Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 46-55. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§49 Article 2 excludes from the Convention six specific categories. The first three (paragraphs (a)-(c)) are based on the nature of the transaction; the remaining three (paragraphs (d)-(f)) are based on the nature of the goods.
"This Convention does not apply to sales:
(a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;
(b) by auction;
(c) on execution or otherwise by authority of law;
(d) of stocks, shares, investment securities, negotiable instruments or money;
(e) of ships, vessels, hovercraft or aircraft;
(f) of electricity."
§50 A. Specific Exclusions
Most consumers do their shopping at stores in their own community; all of these purchases fall outside the Convention because they are not international (Art. 1, supra at §39). However, consumers may occasionally shop on the other side of a nearby international border or during trips abroad, or may order from foreign mail-order houses. In some of these transactions the seller will know that the buyer is a foreigner so that the transaction would meet the Convention’s requirements of internationality. (See Art. 1(2), supra at §41).[page 46]
In UNCITRAL attention was drawn to the development of national legislation and case law designed to protect consumers; it was agreed that the Convention should not supersede these rules. Consideration was given to a provision that the Convention would not override any domestic rule that was "mandatory" or that implemented "public policy" (ordre public ) but it was found that these concepts carried different meanings in various legal systems; the clearest and safest solution was specifically to exclude consumer purchases from the Convention.
The phrase "goods brought for personal, family or household use " refers to the purpose of the buyer at the time of the purchase. (A similar definition in (U.S.A.) UCC 9–109 applies when the goods "are used" by the buyer for the above purposes; in UNCITRAL "are used" was deleted so that applicability of the Convention would not depend on action taken by the buyer subsequent to the purchase.) The character of the goods is not decisive; the Convention applies to the international purchase of furniture for a business office even though this type of furniture is customarily bought by consumers.
The "unless" clause that concludes paragraph (a) may be illustrated as follows:
Example 2A. Seller, a dealer in photographic equipment in State A, accepted an order from Buyer, a resident of State B, for expensive and complex photographic equipment of the type normally used by professionals. In a controversy over the sale, when Seller invoked the Convention, Buyer offered evidence that he bought the equipment for his personal use as an amateur.
In this case, the seller should be able to show, under the "unless" clause of paragraph (a), that he "neither knew or ought to have known" of the buyer’s purpose; in this event, the Convention would govern the sale. As to burden of proof see O.R. 239, Docy Hist. 460.
Questions that turn on proof of what a person "knew" or "ought to have known" can hardly be free of doubt but advance planning can minimize the uncertainty. Sellers who distribute catalogues to international customers may wish to place on the catalogue’s order forms (and on similar contract forms) a statement such as the following: "International purchases of this equipment may be governed by the United Nations Convention on Contracts for the International Sale of Goods unless the goods are bought for personal, family or household use. If the goods are [page 47] bought for such use, please check the appropriate box below." A buyer who does not make the requested indication could scarcely contend that the seller "ought to have known" of the buyer’s purpose.
The structure of Article 2(a) and practical considerations applicable to the allocation of the burden of proof suggest that the buyer has the burden of proving that it bought the goods for personal, family or household use; the seller would have the burden of proving that it did not know (and had no means of knowing) the buyer’s purpose.
AUSTRIA, Ob (Sup. Ct.), 10 Ob 1506/95, 11 February 1997. B (Swiss) sued S (Austrian), an importer of Italian cars, for failure to deliver a Lamborghini Countrac. The Court held, pursuant to Art. 2(a), that CISG did not apply since B purchased the car for personal use. The opinion noted that CISG would have applied if the seller had proved that it "neither knew or ought to have known" that the car was purchased for personal use. CLOUT 190.
(Sales to consumers are included in "Principles of European Contract Law".)
The exclusion of sales "by auction" resulted from various considerations: Auction sales present unique problems with respect to formation of the contract. The seller will not know who the buyer is (and hence whether the Convention applies under Art. 1(1)) until after the sale is "knocked down" to the highest bidder. Local law often applies special regulations to auction sales.
