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Presented at the Canadian Bar Association's International Law Section Annual Conference in Ottawa, in May 2001

The Adolescence of the
United Nations Convention on Contracts for the International Sale of Goods
In Canada

J. Anthony VanDuzer
University of Ottawa
April 2001

INTRODUCTION

The United Nations Convention on Contracts for the International Sale of Goods[1] (CISG) may be in its early adolescence but it has not grown up very much in Canada. To date only two cases,[2] one at the appellate level,[3] have referred to the CISG. The paucity of Canadian case law would appear to demonstrate 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.[4]

It seems unlikely that this lamentable state of ignorance can continue. The number of countries currently parties to the CISG now stands at 58[5] 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.[6] 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, knowledge and understanding regarding the Convention will gradually increase. As a consequence, not only will the CISG apply to larger and larger numbers of contracts where the parties do not agree to exclude it but also one may anticipate that it will become much more popular as an agreed choice of law. In this paper, I will suggest some of the issues associated with the application of the Convention for Canadian lawyers as well as how to develop a better understanding of this increasingly important source of international sales law.

ISSUES RELATED TO THE APPLICATION OF THE CISG

Why not just exclude the Convention?

The Convention is still fairly new. 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 in preference to domestic sales law. Commentators have observed, however, 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.[7] The following summarizes the reasons commonly given to justify this practice.

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, where the laws of a foreign jurisdiction are unacceptable, the use of the Convention may be a practical way to resolve the issue. 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.

Article 42 - An example of the possible costs and benefits of the CISG's application

Article 42 of the CISG 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 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.

The remainder of this section discusses Article 42 as 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.

To illustrate the application of Article 42, consider the following hypothetical situation. Erbil Electronics Inc. (Erbil Electronics) is a major producer of consumer electronics products. Its place of business is in Canada and it sells through a network of distributors in 10 countries. It sells its goods under its "Erbil" 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, Erbil Electronics receives an order for goods worth $100,000 from Poltronics Ltd. (Poltronics), a business operating a chain of retail electronics stores exclusively in Poland. Poltronics found out about Erbil Electronics from the latter's web site. Erbil Electronics ships the goods in April. Poltronics is very happy with the goods until it gets a letter from Erbil Dairy Products Inc. (Erbil Dairy) a large producer of cheese, whose products may be found in every grocery store in Poland. In the letter, Erbil Dairy claims that the Erbil Electronics products infringe its trademark "Erbil" which is registered in Poland in association with all dairy products, demands that Poltronics cease selling the products and threatens legal action if it does not. Poltronics obtains legal advice that the Erbil Dairy claim is unfounded and would ultimately be dismissed since there is little likelihood that the products of Erbil Electronics and Erbil Dairy will be confused in the marketplace. Poltronics lawyers go on to warn that a law suit could nevertheless represent an expensive and time consuming disruption of its business. Poltronics gives notice to Erbil Electronics that it is avoiding the contract based on a violation of Article 42 of the CISG.[10]

The following discussion of the application of Article 42 to these facts shows how it seeks to address the needs and interests of the buyer and seller in an international context as well as the difficulty of predicting with confidence what are the parties' specific obligations under the provision.

1. Is Erbil Dairy's claim a right or claim within the meaning of Article 42?

Article 42 protects the buyer against a third party "right or claim" based on intellectual property.   Several commentators have suggested that the seller's responsibility extends to any right or claim, even a claim which is unfounded, such as Erbil Dairy's.[11] Indeed, even frivolous claims and rights which have not been invoked may be caught.  With respect to uninvoked rights, the rationale for such a high standard 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. As well, a right to recover damages arising only when the third party right is invoked may be rendered ineffective where the seller is no longer solvent. Regarding unfounded and frivolous claims, the buyer has a legitimate interest in being free of the risk of expending time and money defending such claims.  As well, in most cases, the seller will be in a better position both to assess and defend against such claims claim.  Notwithstanding these considerations, several prominent commentators have taken the position that the seller's obligation extends only to claims that have some merit.[12]

Applying the higher standard suggested by commentators, the unfounded claim of Erbil Dairy would clearly fall within the meaning of a "right or claim." It is less clear whether the Article would apply if a "claim" was required to have some merit.  Even on this test, however, the claim on these facts may be caught, since the third party does have a registered trademark for Erbil.

