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Reproduced with permission of 35 Uniform Commercial Code Law Journal (2002) 43-62

Implementing CISG's Scope Provisions:
Validity and Three-Party Cases

Steven Walt [*]

[Introduction]

The United Nations Convention on International Contracts for the Sale of Goods [1] ("CISG") is a multilateral treaty that is implemented by national courts and arbitral tribunals. Central to CISG's uniform implementation is a scope provision limiting the issues governed by the treaty: Article 4. Even when CISG applies to a sales transaction, its rules govern only particular issues arising from the transaction. Article 4 limits CISG's rules to the parties to the sales contract. It also limits the rules to the contractual rights and obligations of the parties. Finally, article 4 excludes a range of issues from CISG's scope. Considered as a whole, article 4 describes a principle of rule-displacement: When CISGs' rules address an issue, they displace domestic law controlling the same issue. When its rules do not address an issue, domestic law continues to control. Because CISG and domestic law rules frequently overlap, CISG's uniform implementation by judicial and arbitral tribunals requires a correct application of article 4 and its principle of rule-displacement.

This essay briefly describe the first applications of CISG's principle of rule-displacement. It is easy to illustrate article 4's operation by simple hypotheticals. Article 4's diplomatic history supplies uncontroversial examples, as do some commentators.[2] This essay focuses on two slightly more difficult but familiar cases: cases in which domestic law refuses or restricts enforcement of a contractual provision, and three-party cases. Article 4's principle of rule-displacement is not [page 43] self-applying. The former sort of case requires determining whether CISG considers the enforcement of the provision a matter of "validity." At issue is how CISG characterizes an issue, and whether it addresses the matter. Three-party cases require ordering rights to the goods between the seller, buyer and third parties arising from CISG, domestic law alone, or both CISG and domestic law. Cases implicating validity under domestic law and three-party cases both present problems for article 4's application to sales contracts otherwise governed by CISG.

I. ARTICLE 4'S PRINCIPLE OF RULE-DISPLACEMENT

Article 4 provides as follows:

"This Convention [CISG] governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:

(a) the validity of the contract or any of its provision or any usage;
(b) the effect which the contract may have on the property in the goods sold."

Article 4 places three limitations on CISG's application. Together the limitations determine CISG's scope. First, CISG's rules apply only to the parties to the sales contract otherwise governed by CISG ("the seller and the buyer"). Article 4's restriction to contracting parties means that the rights and obligations of non-parties based on the sales contract therefore are controlled by domestic law. Second, as between the contracting parties, CISG's rules only describe their legal entitlements arising from the sale contract ("arising from such contract") . Non-contractually based entitlements, even between the contracting parties, are defined by domestic law. Third, article 4 excludes from CISG's scope two sorts of issues arising from the sales contract: matters of "validity" of the contract; its provisions or usage not expressly provided for by CISG; and the effect of the sales contract on title in the goods sold ("property in the goods sold"). Article 4's three limitations are summarized as follows:

  1. CISG's rules apply only between the parties to the sales contract.
  2. CISG's rules describe only legal entitlements arising from the sales contract.
  3. CISG's rules do not address issues of validity or the effect of the sales contract on title to the goods sold unless CISG expressly provides otherwise.

Article 4's three limitations determine when domestic law applies and when it is displaced. If an issue arises from the sales contract and is [page 44] not excluded by Article 4's limitations, CISG's rules control. They displace domestic law rules, however domestic law labels the issue.[3] If an issue arises from the sales contract and is excluded by Article 4's limitations, CISG's rules do not displace domestic law and it continues to apply. Sometimes CISG's rules do not expressly address issues that are not excluded by article 4's limitations. In such cases, under some circumstances, article 7 allows recourse to applicable domestic law.[4] Thus, article 4 describes a principle of rule-displacement: CISG displaces domestic law when it defines and resolves an issue concerning the contracting parties' rights arising from the sales contract; domestic law continues to govern when CISG either it does not address the issue or leaves its resolution to domestic law.[5]

Often it is easy to apply article 4 and its underlying principle of rule-displacement. Applications are clear when one or more of CISG's rules address an issue and resolve it. In these cases, CISG's rules uncontroversially displace domestic law on the matter. For example, article 16(2)(a) treats an offer as irrevocable when it indicates that it is irrevocable. The article imposes no further conditions on the irrevocability of an offer. Thus, article 16(2)(a) displaces competing domestic law rules, such as the UCC's "firm offer" rule with its additional requirements. Another easy example involves domestic law requirements of consideration. Article 29(1) makes enforceable a modification of the contract by the "mere agreement', of the parties. It imposes no further conditions of enforceability. The article therefore displaces domestic law rules which require that a modification be supported by consideration. The same conclusion extends safely to the initial agreement.[6] [page 45]

II. CASES INVOLVING ISSUES OF VALIDITY

Slightly more difficult are some cases involving issues of validity. Because CISG does not define "validity", the precise scope of article 4(a)'s exclusion is unclear. Still, article 4(a)'s reach is uncontroversial over a range of central cases. Although article 4(a) excludes issues CISG determines to be ones of validity, the absence of a definition of, 'validity', in effect leaves the matter to national law. In practice, paradigmatic instances of invalidity under national law present issues of validity under article 4(a). Consistent with the slight relevant diplomatic history,[7] mistake, capacity, fraud, unconscionability and duress are covered. Thus, initial case law predictably treats mistake, capacity, fraud and the like as instances of invalidity.[8] The enforceability of liquidated damages clauses, although less clearly covered by article 4(a), probably also is a matter of validity.[9]

