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Reproduced with permission of 32 Canadian Business Law Journal (1999) 313-325

Canada's First Decision on the International Sales Convention

Jacob S. Ziegel

Canada acceded to the International Sales Convention (Convention or CISG) on April 23, 1991, with effect from May 1, 1992.[1] For the first six and a half years there were no reported Canadian decisions involving the Convention. The position changed on December 16, 1998 with the release of the decision of Justice Zalev of the Ontario Court of Justice (General Division) in Nova Tool & Mold Inc. v. London Industries Inc.[2]

Unfortunately, for reasons that will be explained, the decision is not a good precedent for the treatment of the Convention in future Canadian litigation. This comment is therefore offered as a caveat on avoiding the mistakes that were made in Nova Tool and as an urging to counsel to treat the Convention more seriously than it was treated in Nova Tool.

The Facts

Nova is a mold (sic) manufacturer carrying on business in Windsor and its main business is the manufacture of steel molds used in the manufacture of plastic auto parts in plastic injection machines. London is a manufacturer of plastic auto parts in London, Ohio, and the Honda plant is (or was) one of its most important customers.

In late 1995 or early 1996, London sent Nova a request for a quotation for nine molds for parts required by Honda together with [page 313] the engineering prints, specifications and Honda's time schedule. The specifications included the "graining" of several of the molds. London also solicited quotations from Nova's competitors in the Windsor area. Two of the requested bids were for jobs 619 and 620. Apparently Nova's quoted prices were substantially lower than its competitors' and London awarded Nova most of the jobs for the molds, including the contracts for jobs 619 and 620. In each case, London provided Nova with a written acceptance of its bid to which there was attached a copy of London's standard terms and conditions.[3]

With the exception of jobs 619 and 620, the other molds were satisfactorily completed and delivered on time to London. Unhappily, as argued by London, this was not true of jobs 619 and 620. Nova was slow in starting work on these jobs and was a long way from completing them at the end of 1996. Moreover, the first try-outs showed serious problems with both molds. The problems persisted in the new year and neither mold was completed by the date contemplated in Nova's original bids.

London was particularly concerned about the status of job 620 and concluded that it had no option but to find another mold shop that could correct the existing defects and deliver a complete and properly functioning mold in time for London to meet its own obligations to Honda. Cambridge Tool & Die Corporation, a competitor of Nova's, agreed to take over the job on a "time and materials" basis. On February 10, 1997, Nova agreed to release job 620 so that it could be completed by Cambridge. Cambridge then completed manufacture of the mold and submitted a bill to London for labour and materials of US$ 335,220, which London paid. Nova's original bid for the job was US$ 186,400.

Nova continued work on the other jobs including job 619. The molds were delivered to London but London complained that the mold on job 619 was not operating properly and that the required graining had not been done on jobs 620, 621 and 667. The cost of correcting the defects in job 619 was estimated by London at US$ 15,600. However, London was not in a position to send the mold out immediately for repair since it first needed to produce enough parts to meet Honda's production needs.[314]

Nova submitted invoices to London for the molds it had completed (including job 619 but not, of course, job 620) for a total of US$ 367,834.[4] London was not prepared to pay and, not surprisingly, filed its own hefty counterclaims. The parties were not able to settle their differences. Nova thereupon initiated action for payment of the above balance and London counterclaimed for US$ 442,707. This amount was arrived at as follows:[5]

Paid Cambridge to complete 620 $335,220
London (sic) internal costs for late delivery of 620 $  55,227
Repair costs for 619 $  15,600
Graining costs for 620, 621 & 667
(which should have been done by Nova)
$  39,660
TOTAL U.S. $442,707

Disposition of Counterclaim

The following issues arose out of London's counterclaim and were addressed to a greater or lesser extent in Zalev J.'s judgment:

1. Was Nova in breach of its contractual obligations with respect to Jobs 619 and 620? [6]

2. Was Nova entitled to notice before the contract for Job 620 was terminated by London? [7]

3. Was Cambridge's bill for labour and materials for correcting the defects and completing job 620 reasonable and had London acted reasonably to mitigate its damages arising out of Nova's failure to meet its job 620 obligations? [8]