Execution and other forced sales are fundamentally different from other transactions because of the inability of the parties to negotiate the terms of the contract; in addition, the manner and effect of such forced sales are subject to special regulations.[page 48]
These considerations are useful in defining the scope of this exclusion. For example, when the buyer fails to pay for the goods the seller may be empowered to "avoid" the contract and resell the goods. Similar rights may be given to the buyer when the seller delivers seriously defective goods (Arts. 49, 64, 75, 81, 88). Such resales by a party to the contract, even though authorized by the Convention, are not excluded from the Convention as sales "(c) on execution or otherwise by authority of law." The same principles apply when a secured party on default by the debtor resells the collateral at a private sale rather than by auction.
The exclusion of the intangible rights listed in Article 2(d) illustrates the fact, discussed more fully in §56, infra, that the sale of "goods" refers to moveable, corporeal things. In the 1964 Hague Conventions and in UNCITRAL there was general agreement that transactions in the types of assets listed in Article 2(d) should be excluded from the law covering "sales of goods. " The exclusion of "negotiable instruments" (Fr.: effets de commerce; Sp.: titulos o efectos de comercio ) refers to instruments calling for the payment of money; documents controlling the delivery of goods (e.g., warehouse receipts, bills of lading) are subject to the Convention when they are employed to effect the delivery of goods. See Arts. 30, 34, 58(1), infra. See: HUNG. Arb. AZVb 92205, 20 December 1993. CISG is not applicable to shares. UNILEX D. 1993-27. See: Schlechtriem, Com. (1998) 35.
The 1964 Hague Conventions excluded sales "of any ship, vessel or aircraft, which is or will be subject to registration." ULIS 5 (1)(b); ULF 1(6)(b). The reference to registration was designed to designate goods which, according to Prof. Tunc’s commentary, "are or will be subject to [page 49] a special system of rules which, moreover, frequently resembles that for immovables." In UNCITRAL it was found that national legislation included many varieties or regulations that might (or might not) be deemed to include "registration"; the concluding phrase was deleted. Consideration was given to excluding only vessels of a specified tonnage; this attempt also was abandoned.
Does the exclusion of the sale of "ships, vessels" (Fr.: navires, bateaux; Sp.: buques, embarcaciones ) extend to small pleasure craft such as sailboats and rowboats? No such restriction seems feasible for the exclusion of "aircraft." UNCITRAL’s inability to find a workable basis for distinguishing between large and small craft and the difficulty that courts would encounter in developing such a distinction suggest that Article 2(d) must be read without qualification: Sales of small pleasure craft do not fall within the Convention. Article 7(1) provides: "In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application ..." International uniformity in interpretation and application would be more readily achieved by an unqualified reading of Article 2(d) than by judicial attempts to narrow the scope of the provision. See Nicholas, LQR (1989) 206. On the other hand, Professor Schlechtriem has suggested that this exception should not be extended to the sale of boats that under domestic law do not come under the special regulations of domestic law applicable to ships. Discussion at the Diplomatic Conference is reported at O.R. 240–241, Docy Hist. 461–462.
Providing a ship with supplies (e.g., fuel) or with equipment necessary for the voyage, although within domestic maritime law would be subject to the Convention if other requirements of Article 1 are met. See McMahon, 21 J. of Mar. L. & C. 305, 306 (1990). On the sale of materials for ship construction see §56, infra. However, under Article 90 the Convention would yield to an "international agreement" governing the rights of the seller and buyer who "have their places of business in States parties to such agreement". See §§462–464, infra. HUNG. Sup. Ct. Gf.31-349/1992f9, 25 September 1992. Malev v. Pratt & Whitney. Aircraft engines [page 50] are subject to CISG. UNILEX, D. 1942-20. See: Winship, P., 50 J. Air L. & Comm. 1053–1066 (1985).
The exclusion of contracts for the sale of electricity is explicit and clear-cut. See also §56, infra.
§56 B. "Sale of Goods"
As we have seen, Article 1 provides that the Convention applies to contracts of "sale of goods". The Convention does not define "goods" but some of the exclusions specified above in Article 2 and other provisions of the Convention provide guides for construing this basic concept.