The hard cases are those that raise issues that CISG does not clearly address or consider matters of validity. In these cases, article 4(a)'s principle of rule-displacement is indeterminate in application. The effectiveness of warranty disclaimers under CISG is a prominent example of a difficult case. Warranties allocate the risk of non-conformities in [page 46] the goods to the seller, and article 35 creates a set of default express and implied warranties of quality. Warranty disclaimers shift the risk of non-confirmity in the goods to the buyer, seemingly permitted by articles 6 and 8.[10] The question is whether CISG governs the effectiveness of warranty disclaimers. Article 4(a)'s principle of rule-displacement does not say. CISG's provisions do not expressly address the issue of the effectiveness of disclaimers.

Two conflicting views are possible.[11] They disagree over the proper characterization of the issue for purposes of article 4's application. One view treats disclaimers as raising an issue of the validity of a contract term. The enforcement of a risk-allocation between the contracting parties can create externalities and implicate other public policy concerns. These are matters going to validity, which article 4(a) leaves to applicable domestic law. The other view treats disclaimers as a matter of contract interpretation: the determination of the risk-allocation defined by the terms of the parties' contract. Article 8 contains rules for interpreting the terms of the parties' contract. It therefore addresses and controls the legal consequence of contract terms. Thus, the effectiveness of a disclaimer is a matter of contract interpretation governed by CISG, not validity governed by applicable domestic law. The disagreement is over the proper characterization of the issue presented by warranty disclaimers: are disclaimers matters of "validity" or matters of contract interpretation addressed by CISG? Article 4 and its principle of rule-displacement does not dictate the proper characterization. Initial case law has treated the effectiveness of warranty disclaimers as raising an issue of validity, controlled by domestic [page 47] law.[12] The example of disclaimers shows that cases are difficult when an issue is not easily characterized as a matter of validity or otherwise addressed by one or more of CISG's provisions.

III. THREE-PARTY CASES

Three-party cases involve a sales contract governed by CISG in which a third party acquires an interest in the goods. The third party's interest obtained may be a security interest, ownership or lesser interests. Two sorts of three-party cases are typical. In one sort the seller (S) delivers the goods to the buyer (B) and the buyer fails to pay the contract price as the contract requires. At or after delivery, a third party (T) acquires from B an interest in the goods delivered. When S seeks to end the contract and recover the goods from B, T (or B) claims that S may not recover them. T contends that it has a superior right to the goods as against S and B. In the second sort of case, S delivers the goods to B, and B pays the contract price. Prior to delivery, S contracts to sell the goods to T or transfers to T an interest in the goods. When T tries to recover the goods from B, B contends that it has a superior right to them as against T and S.

Three-party cases involve priority contests in the delivered goods. In typical cases, a party to the sales contract may have both a contractual and property right to the goods. In the first case, S may have contractual and property rights to the goods. In the second case B, may have them: In dispute is the priority of T's interest in the goods over S or Bs' contractual and property rights to them. The dispute presents a threshold issue of the law applicable to this priority contest when CISG and domestic law overlap. CISG applies to some of S or Bs' rights in the, "goods arising from the sales contract, and domestic law governs others. Domestic law also controls T's rights in the goods. Implicated, therefore, is article 4 and its principle of rule-displacement when CISG and domestic law overlap. The first typical sort of three-party contest is particularly salient: the contest between T and S to the goods delivered to B. The contest was present in Usinor Industeel v. Leeco Steel Products, Inc.,[13] [page 48] a recent district court case. Usinor Industeel is the first U.S. case to discuss CISG's principle of rule-displacement in detail. The case gets mixed marks. The result, although in part correct, relies on a partly mistaken application of article 4 and the principle of rule-displacement. An assessment of the case shows the need for an accurate understanding of article 4.

Three-party disputes involving conflicting property rights in goods in the buyer's possession held by the seller and third parties are less difficult than cases presenting issues of validity. In these disputes, article 4 has a clear application and gives a determinate answer as to whether CISG's rules or domestic law applies. The fact that the seller may have contractual rights to the goods against the buyer does not make its application harder. According to article 4, CISG's rules govern the seller's contractual rights to the goods as against the buyer. Applicable domestic law continues both the seller and third party's property rights to the goods.

Put schematically, S may have both a contractual right against E to goods in E's possession and a property right in them. At the same time, T might have a conflicting property right in the goods. Article 4's limitation of CISG's provisions to the parties to the sales contract means that CISG does not address the priority dispute in the goods between S and T. Applicable domestic law, therefore, instead determines the priority of S and Ts' property rights in the goods in E's possession. "Dual law" applies to S's rights to the goods against E, however. CISG governs S's remedial rights to the goods against E based on the sales contract, because Article 4 makes CISG's rules applicable to S's (and E's) rights "arising from such a contract." S's rights include remedial rights to the goods described by CISG. At the same time, S's property rights in the goods in E's possession continue to be controlled by applicable domestic law because article 4(b) excludes from CISG's scope the effect of the sales contract on title ("property"). Thus, CISG does not displace domestic law governing property rights in goods arising from the sales contract. The court in Usinor Industeel fails to keep track of article 4's limitations and their consequences in three-party cases.