4. Was there accord and satisfaction between London and Nova as a result of the meeting of principals of the two companies on February 10, 1997 and Nova's agreement to release Job 620 to Cambridge? [9]

5. Was London entitled to recover the costs of graining the named molds? [10]

6. Was London entitled to recover the costs of correcting the defects in Job 619? [11]

7. Was London entitled to recover the extra costs of building up its supply of parts? [12]

8. Was London entitled to set-off its counterclaim against Nova's liquidated claim for moneys owing on the completed molds? [13]

With the exception of question 7, Zalev J. answered all the issues in London's favour and allowed London's counterclaim for the full amount less $55,270.[14] In dealing with the legal aspects of the questions, he relied either on the terms of the agreement or on Anglo-Canadian case law dealing with the ingredients of accord and satisfaction, the measurement of damages and rights of set off. The choice of law question of whose law applied to the contracts [15] and to the issues enumerated above are not discussed in the judgment. Nor is U.S. law considered at any point although a persuasive argument can be made that under choice of law contract principles (and ignoring the impact of Canada and the United States both being adherents to the International Sales Convention), Ohio's law had at least as strong a claim to being considered applicable as Ontario's.[16]

The only reference in the judgment to the International Sales Convention appears in the following passage dealing with London's claim for breach of warranty:[17]

I have already quoted the warranty provisions in the contract. London relies on this contractual warranty and also relies on the implied warranties under [page 317] the International Sale of Goods Act R.S.O. 1990, c. I.10. London relies particularly on Article l(l)(a) and (l)(b), 35(1), 36(1), (2), 45(l)(a), (l)(b) and 74, all of which follow as Schedule "B".[18]

Discussion

Zalev J. does not examine the quoted sections of the Convention and does not give us his views with respect to their applicability. Still more important, he does not tell us why only these articles of the Convention were being invoked and also why, since apparently it was not disputed that both Canada and the United States had adopted the Convention, Ontario's domestic sales law was relevant at all. With some important exceptions,[19] the Convention is an international sales code and it addresses all the familiar features of modern domestic sales laws including formation of the contract [20] and rules governing modification or consensual termination of contract;[21] the seller's and buyer's obligations and remedies for breach of contract; risk of loss; the measurement of damages, and the definition and admissibility of the defence of frustrating events. The Convention likewise addresses the principles governing the interpretation of the Convention and the parties' contract [22] and how gaps are to be filled in the Convention,[23] and also affirms the parties' right to exclude the Convention in its entirety or to derogate from some of its provisions.[24]

The short answer to my questions appears to be that only London had invoked the Convention in its pleadings [25] and then only in [page 317] support of its argument that Nova had breached its implied warranty obligations. There is nothing in the court's judgment to indicate whether the Convention's provisions were actually argued at trial and Zalev J. may have felt it was not his job to raise the Convention's other provisions if the parties felt it unnecessary to do so.[26] He may also have concluded that Nova's breaches of contract were so obvious under London's contractual terms and conditions that invoking the Convention's warranty provisions was only icing on the cake.

Still, the judge could have ascertained that there was no earlier reported Canadian case in which the Convention had been relied on and that his judgment could set an important precedent. London's counsel having pleaded parts of the Convention, Zalev J. could have insisted on counsel reviewing all relevant aspects of the Convention [27] or on his not relying on the Convention at all. Since the judge chose not do this, all we are left with is a diminutive precedent providing little guidance as to how the Convention is likely to be applied in future Canadian cases.