By comparison, the buyer's protection under Canadian domestic law appears to be weaker.  Under Ontario's Sale of Goods Act,[13] for example, there is no specific provision dealing with the seller's responsibility for third party intellectual property claims and few reported cases in which such claims have been considered.  It has been held, however, 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.[14] It has been held as well that if the goods did not infringe at the time of the sale but third party right arose and was successfully asserted against the buyer subsequently, the seller would be in breach of its implied warranty under section 13(b) that the buyer will receive quiet possession of the goods.[15]  The main difference may be that Ontario law provides no protection against unfounded or frivolous claims [16] and so would not help Poltronics in this case.

Another aspect of Article 42 which is helpful to the buyer is that it 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, it is clear that a right or claim under Polish law would be a violation of Article 42.

In contrast, it is not obvious how one would determine the relevant intellectual property laws for the application of domestic Canadian sales law.  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) and (b) if the goods infringed a trademark only under Polish law and not under Canadian law? Would it make a difference if the third party right did not exist under the laws of some other state in which Poltronics could sell the goods?[17]  The certainty of the CISG on this issue is clearly preferable, at least from the buyer's point of view.

2. Is the Erbil Dairy claim a claim of which seller knew or could not have been unaware at the time of conclusion of contract within the meaning or Article 42?

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.[18]

Erbil Electronics did not have any subjective knowledge of any claim by Erbil 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 enquire 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.[19] This standard is generally thought to impose a duty in inquire. Since the level of knowledge required of the seller in Article 42 is higher, it may be argued that no obligation to enquire is imposed, unless the seller has some information which should put it on notice. In other words, willful blindness may characterize the standard most accurately.  Again, this issue is not settled in international jurisprudence and commentators are divided.[20]

What if, on the facts proposed, Erbil Electronics had enquired and determined that there was a trademark identical to its own registered by Erbil Dairy in relation to goods where the likelihood of confusion would be remote at best.  Would the seller, Erbil Electronics, still be liable?  Would it have been sufficiently aware of a right or claim, even though no claim was asserted at the time of contracting or delivery and any possible claim would have to be unfounded or frivolous?  On the basis of the facts suggested, 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 grounds that it could not have been unaware that there was a risk of a claim being made.  If there were no possibly valid registered third party right, liability seems harder to justify.

In this regard, the CISG operates very differently from domestic Canadian sales law. Under Ontario's Sale of Goods Act, for example, the seller's knowledge is simply irrelevant. If a valid right exists, the seller is liable. The harder question, as noted above, is under what law validity of the right must be determined. Save for this caveat, the standard represented by the Ontario Sale of Goods Act is a more certain allocation of risk than that in CISG Article 42.  In attempting to be responsive to the particular acknowledged exigencies of international sales, the drafters of the CISG have created a standard which will be highly unpredictable in practice.

3. Can the seller, Erbil Electronics, argue that it should be relieved of liability based on the knowledge of the buyer, Poltronics?

Another 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. 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 and argued that the buyer has no duty to enquire 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."[21]

On the facts proposed, it may be quite likely that the buyer's personnel have knowledge of the operations of the third party, Erbil Dairy, given its widespread commercial activities in Poland.  Would this be sufficient to put Poltronics on notice of a possible trade markinfringement claim in relation to the goods of Erbil 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?  Again, there is no clear answer regarding the precise nature of the buyer's knowledge requirement.

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.[22]  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.

On the facts there is no basis for the seller to avoid liability under the second ground provided for in Article 42, that the right or claim results from the seller's compliance with technical drawings, designs, formulae or other specifications of the buyer.[23]

Summary

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.[24] 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 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. The range of claims for which the seller is responsible may extend to uninvoked rights and unfounded and frivolous claims under the intellectual property laws of the buyer's state and any other state in which the parties contemplated that the goods would be used or sold, a significantly heavier burden on the seller than would exist under Ontario law. In these ways, the CISG seeks to reflect business reality. Defending even frivolous claims can be time consuming and expensive. The buyer should be protected against third party claims under the national intellectual property laws in the states in which both the buyer and the seller are aware the buyer will be using or selling the goods. The Ontario Sale of Goods Act does not clearly address either of these issues.  On the other hand, under the CISG the seller is only responsible for third party rights and claims about which it knew or could not have been unaware and will not be responsible for rights and claims about which the buyer knew or could not have been unaware.  Again, this provision is an 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.  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.

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 domestic law. 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.

UNDERSTANDING THE CISG

Interpreting the CISG is different from interpreting domestic sales law

If we Canadian lawyers are going to begin to understand the CISG, we will have to learn some new ways of thinking about and researching the law. The Convention contains special internal interpretive rules that must be applied.  These rules are different from the domestic rules of interpretation with which Canadian lawyers and judges are familiar. In accordance with these rules, understanding the Convention requires lawyers to come to terms with the emerging case law, not just in Canada, but also in all the other national jurisdictions in which courts are applying the CISG as well as the burgeoning international scholarship on the Convention.