A. Usinor Industeel's Application of CISG

Usinor Industeel's facts are straightforward. Usinor Industeel, having [page 49] its place of business in France, sold a quantity of steel to Leeco, with its place of business in Illinois. The sale was on a credit basis, and Usinor retained title to the steel until Leeco paid the entire contract price. Leeco previously had granted to LaSalle National Bank a security interest in its inventory in its possession, which included the steel Usinor later delivered. LaSalle's security interest in the delivered steel was perfected at the point Leeco took possession. When Leeco failed to pay Usinor the full contract price, Usinor demanded that Leeco return the steel it had delivered. LaSalle objected to Usinor recovering the steel. It instead apparently urged Leeco to sell the steel instead to pay off the outstanding secured debt to it Leeco owed.[14] At trial Usinor moved alternatively to replevy the steel or avoid the sales contract with Leeco. The court denied both motions, finding in the circumstances that applicable Illinois law does not allow replevin and CISG does not allow avoidance.

The court in Usinor Industeel found CISG applicable to the sales contract under article l(l)(a), because the parties had their places of business in different Contracting States. To decide the motions, the court determined that it must decide whether CISG gave Usinor a right to replevin the goods or avoid the contract. The court, therefore, framed the issue as requiring it to decide whether CISG governs a "controversy" when a third party has a security interest in the goods.[15] Relying on article 4's language limiting CISG's scope to "the rights of the seller and the buyer ...", it concluded that CISG 's rules "yield"[16] to the rights of third parties under applicable domestic law. Accordingly, the court tested Usinor's rights of replevin and avoidance by LaSalle's rights in the delivered steel under domestic law:

"The remedy of avoidance under the CISG is not available to Usinor if LaSalle has a right to the Steel Shipments under domestic law. The remedy of replevin is not available if Usinor does not have title to the Steel Shipments under domestic law."[17]

The court applied the forum state's choice of law rule to select [page 50] applicable domestic law. Invoking pre-revision U.C.C. 1-105(1), it found that the forum state's law, Illinois, bore an "appropriate relation" to the sales contract and therefore controlled Usinor's rights to the delivered steel. Under Illinois' Replevin Act, goods can be replevied only by their owner or person entitled to possession.[18] According to U.C.C. 2-402(2), title (ownership) to the goods passes to the buyer upon the seller's delivery of the goods. U.C.C. 2-401(1) limits the retention of title by the seller in the goods to retention of a security interest. Relying on both provisions, the court concluded that Usinor was not entitled to replevy the steel it had delivered to Leeco. Usinor no longer owned the steel because delivery to Leeco passed title in the steel to it. Usinor's retention of title in the steel merely gave it a security interest in the goods. Because Usinor never filed a financing statement to perfect its security interest, while LaSalle held a perfected security interest in the steel when Leeco took delivery, under Illinois law Usinor's security interest was subordinate to LaSalle's security interest.[19] Usinor, therefore, was not entitled to possession of the steel as against LaSalle. Because Usinor did not have superior rights to the steel against LaSalle, the court also concluded that Usinor could not avoid the sales contract.[20]

The court's application of article 4 is unclear. It does not explain how article 4 works to displace CISG and make domestic law controlling. According to the court, under article 4, CISG's rules are inapplicable to determine the seller's rights to recover goods or avoid the sales contract when a third party has an interest in the goods. It therefore concludes that article 4 does not displace domestic law rules governing replevin or the right to avoid the sales contract. However, the court relies on different provisions of article 4 to reach this conclusion. Its reliance on article 4's "the rights ... of the seller and the buyer ..." language suggests that domestic law rules control whenever third party interests in goods are involved. The particular remedy the seller seeks with respect to the goods does not alter the law applicable to disputes between the seller and the third party. At the same time, the court at one point concludes that "the Court finds that [page 51] the UCC governs the determination of whether LaSalle has title in the Steel Shipments, or, to phrase it in a different way, application of the UCC determines the validity of ... [Usinor's] retention of title in the contract."[21] The reference to "validity" suggests that the court instead finds that article 4(a)'s exclusion of issues of validity makes CISG inapplicable to the dispute. If so, article 4's exclusion of CISG is more limited. There is no suggestion here that CISG's rules would be inapplicable to issues involving third party interests in goods when issues of "validity" are not involved.

More important, the court misapplies article 4 to the seller's right of avoidance. In fact, the remedy is governed only by CISG. Avoidance of the contract is a CISG-based remedy, and therefore, one of "the rights ... of the seller" article 4 describes as covered by CISG. It is a remedy that operates against the buyer and has no effect on a third party's interests in the goods subject to the sales contract. Avoidance does not present an issue of "validity," excluded from CISG's scope by article 4(a), because CISG's rule provide for the remedy. And because the remedy also is not based on the seller's property rights in the goods, domestic law rules concerning title in the goods have no application. Article 4(b)'s exclusion of CISG based on "the effect ... of property in the goods" therefore does not apply. Thus, under article 4, CISG governs the seller's rights of avoidance against the buyer. According to article 4's principle of rule-displacement, CISG displaces domestic law restrictions on the seller's right of avoidance.