Other Lessons from Nova Tools

I believe Nova Tools teaches a number of other lessons. It is safe to assume that the level of consciousness about the Convention is very low among commercial lawyers in Canada, as it is also among U.S. lawyers.[28] It is my distinct impression that a very large number of contracts between Canadian and U.S. parties still fail to exclude the Convention if the parties do not mean it to apply to the contract -- not because the parties wish to be governed by the Convention but because they do not know enough about the Convention to [page 318] appreciate that a simple reference to the law of a state or a province is not sufficient to exclude the Convention.[29]

I also think it safe to assume that, if confronted with the choice, most Canadian and U.S. lawyers would much prefer to be governed by the domestic sales laws of Canada or the U.S. than by the Convention. The preference is understandable. Both countries are predominantly common law jurisdictions. Both countries (with the possible exception of Quebec) have similar sales laws and the leading reports and treatises are readily accessible in a common language even to lawyers located in outlying areas.[30] In economic terms, it is simply much more efficient for such sales contracts to be subject to the domestic laws of Canada or the United States than to be governed by a new and still evolving law based on an amalgam of common law and civil law principles but with many gaps and ambiguities. This is true even if the goods are to be manufactured or imported from outside North America, although admittedly complications will arise if a third party is involved whose domestic law is not common law-based.

In an earlier comment in this journal,[31] I raised the desirability of Canada and the United States making a joint declaration under article 94 of the Convention that the Convention is not to apply to contracts of sale and their formation by parties having their places of business in the two countries. Professor John Honnold, a principal architect of the Convention, challenged my position.[32]

I remain unrepentant in my heresy. However, since the prospects of Canada and the United States adopting my suggestion remain very remote, Canadian and U.S. commercial lawyers had better take the International Sales Convention much more seriously than they have up to now.

Postscript

Since the preparation of the above comment, another judgment involving the International Sales Convention has been released in [page 319] Ontario. This is Justice Katherine Swinton's decision in La San Guiseppe v. Forti Moulding Ltd. [33] involving an Italian seller (the plaintiff) and an Ontario importer (the defendant). Swinton J.'s treatment of the Convention is much more satisfactory than was Zalev J.'s in Nova Tool although she too overlooked some relevant points. Again I suspect this was due to the way in which the case was argued before her.

LSG is a manufacturer of picture frame mouldings; the defendant (Forti) is a Toronto-based distributor of picture frames and picture frame mouldings. Between 1989 and 1996 LSG supplied Forti with large quantities of its product and, to accommodate Forti, also provided the latter with a double mitre saw manufactured by another company. Apparently none of the dealings between the parties was reduced to writing.

Forti was very delinquent in its payments and action was initiated by LSG to recover the balance owing to it, 48,707,460 lira, plus interest. Forti counterclaimed for $94,341.12 (or about twice the amount of the plaintiff's claim) alleging, inter alia, that some of LSG's deliveries were defective, that there had been overshipments, and that the double mitre saw did not work properly. Justice Swinton allowed the plaintiff's claim in full with prejudgment and postjudgment interest, and dismissed the counterclaim.

The following issues involving the Convention were considered by Swinton J.

(a) Did the Convention Apply to the Parties' Contracts?

Both Canada and Italy are adherents to the Convention. Swinton J. noted [34] that the plaintiff had failed to provide documentary proof of Italy's signature of the Convention in 1986 but nevertheless was willing to dispense with the requirement because Italy's signature was a matter of "public record". Although I applaud her willingness to dispense with expensive formalities, it would have been helpful if she had explained why accession by a foreign country to an international convention is a matter of public record. Is she suggesting that United Nations treaty records deserve the same judicial notice as federal and provincial legislation within Canada and, if so,[page 320] is this because of a common law rule or is it because of a federal or provincial statutory provision?

So far as the parties before her were concerned, she held [35] that the Convention applied (a) because the contracting parties had their places of business in Contracting States, and (b) because the rules of private international law led to Ontario as the applicable law of a Contracting State. She was clearly right on (a); I am not so sure she was correct on (b). Because there was no written contract, it is safe to assume that the parties had not chosen a proper law to govern their contractual relations and that it was up to the court to determine which country -- Italy or Canada -- had the closest connection with the contracts. It is a close call but I would have thought that Italy, as the supplier's home and the place where the contract was to be performed, had a slight edge.

(b) Did the Parties Conclude a Master Contract before the Convention Came Into Force in Italy and Canada?

