986) at 71.

16. [1921] 3 K.B. 387, [1921] All ER Rep. 459 (C.A.)(third party claim for trademark infringement); applied in Canada in Egekvist Bakeries Inc. v. Tizel, [1950] 1 D.L.R. 585 (Ont. H.C.); affirmed [1950] O.W.N. 168 (C.A.); and Winsor & Assoc. Ltd. v. Belgo-Canadian Mfg. Co. (1976), 76 D.L.R. (3d) 686 (B.C.C.A.). Neither of the Canadian cases involved the consideration of an intellectual property right.

17. Microbeads AG v. Vinhurst Road Markings Ltd., [1975] 1 All ER 529, [1975] 1 WLR 218 (C.A.); applied in Canada in Gencab of Can. Ltd. v. Murray-Jensen Mfg. Ltd. (1980), 114 D.L.R. (3d) 92 (Ont. H.C.), a case involving a patent claim. See J. Ziegel, Report to the Uniform Law Conference of Canada on the Convention on Contracts for the International Sale of Goods (1981). Gerald Fridman describes the scope of s. 13(b) as "not very clear" (G.H.L. Fridman, The Sale of Goods in Canada, 4th ed. (Toronto: Carswell, 1995) at 115. See Benjamin's Sale of Goods (5th ed) (A.G. Guest ed.)(London: Sweet & Maxwell, 1997) at 183 to similar effect.

18. It is important to note as well that the remedial scheme under the CISG is different from that under the Sale of Goods Act. Under Art. 49 the CISG, avoidance is available where there has been a fundamental breach of contract as defined in Art. 25. Under the Sale of Goods Act, the contract may be avoided for breach of the implied condition in s. 13(a) but the buyer is limited to a remedy in damages for breach of the implied warranty under s. 13(b). Under the rigid Sale of Goods Act, the impact of the breach is irrelevant.

19. The authors of Benjamin's Sale of Goods (supra note 17 at 183) state that s. 13(b) could "scarcely have been intended to impose on the seller the obligation of guaranteeing the buyer against any disturbance which may occur".

20. Supra note 17.

21. The court found that "there was a very grave risk" of "an action leading to substantial damages" (ibid. at 95).

22. Egekvist Bakeries Inc. v. Tizel, supra note 16.

23. Supra note 16 (Banks and Atkin, L.JJ.).

24. Fridman, supra note 17, at 206.

25. See Secretariat Commentary, supra note 15, at 108-109.

26. CISG Arts. 2, 9(2), 49(2)(b)(i), 68, 74 and 79(4). The expression "could not have been unaware" is used in Arts. 8(1), 35(3) and 40.

27. Rauda & Etier, supra note 14 at 44, discuss the differing views and conclude that there is a duty to investigate. A similar view is expressed in Schlechtriem, supra note 15, at 73. John Honnold and Albert Shinn conclude that there is no such duty (J. Honnold, Uniform Law for International Sales, 3d ed. (New York: Kluwer, 1999) at 260; A. Shinn, "Liabilities under Article 42 of the UN Convention on Contracts for the International Sale of Goods" (1993) 2 Minn. J. Global Trade 116, at 125).

28. A patent search would not reveal any grounds upon which a patent could be found to be invalid, however.

29. The effect of the buyer and the seller having the same duty to investigate would be that one cancels the other out. In the result, the seller would be liable only where it had subjective knowledge of a third party right or claim and the buyer did not.

30. Rauda and Etier, supra note 14, at 55-56 say that the aim of Art. 42(2)(a) is to "prevent the buyer from practising an ostrich's policy"

31. E.g. Northwest Co. v. Merland Oil Co. of Can., [1936] 2 W.W.R. 577 (Alta C.A.); cited in Fridman, supra note 17, at 112.

32. In Gencab of Can. Ltd. v. Murray-Jensen Mfg. Ltd., supra note 17, a general discussion at the time of contracting between the buyer and the seller regarding possible concerns related to the seller's patent rights in the subject matter of the contract did not prevent the buyer from relying on s. 13(b).

33. E.g. Ashington Piggeries Ltd. v. Christopher Hill Ltd., [1972] A.C. 441, [1971] All ER 847 (HL). The seller will be liable if it selects materials to meet the specifications which are inadequate. As well, the buyer cannot rely on the seller's implied obligation to provide goods fit for the purpose for which they are intended to be used if the buyer indicates that it is not relying on the seller's expertise but rather on a "patent or trade name" of the product. (See e.g. Baldry v. Marshall, [1925] 1 K.B. 260, [1924] All ER 155 (CA).

34. To complete the analysis, it would be necessary to determine, among other things, whether the buyer had given a reasonable notice to the seller of the Art. 42 breach as required by Art. 43 and, if so, whether the buyer was entitled to avoid the contract in accordance with Art. 49 on the basis that the third party claim was a fundamental breach of contract, or merely entitled to damages and, if so, whether the buyer had properly avoided the contract under the CISG.

35. There is an issue as to whether Art. 42 can be interpreted as imposing an obligation on the seller with respect to third party claims based on the laws of more than one state. This is discussed by Shinn, supra note 27, at 127-130.


Pace Law School Institute of International Commercial Law - Last updated January 7, 2004
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