B. CISG's Principle of Rule-Displacement and Usinor Industeel

Article 4 has a determinate application to three-party disputes between the seller, buyer and a third party asserting interests in the goods the seller delivered to the buyer. Article 4 uses two factors to select applicable law: the parties to the sales contract, and issues arising from the sales contract that 4(b) describes. Article 4's "seller-buyer" limitation makes CISG inapplicable to resolve the seller and the third party's conflicting claims. Domestic law therefore orders competing property rights to the goods delivered. Article 4(b)'s exclusion of "the effect which the contract may have on property in the goods sold" from CISG's scope makes CISG inapplicable to control rights to the goods based on title (property). Domestic law therefore again governs the [page 52] seller's rights to the goods based on ownership, even as against the buyer. Finally, article 4 does not displace CISG when one of its provisions gives the seller rights against the buyer. In this case, CISG instead displaces domestic law. Thus, it is possible for CISG to control the seller's rights against the buyer, while domestic law controls the seller's rights to the goods. In Usinor Industeel, the court failed to recognize the possibility that domestic law governs Usinor's right of replevin, and CISG controls Usinor's right to avoid the sales contract.

To see this, notice that a seller may have two sort of rights when its buyer breaches after the goods have been delivered: rights against the buyer and rights to the delivered goods. CISG gives the seller the right to avoid the sales contract in specified circumstances. Avoidance puts the contract to an end. Under article 81(1), it terminates the parties' contractual obligations to each other without affecting the seller's other remedies for breach.[22] Under article 64(1)(a), the seller may avoid the contract if the buyer's failure to perform amounts to a fundamental breach. A breach is fundamental, according to article 25, if it "results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract." To be effective, article 26 requires that the seller give notice of avoidance to the breaching buyer.[23]

The seller's remedy of avoidance is a right it has against the buyer. Avoidance does not itself give the seller a right to the goods delivered under the sale contract. Articles 64(1) and 81(1) define the right of avoidance, and articles 25 and 26 describe the conditions for its effective exercise. The right to terminate the contract arises from the buyer's fundamental breach of the contract. Thus, under article 4, CISG governs the seller's avoidance right because the right against the buyer is one "arising from" the sales contract. Since CISG defines and addresses the avoidance right, the right cannot be a matter of validity left to domestic law under article 4(a). And since the seller's avoidance right is one against the buyer, not against the goods, the right cannot affect "property in the goods sold." Article 4(b) therefore does not make domestic law applicable to govern the right of avoidance. [page 53]

This Conclusion shows where the court in Usinor Industeel goes wrong. The court is mistaken when it conditions the availability of Usinor's right of avoidance on LaSalle's right to the delivered steel.[24] Article 4 displaces domestic law governing the availability and exercise of Usinor's right to avoid the sales contract. It excludes requirements for termination of the Contract based on domestic law, not CISG. CISG defines the seller's avoidance right and its effective exercise, and CISG nowhere makes the right dependent on entitlements to the goods delivered to the buyer. This means that Usinor's right of avoidance does not depend on its right to recover the steel it delivered to Leeco. LaSalle's interest in the delivered steel therefore also cannot affect Usinor's right against Leeco to terminate the contract. Of course, on Usinor Industeel's facts, Usinor may not have been entitled to avoid the contract under CISG. Leeco 's failure to pay the full contract price may not constitute a fundamental breach. Even if Leeco's breach was fundamental, Usinor might not have given Leeco notice that it was terminating the contract.[25] The point above only concerns applicable law: Usinor's right to avoid the contract is governed by CISG, not domestic law, and CISG does not condition the avoidance right on a Contracting party's interest in the goods.

The seller also may have a right to the goods it delivered. Its right is based either on the sales contract or on a property right in the goods. When based on the sales contract, the right to the goods is a consequence of avoidance. Under article 81(2), "[a] party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract." Thus, the seller who delivered the goods and effectively avoided the contract may recover the goods from the buyer. This contract-based right against the buyer is provided by CISG and, according to article 4, is controlled by CISG's rules. As controlled by CISG, the seller may recover the goods only if it has avoided the contract.[26]

Alternatively, the seller's right to recover the goods can be based on its property right in them. The right to recover them derives from the [page 54] seller's superior property right in the goods as against the buyer. The seller, when the owner of delivered goods or one entitled to possess them as against the buyer, can recover them. Article 4 leaves the seller's rights to the goods based on its property rights in them to domestic law. CISG's rules do not control the issue. This is because article 4 makes CISG inapplicable. According to article 4, CISG governs the seller and buyers' rights "arising from" the sales contract. Thus, non-contractually based property rights in the goods, such as those provided by the law of restitution, are controlled by domestic law, not CISG. In addition, article 4(b) states that, unless "expressly provided otherwise," CISG is "not concerned" with "the effect of the sale on property in the goods." Thus, domestic law also controls contractually created property rights in the goods. For example, the seller's retention of title to the goods in the sales contract presents an issue as to whether delivery to the buyer passes ownership ("property") to the goods. Because the issue concerns the "effect of the sale on property in the goods," domestic law controls. Applicable domestic law may treat a title retention clause as reserving ownership in the goods notwithstanding their delivery. Domestic law therefore also governs the seller's right to reclaim the goods based on its ownership.[27] CISG continues to govern the seller's reclamation right provided by CISG and arising from the sale contract.