Forti argued that the parties had agreed in 1989 on a master contract to govern their future relations. Swinton J. disagreed and held [36] that the 1989 understanding was only an agreement to agree. The specific contracts were concluded after Canada had joined the Convention. It is open for consideration whether, to justify her conclusion, she should also have consulted the contract formation provisions in Part II of the Convention because if those provisions take a broader view of the effect of a foundational contract then arguably they should have been applied.

Swinton J. assumed, assuredly correctly, that the Convention only applies to contracts concluded after the date when the Contracting States adopted the Convention. That is the normal presumption in international treaties unless the Convention provides otherwise. Curiously, Article 1 of the Convention does not address the issue. Just as curiously, none of the CISG commentaries I have had time to consult address it either.

(c) The Alleged Quality Defects of the Mouldings [37]

Swinton J. was not satisfied on the evidence that there was anything seriously wrong with the moulding supplied by LSG.[page 321]

Apart from this, she held that Forti was precluded by article 39 of the Convention from raising the complaints at this late stage given that the Convention requires the buyer to notify the seller within a reasonable time after the buyer knew or ought to have known of the defects. She dismissed Forti's claims that it had complained much earlier. Also favouring the seller's position was the court's finding that there was no evidence to indicate that the seller knew of the defects before supplying the merchandise so that Forti could not rely on article 40 to offset the debilitating effects of article 39.

A puzzling feature of Swinton J.'s judgment is her finding [38] that the seller had not breached ss.14 to 16 of the Ontario Sale of Goods Act (SGA).[39] Presumably she did not mean to suggest that the domestic sales provisions in Ontario can coexist with the CISG provisions. My own hunch is that she was responding to the buyer's pleadings invoking the SGA but it was unfortunate that she rose to the bait. She should have held firmly to the position that there was no room for applying Ontario's internal sales rules unless it could be shown convincingly that there was a gap in the Convention that could not be bridged by the Convention's interpretive and analogical provisions.[40]

(d) Complaints about the Saw

Forti was no luckier on this score than it was with respect to its other complaints. Swinton J. held [41] that LSG gave no warranty in selling the saw to Forti and that none should be implied. She also found that the model was Mr. Forti's choice and that the saw he received was not different from what he ordered in any significant way.

Her reasoning seems intuitively right but it would have been helpful if she had given it a stronger Convention footing. After all, article 35(2)(a) does imply a warranty of merchantability in the buyer's favour in every contract of sale and, unlike s. 16 of the Ontario SGA, does not require the seller to be in the business of selling goods of that kind. The answer, I believe, lies in the important qualifying words, "except where the parties have agreed [page 322] otherwise"" appearing in article 35(2)(a). The agreement to exclude the warranty does not have to be express and may be implied from the surrounding circumstances. LSG was only doing Forti a favour in securing the saw and selling it to Forti and could not be expected to assume warranty liabilities.

(e) Overshipments

Swinton J.'s response to this complaint was twofold.[42] First, she did not believe the complaint. Second, even if the complaint was well grounded, under article 52(2) of the Convention and s.29(2) of the SGA, "there can be no complaint several years later". This is not what either of these provisions actually says. What they provide is that the buyer can opt either to reject the excess quantity or to retain the overshipment and pay for it.[43] Presumably, therefore, what Swinton J. intended to say was that because of the long delay Forti was estopped from denying that it had agreed to retain the overshipment if there was any.

(f) LSG's entitlement to prejudgment interest

This is the last point in Swinton J.'s judgment requiring further consideration. She held,[44] relying on s.128 of the Courts of Justice Act,[45] that LSG was entitled to pre-judgment interest from the date the cause of action arose as well as post-judgment interest. What she does not appear to have realized is that article 78 of the Convention also purports to govern the seller's entitlement to interest and therefore should have been applied in place of s.128, at least so far as pre-judgment interest was concerned.

Article 78 provides that if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74. The article has provoked much litigation and much [page 323] scholarly comment [46] because of its ambiguities. A great deal of the case law revolves around the computation of the rate of interest because CISG is completely silent on it. The gap is due to the delegates' inability at the diplomatic conference in Vienna at which the Convention was adopted to reach agreement on a formula for political, economic and religious reasons.