The key role of the interpretive rules internal to the CISG [25]

Article 7 sets out the main interpretive rules in the CISG which inform the application of the Convention. Two of these rules require resort to an analytical methodology and sources of law which are different from domestic sales law. In the interpretation of the Convention regard is to be had to:

  1. its international character; and
  2. the need to promote uniformity in its application.[26]

The international character of the Convention and promoting uniformity mean that, in application to particular cases, courts should not interpret the CISG's provisions by analogizing them to domestic law provisions addressing the same issues.   Since domestic law provisions are different, such an approach would lead, inevitably, to disparate interpretations of the provisions of the Convention. So, for example, Canadian courts should not apply Canadian case law on the forseeability of loss, a cornerstone of how we determine the limit of damages, to interpret the limit on damages expressed in Article 74 of the CISG even though it also incorporates a concept of forseeability.[27]

How then is one to understand the Convention if one cannot resort to familiar domestic concepts, rules and the cases which have elaborated them?Commentators have argued that seeking to resolve each case by interpreting the language of the Convention alone is not the solution because this approach too will lead to fragmentation and a lack of consistency in the application of the Convention, contrary to objective of uniform application.[28]  Instead, resort should be had to cases on the Convention itself, decided not just by Canadian courts but by courts in all jurisdictions. Foreign case law must be equally persuasive. Zeller describes a decision of an Italian court citing 42 cases from Germany, the U.S., Switzerland, Holland, France and Italy as a classic example of the right approach.[29]  Only by taking into account interpretation in multiple jurisdictions will case law converge on a uniform interpretation.

Interpretation also requires more attention to the writings of scholars than has been the case, at least historically, in common law jurisdictions.[30]  The work of international scholars well versed in the specific kind of analysis required under the CISG and adept at dealing with jurisprudence from many countries in many languages will be necessary to meet the challenge of developing a proper understanding of the Convention. At least for the foreseeable future, the absence of a large body of case law will mean an even greater role for academic commentary.

Finally, while it may be necessary to admonish national courts to approach the CISG in a manner consistent with Article 7's directives, this will not be necessary with respect to arbitral tribunals to the same extent and it is arbitral tribunals which are likely to decide most international commercial disputes governed by the CISG.  Arbitration is the dispute settlement procedure of choice for international commercial issues.  International arbitral tribunals often have members from a variety of legal traditions and, as such, will be less disposed to view the Convention obligations though any particular domestic law lens. The dominant role of arbitration underlines the necessity of applying the approach described above if one is to understand how the CISG will be applied in practice.

Sources of information on the CISG

Applying the approach described above requires access to the international case law and commentary on the CISG.  Fortunately, there are a variety of readily available sources of information. In addition to a number of hard copy commentaries,[31] some in their third edition, and a rapidly expanding literature in academic journals, there are remarkable resources available on the internet.  A network of national web sites on the CISG has been created.[32]  The Institute of International Commercial Law at Pace University in New York has a remarkably sophisticated and complete web site [33] which provides access to virtually all case law, including English summaries of many decisions originally rendered in other languages, and a significant amount of the secondary literature on the Convention, in a format which is searchable nationally or by Convention article. A comprehensive database of decisions with English abstracts is also maintained by UNCITRAL.

CONCLUSION

Canadian lawyers need to know more about the CISG than they appear to at present. Our chair, James Klotz, warned in 1993 that there are many ways Canadian lawyers may get caught by the Convention.[34]  These risks are now greater than ever, as more and more countries adopt the Convention and an increasing proportion of sales transactions have an international dimension.  It has become essential to learn something about the CISG in order to understand the implications of its applying to your client's transactions. Though the application of many of its provisions, like Article 42, remain critically uncertain, for particular situations the CISG may nevertheless be preferable because, unlike domestic sales laws, it is designed to address the particular interests of parties to international sales transactions.  In order to give appropriate advice in this regard, Canadian lawyers must adopt the distinctive approach to interpretation mandated by the CISG and become conversant with the emerging international case law and commentary on which it relies.


FOOTNOTES

1. Done at Vienna 11 April 1980, UN Doc. No. A/Conf.9 7/18 (Annex I) 1980. The Convention came into force in certain countries, on January 1, 1988, and in Canada and all its provinces (and subsequently its territories) on May 1, 1992. It is implemented in Ontario by International Sale of Goods Act, R.S.O. 1990, c. I.10.