Once the scope of CISG and domestic law is identified, Article 4's application to Usinor Industeel's facts is straightforward. Article 4's "seller-buyer" limitation makes CISG inapplicable to decide the contest between Usinor and LaSalle because the dispute is between a contracting party and a no-contracting party. Domestic law instead applies to this contest. Nonetheless, under article 4, CISG remains applicable to Usinor's rights against Leeco arising from the sales contract. [page 55] CISG permits Usinor to avoid the sales contract with Leeco if the conditions for an effective avoidance are satisfied. The contest between LaSalle and Usinor does not affect the continued application of CISG to that right. Thus, domestic law governs the contest between LaSalle and Usinor; CISG governs Usinor's rights of avoidance against Leeco.

Both CISG and domestic law control Usinor's rights against Leeco to the delivered steel. CISG governs Usinor's rights to steel arising from contract-based remedies provided by CISG. So Usinor has a right to recover the steel under article 81(1) if it has avoided the contract. Because article 4's "seller-buyer', limitation makes CISG inapplicable to the dispute between LaSalle and Usinor, Usinor's right to the steel under CISG is not effective against LaSalle. At the same time, domestic law governs Usinor's rights to steel based on its property rights. Under article 4(b), CISG does not control Usinor's rights to the steel based on "the effect of the sale on property." Usinor's reservation of title to the steel in the sales contract presents an issue concerning the effect of the sale on Usinor's ownership ("property") of the steel. Domestic law therefore governs Usinor's right to recover the steel based on its property rights.

The Usinor Industeel court's application of article 4 is partly mistaken. CISG governs Usinor's right to avoid the sales contract with Leeco, and contrary to the court's finding, Usinor's avoidance right does not depend on LaSalle's right to the delivered steel under applicable domestic law. Rather, Usinor's avoidance right depends only on whether it effectively avoided the contract under CISG: namely, whether it gave timely and proper notice of avoidance following a fundamental breach by Leeco.[28] Further facts are needed to determine whether Usinor effectively avoided the contract. CISG also governs Usinor's right to recover the steel as against Leeco if it effectively avoided the contract. Because the court concluded that Usinor could not avoid the contract, it did not go on to determine Usinor's right of recovery against Leeco under CISG. If Usinor had effectively avoided the contract, article 81(2) would give Usinor a right against Leeco to recover the steel. As with avoidance, Usinor's avoidance-based rights to the steel against Leeco also are unaffected by LaSalle's rights to it under domestic law. In short, the court wrongly considers a third party's interest in goods when CISG makes those interests irrelevant in defining the seller's remedies against the buyer.

The court's application of article 4 to Usinor's remedies based on its [page 56] property rights is correct. Illinois' Replevin Act allows replevin only by the owner of the good or one entitled to its immediate possession. Usinor was neither. Article 4(b) leaves the effect of the sale on property rights in goods to applicable domestic law, and under applicable Illinois law, the effect of the Usinor's reservation of title in the steel is limited to the reservation of a security interest.[29] Reservation of title does not prevent Usinor's delivery of the steel from passing ownership to Leeco. Because article 4's "seller-buyer" limitation makes CISG inapplicable to govern Usinor's rights against LaSalle, its rights are determined by applicable Illinois law. Under Illinois' version of the Uniform Commercial Code, Usinor had an unperfected security interest in the steel while LaSalle had a perfected security interest.[30] As such Usinor was not entitled to possession of the steel as against LaSalle. Thus, it could not replevy the steel under Illinois law.

C. Roder Zelt's Application of the Principle of Rule-Displacement

Roder Zelt-Und Hallenkonstruktionen GMB v. Rosedown Park Pty. Ltd.,[31] an Australian case, applies article 4 correctly in what in effect is a three-party dispute. Roder Zelt involved a seller's attempt to recover delivered goods from the buyer in the buyer's Australian bankruptcy proceeding. The sales contract, which contained a title retention clause, was subject to CISG and the controlling domestic law was Australia. Because the administrator of the buyer's estate contested the seller's interest in the goods, effectively the case presented a priority dispute between the seller and the administrator. Applying CISG to the seller's contractual rights against the buyer, the court found that the seller's filing of a claim in the buyer's bankruptcy proceeding following the buyer's fundamental breach effectively avoided the contract. The finding rightly ignored the (claimed) interests of third parties in the goods.[32] The court, by citing the right to restitution given by article 81(2), also recognized the seller's right to recover the goods from the buyer under CISG. In determining the seller's property rights in the goods against both the buyer and the administrator of the buyer's estate, the court applied article 4(b). Under Article 4(b), Australian domestic law controls the effect of the seller's retention of title in the sales contract on [page 57] ownership. Under Australian law, retention of title reserves ownership and does not by itself create a security interest in the goods.[33] Delivery of the goods therefore did not transfer ownership to the buyer. Thus, the court concluded that the seller remained the owner of the goods. As owner of the goods, the seller had priority in them as against the administrator of the buyer's estate.

The Roder Zelt court correctly found that', dual', law applied: CISG governed the seller's rights to the goods arising from the sales contract, and Australian domestic law governed the seller's ownership in the goods. On the facts of the case, under both CISG and domestic law, the seller had a right to recover the goods delivered. Thus, the court did not have to rely on one set of rules in determining the seller's rights. On different facts, however, the Roder Zelt court's application of article 4 requires testing the seller's rights under both CISG and applicable domestic law. This is because the seller could be entitled to the goods under domestic law but not under CISG .For instance, suppose the seller in Roder Zelt had not effectively avoided the sales contract after the buyer's breach. In that case, it would not have a restitutionary right to the goods under article 81(2) of CISG. And since CISG displaces contractual remedies under Australian contract law, the seller could not rely on these remedies to recover the goods. As the court notes, CISG's provisions "replace" common law contractual remedies; however, the remedies are described.[34] Nonetheless, under article 4(b), Australian law continues to control the seller's ownership rights in the goods. CISG does not "replace" domestic law remedies based on property rights in the goods. Thus, the seller still could rely on a title retention clause effective under Australian law. It therefore could recover the goods based on its ownership.