Given this lacuna, tribunals appear to have awarded interest on one of four possible formulas. Some courts [47] have resorted to trade usages under article 9 of the Convention; other courts, believing that CISG itself provides no internal clues and that there is therefore no scope for applying the gap-filling directive in article 7(2), go outside the Convention and apply the rate of interest prevailing in the country which is the proper law of the contract.[48] Other adjudicators bypass the conflict of laws issues and apply the rate obtaining in the creditor's country because it strikes them as the fairest rule.

It would have been interesting to know how Justice Swinton would have resolved the imbroglio had she known of it. She might have been attracted to the solution applying the rate of interest under the proper law of the contract because, in the light of her earlier findings, that was Ontario law. So s.128 of the Courts of Justice Act would have been the right answer after all. On the other hand, there is a great deal to be said for applying the rate obtaining in the creditor's country (Italy in the present case) because that is where LSG was entitled to be paid and would have put the money to use.

Conclusion

The present case, unlike the situation in Nova Tool, also proves the value of the parties' contractual relations being governed by the Convention where seller and buyer are located in states with very different legal systems. It was unrealistic to expect Forti to [page 324] know anything about Italian sales law and equally unrealistic to require LSG to familiarize itself with the details of Ontario sales law. The Convention neatly solves the conundrum (as it was intended to) by providing the parties with a common sales code which will apply regardless of whether action is brought in the country of the seller's or buyer's place of business.[page 325]


FOOTNOTES

1. See UNCITRAL Document A/CN.9/462, May 19, 1999. As of the latter date, the Convention was in force in 56 states. In acceding to the convention, Canada invoked the federal-state clause in article 93 of the Convention and only acceded to the Convention on behalf of those provinces that had requested it, viz. all the provinces with the exception of Saskatchewan and Quebec. Those two provinces were added shortly afterwards. See further J.S. Ziegel, "Canada Prepares to Adopt the International Sales Convention" (1991), 18 C.B.,.J. 1.

2. [1998] O.J. No. 5381, 84 A.C.W.S. (3d) 1089. So far as I know, the decision has not yet been reported in any of the major series of reports in Canada. The decision was brought to my attention by Professor Albert Kritzer, Executive Secretary, Institute of International Commercial Law, Pace University School of Law, New York.

The bracket phrase page followed by a number is used to identify the page number of the original publication.

3. Judgment, para. 13 and sched. "A". No issue was raised at trial about whether there was a conflict between the terms of Nova's bid (which are not given in the judgement apart from the price quoted by Nova) and London's terms and conditions, thereby giving rise to a battle of the forms. Cf. CISG, article 19. I will therefore ignore the issue as well.

4. London subsequently paid Nova US$ 97,971.18 and Nova amended its statement of claim to US$ 269,862.82: judgement, para. 40.

5. Judgment, para. 41. There appears to be a discrepancy in the figures appearing below since they add up to $445,707 and not $442,707 as presented in the judgment.

6. The issue is not addressed directly by the court with respect to Job 620 but is addressed implicitly by Zalev J. in the related issues involving Job 620.

7. Judgment, para. 52.

8. Judgment, paras. 52-57.

9. Judgment, paras. 47-52.

10. Judgment, para. 53.

11. Judgment, paras. 61-62.

12. Judgment, para. 63.

13. Judgment, para. 65.

14. Zalev J. was not satisfied that London's costs of building up a supply of spare parts was sufficiently related to the defects in job 619.

15. So far as I can tell, London's terms and conditions contained no choice of law clause. I assume no choice of law clause appeared either in London's original requests for quotations from Nova or in Nova's bids in response to the requests.

16. In favour of Ohio law being the governing law are the facts that London was an Ohio-based company, that the requests for bids came from Ohio and presumably were couched in U.S.-style legalese, that the molds were deliverable to Ohio and, most important, that London's terms and conditions were written from an Ohio sales law perspective. (Ohio has adopted the American Uniform Commercial Code, including Article 2 on sales.)