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.

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. 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.

5. The following countries were party to the Convention as of April 4, 2001: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, People's Republic of China, Croatia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Guinea, Hungary, Iraq, Italy, Kyrgyzstan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, New Zealand, Netherlands, Norway, Peru, Poland, Romania, Russian Federation, St. Vincent and the Grenadines, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, U.S., Uruguay, Uzbekistan, Venezuela, Yugoslavia, and Zambia.

6. 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.

7. Ziegel, supra note 4; 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.

8. Under Art. 94 of the Convention, two states can jointly declare that the CISG does not apply to contracts between parties in those two states. The adoption of such a declaration by Canada and the United States in relation to cross border trade was recommended by Jacob Ziegel in "Canada and the Vienna Sales Convention" (1886-87) 12 C.B.L.J. 366 and again in 1999 (supra note 4 at 319), though he is doubtful regarding the likelihood of adoption.

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. For the purposes of the example, I will 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).

11. 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. and Arb. 30 at 36. Although it is not an issue on the facts suggested, in some cases there may be an issue as to whether a particular right or claim is based on an intellectual property right (See 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)).

12. Secretariat Commentary, ibid., 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.

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

14. Niblett Ltd. v. Confectioners' Materials Co. Ltd., [1921] 3 K.B. 387, [1921] All ER Rep. 459 (C.A.); 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.

15. 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. Co. (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. It is also conceivable that goods infringing a third party right at the time of contracting could be found to be unmerchantable in breach of section 15.2 or not fit for the purpose of which they were intended to be used in breach of section15.1. Two of the law lords in Niblett, ibid., determined that trademark infringing labels on the product made it unmerchantable (Banks and Atkin, L.JJ.).

16. 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 the CISG, avoidance is available where there has been a fundamental breach of contract (Art. 49). 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).

17. Fridman suggests 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 (Fridman, supra note 15, at 206).

18. See Secretariat Commentary, supra note11, at 108-109.

19. 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.

20. Rauda & Etier, supra note 11 at 44, discuss the differing views and conclude that there is a duty to investigate. A similar view is expressed in Schlechtriem, supra note 12, 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).

21. Rauda and Etier, supra note 11, at 55-56 say that the aim of Art. 42(2)(a) is to "prevent the buyer from practising an ostrich's policy"

22. E.g. Northwest Co. v. Merland Oil Co. of Can., [1936] 2 W.W.R. 577 (Alta C.A.); cited in Fridman, supra note 15, at 112. 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 s. 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. Under section 15.2, the seller is not in breach of its obligation to deliver goods of merchantable quality if the defect was such that the buyer's inspection ought to have revealed it. It may be that in some circumstances this exception to liability could be relied on by the seller where the third party claim should have come to the buyer's attention as a result of the buyer's inspection.

23. There is no analogue to this provision in s. 13 of the Sale of Goods Act. In case law under section 15.1, however, 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, though it will be liable if it selects materials to meet the specifications which are inadequate. (See for example Ashington Piggeries Ltd. v. Christopher Hill Ltd., [1972] A.C. 441, [1971] All ER 847 (HL)). 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 for example, Baldry v. Marshall, [1925] 1 K.B. 260, [1924] All ER 155 (CA)).

24. 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.

25. Zeller, supra note 7.

26. The third interpretive principle set out in Article 7 is that regard is to be had to the observance of good faith in international trade.

27. Under CISG Art. 74, damages should "not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract ...". Zeller, supra note 7. cites several US cases which erroneously hold that the Art. 74 standard should be interpreted in light of the US domestic law concept of forseeability.

28. F. Ferrari, "Uniform Interpretation of The 1980 Uniform Sales Law" (1994-5) Georgia J. Int'l and Comp. L.183. This view is not universally shared. See for example R. A. Hillman, "Cross Reference and Editorial Analysis, Article7" <http://www.cisg.law.pace.edu/cisg/text/hillman.html> (date accessed April 26, 2000).

29. Zeller, supra note 7, citing Sentenza 12 Juglio 2000, n. 405.

30. Ferrari, supra note 27.

31. Schlectriem, supra note 11, and Honnold, supra note 20.

32. The address for Canada’s site is as follows: <http://is.dal.ca/~cisg/index.htm>.

33. <http://www.cisg.law.pace.edu>.

34. Cited in J. Beaufoy, "Lawyers Tread Softly Around New Convention" Law Times October 18, 1993.


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