IV. TWO CONSEQUENCES OF ARTICLE 4

Article 4's principle of rule displacement does not always displace CISG or domestic law entirely. Sometimes both CISG and domestic law can apply at the same time. In three-party cases article 4's "seller-buyer" limitation makes CISG inapplicable to determine the rights of [page 58] third parties to goods sold to the buyer under a sales contract. Domestic law controls their rights. At the same time, CISG governs the seller's rights to the goods as against the buyer. Article 4(b) also leaves to domestic law property rights in the goods arising from sales contracts otherwise governed by CISG. Thus, domestic law governs the buyer or sellers' property rights in the goods while CISG controls their contractual rights to the goods. This overlap of CISG and domestic law has two consequences: one in disputes between the buyer and seller, and the other in three-party contests.

One consequence concerns the seller's rights to recover the goods against the buyer. Because CISG gives the seller contractual rights to the goods while domestic law can give it property rights in them, the seller can rely on either sort of right to recover the goods. It need not have both contractual and property rights to do so. For instance, under CISG the seller may lack, or may lose, a right to avoid the contract. It may fail to give proper or timely notice of avoidance to the buyer, or the buyer's breach may not be fundamental. If so, the seller has no right to article 81(2)'s contract-based remedy: restitution of the goods it delivered. However, the seller still may retain property rights in the goods recognized by applicable domestic law. For instance, applicable domestic law might give effect to a clause in the sales contract reserving title in the seller until it is paid in full.[35] In these circumstances, the seller could rely on its ownership to reclaim the goods even though it lacks a reclamation right under CISG. Conversely, the seller may have no property right in the goods under domestic law after delivering them to the buyer. The seller nonetheless could have effectively avoided the sales contract. In these circumstances, article 81(2) gives the seller a right to restitution of the goods.

The availability of both contractual and property rights to goods is not by itself objectionable. Domestic law rules sometimes give a party both rights. Enforcement of a contract that does not satisfy the Statute of Frauds is sometimes available on a restitutionary basis. And the victim of a breach of a losing contract sometimes can recover "off the contract" using a restitutionary measure of its damages rather than an expectation measure. Another less direct example is the performing surety's subrogation and reimbursement rights against the obligor. The subrogation right can give the surety a property right in an asset of the [page 59] obligor; and the reimbursement right can it a contractual right against the obligor. In all of these cases, a party can rely on either its contractual or property rights. To be objectionable, the presence of both contractual and property rights in goods must be undesirable. Merely because CISG creates a contractual right to the goods while domestic law recognizes a property right in them does not make the "dual" grant objectionable.

The second consequence affects three-party cases. The seller may have greater rights in the goods against third parties under domestic law than it has against the buyer under CISG. Again, in some circumstances CISG does not allow the seller to avoid the sales contract and recover the goods. In these cases, the seller's contract remedies are limited to damages. However, in the same circumstances, domestic law might give the seller the right to the goods, both against the buyer and third parties. For instance, where domestic law treats a title retention clause in a sales contract as effective both against the buyer and third parties, the seller can recover the goods based on its ownership. Third parties' interests in the goods are subordinate to the seller's property right in them.[36] Thus, the seller can rely on its property rights in the goods to prevail against third parties when it cannot prevail against them on its contractual rights to the goods. The result is made possible by article 4's "seller-buyer" limitation. The "seller-buyer" limitation restricts the seller's rights to the goods against the buyer. CISG does not apply to determine the seller's rights against third parties. This allows the seller to obtain greater rights in the goods against third parties under domestic law than it has against the buyer under CISG.

It is worth noticing that this second consequence does not depend on domestic law controlling the seller's property rights in goods as against the buyer. The seller still could have superior property rights in them as against third parties even if CISG displaced domestic law. This is because article 4's "seller-buyer" limitation allows the possibility. For instance, suppose that article 81 were interpreted to give an exclusive remedy as to the goods. In this case, if the seller has not effectively avoided the contract, it is not entitled to restitution of the goods under article 81(2). The seller could not rely on a property right in the goods [page 60] to recover them from the buyer.[37] Accordingly, as an exclusive restitutionary remedy, article 81 would displace domestic law giving the seller property rights in goods against the buyer. Thus, in this case, the seller could not rely on a property right in the goods recognized by applicable domestic law to recover the goods. However, article 4's "seller-buyer" limitation displaces domestic law only with respect to the seller's property rights in goods as against the buyer. CISG's displacement of domestic law does not apply to the seller's property rights against third parties. Domestic law recognizing the seller's property rights in goods therefore would remain applicable against third parties. Thus, the seller still has greater rights in the goods as against third parties than it has against the buyer under CISG. For example, in the buyer's bankruptcy proceeding, the seller would prevail against the buyer's creditors under applicable domestic law. The delivered good would not be available for distribution to the buyer's general creditors.