17. (footnote missing)

18. Article 1 of the Convention determines when the Convention applies to an international sales contract; article 35 specifies the warranties implied in a contract governed by the Convention; article 36 provides that the seller is liable for any lack of conformity in the goods supplied to the buyer and article 45 enumerates the remedies available to an aggrieved buyer. Article 74 deals with the measure of damages recoverable by the buyer.

19. See article 4 (the Convention does not determine the substantive validity of the contract of the effect of the contract on the parties' property rights).

20. Convention, Part II.

21. Under article 29, the parties' agreement to modify or terminate the contract is sufficient and no consideration in the common law sense is required for the enforceability of the agreement.

22. Article 7(1), 8 and 9.

23. Article 7(2).

24. Article 6.

25. I have not seen the pleadings, but this information was given me by London's counsel in Toronto. I was not able to reach Nova's counsel in Windsor to verify the information or to ascertain to what extent the Convention's provisions were argued by counsel in court.

26. Canadian counsel are not alone in overlooking the Convention's relevance in sales disputes between Canadian and U.S. contracting parties. In GPL Treatment Ltd. v. Louisiana-Pacific Corp., 914 P2d 682 (Ore. S. Ct. 1996, affg Ore. Ct. App.), which involved a Canadian seller and an American buyer, the dissenting judge in the Court of Appeals drew attention to the Convention's applicability to the contract. The majority opinion in the Court of Appeals refused the appellant leave to argue the point, saying it was "too little too late".

27. Including dozens of books in many languages, half a dozen websites devoted to CISG, hundreds of article and at least 500 reported cases and arbitrations from jurisdictions around the globe.

28. As of August 1998, there were only 14 listed U.S. cases on the Pace University website. Several of them only mention the Convention in dicta or, while recognizing the applicability of the Convention, proceed to apply U.S. state or federal law rules as if they were the same as the CISG rules.

29. See Ziegel, supra, footnote 1, at pp. 3-4 and 10-11.

30. The emergence of legal websites has of course made the geographical distinctions even less important for the accessibility of common law and Convention materials. However, the greater accessibility of Convention materials does not eliminate the cultural differences between judgments rendered by civilian and common law-based tribunals and between the writing of commentators with different legal backgrounds.

31. J.S. Ziegel, "Canada and the Vienna Sales Convention" (1986-87), 12 C.B.L.J. 366.

32. See Letter by Prof. John O. Honnold (1987-88), 13 C.B.L.J. 504 and my reply, ibid., at p. 505.

33. (Unreported, August 31, 1999, Ontario Superior Court of Justice, File No. 98-CV-142493CM).

34. Supra, footnote 1, at para. 28.

35. Ibid.

36. Ibid., para. 29.

37. Ibid., paras. 33-39.

38. Ibid., para. 39.

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

40. See article 7.

41. Ibid., para. 40.

42. Ibid., paras. 42-43.

43. Under SGAs. 29(2) the buyer can also opt to reject the whole shipment, a draconian remedy that happily was not adopted by CISG. However, there may be circumstances where, by reason of the difficulty of segregating the excess quantity from the right quantity, rejection of the whole may be the buyer's only reasonable remedy.

44. Supra, footnote 1, para. 45.

45. R.S.O. 1990, c. C.43.

46. For a sampling of the scholarly literature see Diederichsen (1994), 14 J.L. & Comm. 177, pp. 180-200; Ferrari (1995), 15 J.L. & Comm. 1, pp. 116-25, and Peter Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd ed. (Oxford, Clarendon Press, 1998), pp. 591-99.

47. E.g., Argentine commercial courts.

48. This solution appears to be most favoured by German courts and leads to applying the rate of interest prevailing in the creditor's country. This presupposes that the proper law always coincides with the law of the creditor's country, which may not be the case. In fact, the contract may have several proper laws to govern issues not resolved under CISG.


Pace Law School Institute of International Commercial Law - Last updated January 18, 2000
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