As a matter of policy, this consequence may or may not be desirable. Giving the seller greater rights in goods as against third parties places risks arising from the buyer's breach on them. Restricting the seller's rights in goods as against the buyer keeps part of that risk on the seller. Because risks arising from the buyer's breach are (expected) costs, a good rule orders property rights in goods between the seller and third parties so as to minimize the sum of these costs. The exercise requires gauging the comparative risk-reducing abilities of sellers and third parties. This involves generalizing over potentially heterogenous groups, and the diversity among domestic laws may simply reflect a difference in implicit judgment about comparative risk assessments.[38] For instance, domestic laws giving effect to title retention clauses against third parties might implicitly judge sellers generally to be in an inferior position to bear risks from the buyer's breach. As a normative matter, the fact that some domestic law gives the seller greater rights against third parties than CISG gives the seller against the buyer is inconclusive. It says nothing about the soundness of relevant domestic law's implicit assignment of risks arising from the buyer's breach between the seller and third parties. Article 4, by limiting CISG's application to entitlements between the buyer and seller arising from the sales contract, does not disturb these implicit risk assignments. [page 61]

V. CONCLUSION

It is often noticed that CISG is a product of compromise and consensus.[39] The compromise is reflected in article 4's principle of rule-displacement. The principle limits CISG's application so that both CISG and domestic law sometimes can apply at the same time between the contracting parties. It also makes CISG inapplicable to determine the rights of non-contracting parties. Article 4's principle has implications in three-party cases in sorting out rights between the seller, buyer and third parties. The principle makes CISG applicable to issues CISG addresses between the seller and buyer arising from the sales contract: CISG displaces domestic law with respect to these issues. Domestic law continues to apply to issues CISG does not address, including property rights in the goods. Accordingly, CISG alone controls rights that the contracting parties have against each other. At the same time, when CISG creates contractual rights in the goods and domestic law recognizes property rights in them, both CISG and domestic law control the contracting parties' rights to the goods. Domestic law alone controls a third party's rights in the goods. Whether the difference between CISG and domestic law rules is a good thing depends on the evaluation of the two sorts of rules. The continued operation of both sorts of rules is a consequence of article 4's principle of rule-displacement. [page 62]


FOOTNOTES

* Professor of Law, University of Virginia School of Law.

1. 19 Int'l L. Mat. 668 (1988). All unprefixed references to "articles" are to CISG's articles.

2. See, e.g., Warren Khoo, Article 4, in Commentary on the International Sales Law 44, 46-48 (C.M. Bianca & M.J. Bonell eds. 1987); John O. Honnold, Uniform Law for International Sales 63-70 (3d ed. 1999); Peter Schlechtriem, Uniform Sales Law 32-33 (1986).

3. See Honnold, supra note 2, at 67-68; Fritz Enderlein & Dietrich Maslow, International Sales Law 42 (1992).

4. See CISG art. 7(2) ("Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law [i.e., conflict of laws rules]").

5. See Clayton P. Gillette & Steven D. Walt, Sales Law: Domestic and International 48 (rev. ed. 2002) (principle of issue-displacement); Honnold, supra note 2, at 72-76; Peter Winship, Commentary on Professor Kastely's Rhetorical Analysis, 8 Nw. J. Int'l L. & Bus. 623, 636-637 (1988).

6. See Secretariat Commentary on the 1989 Draft, Documentary History of the Uniform Law for International Sales 418 (art. 27, para. 3) (J. Honnold ed. 1989). The inference to displacement of domestic law rules requiring consideration is supported by article 23. Article 23 provides that a contract is concluded when an acceptance becomes effective under CISG's provisions. Because the article imposes no further requirements for a contract to be concluded, an effective acceptance is sufficient to conclude a contract under CISG. Thus, article 23's rule concerning conclusion of a contract displaces domestic law consideration requirements. For an argument for the" same conclusion based on article II 's elimination of formal requirements for contract formation, see Peter Schlechtriem, supra note 2, at 45.

7. See Report of the Secretary-General: Formation and Validity of Contracts for the International Sale of Goods (1977), Diplomatic History of the Uniform Law for the International Sale of Goods 256-57 (paras. 21-22) (J. Honnold ed. 1989), Diplomatic Conference, First Committee Deliberations, Diplomatic History, id. at 582-83 (paras. 5, 12).

8. See, e.g., Handelgericht St. Gallen, HG 48/1994, 24-08-1995 (Switzerland), 1 UNILEX D.1995-13 (mistake); Joseph M. Lookofsky, Loose Ends and Contorts in International Sales: Problems in the Harmonization of Private Law Rules, 39 Am. J. Comp. L 403,312-13 (1991); Schlechtriem, supra note 2, at 32 (mistake, unconscionability and duress); cf. International Institute for the Unification of Private International Law, UNIDROIT Principles of International Commercial Contracts, Article 3.1 (1994) (issues of invalidity arising from incapacity, lack of authority, immorality or illegality excluded).

9. See, e.g., Secretariat Commentary on the 1989 Draft, Documentary History, supra note 8 at 428 (art. 42, para. 10); Final Award in Case 9978, 11 ICC Int'l Court Arb. Bull. (no. 2) 117 (2000); Albert H. Kritzer, 1 International Contract Manual: Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods 40 (1994).

10. With few exceptions, article 6 allows the contracting parties to derogate from any of CISG's provisions, apparently including article 35. Article 8(2), when applicable, provides that', statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person. "would have had in the same circumstances." Thus, a "statement" disclaiming warranties in the appropriate circumstances shift the risk of non-conformities in the goods to the buyer.

11. Compare Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) 286-87 (2d ed. 1999); Laura E. Longobardi, Disclaimers of Implied Warranties: The 1980 UN Convention on Contracts for the International Sale of Goods, 53 Fordham L. Rev. 887 (1985) with John 0. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 311-312 (2d ed. 1991); Richard Hyland, Conformity of Goods to the Contract Under the United Nations Convention and the Uniform Commercial Code, in Einheitliches Kaufrecht und Nationales Obligationenrecht 305, 311-121 (P. Schlechtriem ed. 1987).

12. See, e.g., Oberlandesgericht Köln 22 U 4/96, 21-05-1996 (Germany), 1 UNILEX D.1996-5.5 (Abstract); cf. Oberster Gerichtshof 8 Ob 22100v, 07-09-2000 (Austria), 1 UNILEX D.2000-12 (Abstract) (validity of standard clauses restricting right to withhold payment governed by applicable domestic law).

13. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, 47 U.C.C. Rep. Serv. 2d 887 (N.D. III. 2002).

14. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 882, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 889.

15. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 885, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 892.

16. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 886, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 894 (quoting John Honnold approvingly).

17. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 886, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 894.

18. 735 Il Com. Stat. Ann. 5/19-101 (2002).

19. See pre-revision U.C.C. 9-312(5)(b) (1998). The Usinor Industeel court concludes that LaSalle's security interest in the delivered steel has priority without citation to the applicable priority rule; see Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 889, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 898.

20. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 889,47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 898.

21. Usinor Industeel v. Leeco Steel Products, Inc., 209 F. Supp. 2d 880, at 887, 47 U.C.C. Rep. Serv. 2d 887 (N.D. Ill. 2002) at 895-96.

22. See article 81(1) ("Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due ...); article 61(2) ("The seller is not deprived of any right he may have to claim damages by exercising his right to other remedies"); article 45(2) (same for buyer). The closest domestic law counterpart to avoidance is "cancellation." See U.C.C. 2-105(4), 2-703(f), 2-711(1).

23. See article 26.

24. See quotation accompanying supra note 17.

25. Cf. Oberlandesgericht Frankfurt am Main, 5 V 164/90, 17-09-1991 (Germany), 1 UNILEX D. 1999-9 (Abstract) (implicit notice of avoidance permitted); Roder Zelt- Und Hallenkonstruktionen GmbH v. Rosedown Park Pty. Ltd., (1995) 57 F.C.R. 261 (Fed. Ct., S. Austral.) (filing of claim in buyer's bankruptcy proceeding sufficient notice).

26. See article 81 (section heading, "Effects of Avoidance").

27. Professor Honnold disagrees. He argues that article 4 displaces domestic law rules controlling reclamation based on property rights in the goods. Relying on article 81(2)'s grant of a right to restitution, Honnold concludes that the article makes CISG "concerned with" reclamation and therefore displaces domestic law rules governing reclamation rights. See Honnold, supra note 2, at 507-508. Honnold's argument ignores the full content of article 4's "concerned with" language. Article 4 states that, "except where otherwise expressly provided in this Convention, it is not concerned with ... (b) the effect which the contract may have on the property in the goods." Article 81(2)'s right to restitution does not "expressly" provide for the effect of the sale on property rights in the goods. It says nothing about them. Hence, CISG does "not concern" rights to reclamation based on property rights in the goods sold. According to article 4(b), domestic law instead controls. And article 4's limitation to rights "arising from" the sales contract makes domestic law applicable to non-contractually created reclamation rights.

28. See supra p. 53.

29. See supra text accompanying note 18.

30. See supra text accompanying note 19.

31. (1995) 57 F.C.R. 216 (Fed. Ct. S. Austral.).

32. Id. at 235.

33. See Associated Alloys Pty. Ltd. v. ACN 001 452 106 Pty. Ltd., (2000) 74 A.L.J.R. 862 (Austral.); Roder Zelt-Und Hallenkonstruktionenen, 57 F.C.R. 223. For the recognition of title retention clauses under Australian bankruptcy law, see Roman Tomasic & Keturah Whitford, Australian Insolvency and Bankruptcy Law 180-182 (2d ed. 1997).

34. Roder Zelt, 17 F.C.R. 233.

35. The domestic laws of Austria, France, Germany, and Switzerland, for instance, give this effect to title retention contractual clauses; see Retention of Title Clauses in Sales of Goods Contracts in Europe (I. Davies, ed. 1999).

36. The same result can hold in a three-party contest between the seller's creditors and the buyer. In some circumstances CISG does not allow the seller to avoid the contract and recover the goods from the buyer. Still, where domestic law treats title retention clauses in sales contracts as reserving ownership, the seller's creditors can obtain a property right in the goods from the seller. They therefore can prevail against the buyer in a priority contest over the goods.

37. This is Professor Honnold's position. See supra note 27.

38. Cf. Saul Levmore, Uniformity and Variety in the Treatment of the Good Faith Purchaser, 16 J. Legal Stud. 43, 44 (1987).

39. See Steven Walt, Novelty and the Risks of Uniform Sales Law, 39 Va. J. Int'l Law 67 (1999); Arthur Rosett, Critical Reflections on the United Nations Convention on Contracts for the International Sale of Goods 45 Ohio St. L.J. 265 (1984).


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