It is clear that "goods" governed by the Convention must be tangible, corporeal things, and not intangible rights like those excluded by Article 2(d) above—stocks, shares, investment securities and instruments evidencing debts, obligations or the right to payment. As has been noted at §53, supra, the point is that these documents represent intangible rights —a claim for payment or for receiving dividends or other payments from an enterprise. Article 3(2), §60 infra, takes a similar approach in excluding contracts in which the preponderant part of a party’s obligations "consists in the supply of labour or other services ". Possible dispute over whether electricity is tangible (a quantum) or intangible (a wave) was avoided by the exclusion of electricity. See Article 2(f). On the other hand, a sale (e.g.) of gas is within the Convention; a motion to exclude gas was defeated. The classification of computer software has led to controversy; some software seems difficult to distinguish from an exceedingly compact book or phonograph record. Here, as in other borderline areas, it seems prudent to state in the contract whether the Convention applies. See Fakes, 3 Software L.J. 559 (1990). [page 51]
The conclusion that "goods" refers to tangible, corporeal things means that sales of patent rights, copyrights, trademarks and "know-how" are not governed by the Convention. (As we shall see, under the Convention a buyer of goods has rights against the seller if the goods are subject to a "right or claim of a third party based on industrial property or other intellectual property." See Art. 42, §§267–270, infra. )
Many provisions of the Convention also make clear that the term "goods" (French: merchandises; Spanish: mercaderias ) refers to moveable tangible assets. A sale of land is excluded. Any possible doubt on this point is foreclosed by numerous provisions that are incompatible with transactions in land—e.g. quality and packaging (Art. 35), replacement or repair of defective parts (Art. 46), shipment and damage during transit (Arts. 67–69), delivery by installments (Art. 73), preservation and warehousing to prevent loss or deterioration (Arts. 85–88). It follows that a contract to construct a bridge, building or other permanent structure is not a contract for the sale of "goods". The building materials are goods but materials that the builder brings to the building site normally may be removed without breaking the contract with the land-owner; Cf. (U.S.A.) UCC 2-105(1). On the other hand, the Convention would apply to an international sale of a mobile building even though the buyer might decide to affix it permanently to his land. See: ICC Arb. 1992:7153. Materials to be used in construction of building are "goods" subject to CISG. CLOUT 26, UNILEX D. 1992-1.
Questions can arise from contracts relating to things that at the making of the contract are a part of or attached to land (e.g. oil, ores, trees, buildings) but which will become moveable at a later stage. Contracts requiring the seller to extract or sever corporeal objects from land and make them available to the buyer seem to be covered by Article 3(1) (§57, infra ) as "Contracts for the supply of goods to be manufactured or produced.... " Legislative history (§56 n. 9, supra ) shows that the sale of gas is covered; there is no reason to suppose that a direct underground origin for the gas affects this result. On the other hand, a contract permitting a party to come on land and mine, drill or cut timber does not call for one party to deliver goods to the other; crucial provisions of the Convention on conformity of goods (Art. 35), delivery, shipment (Arts. 31–33) and risk of loss (Arts. 66–70) do not address the special circumstances [page 52] of contracts for mining or other extraction activities. Cf. (U.S.A.) UCC §2–107(1): sale of goods includes (minerals and the like only "if they are to be severed by the seller"); Ont. L. Ref. Sales, Vol. 3 p. 15 (Draft Act. §2.5(1)). But cf. Bridge, Sale 28–29. However, the parties by agreement may make the Convention applicable to these translations (§81, infra. ).
Some domestic sales laws exclude exchanges of goods. The (U.K.) Sale of Goods Act applies to transfers or property "for a money consideration"—a restriction that raises questions of interpretation when (e.g.) S delivers goods at a stated price to B with the understanding (as in a "trade-in" transaction) that goods that B delivers to S will reduce the price by a stated amount.
The Convention does not state any restrictions as to the price. Article 53 states: "The buyer must pay the price for the goods...". Articles 55–59 speak in the same general terms. This, plus the parties’ freedom under the Convention to shape the transaction to meet their needs supports the view that exchanges of goods are not excluded unless the parties so choose (Art. 6 infra ). On the other hand, some "counter-trade" arrangements, primarily concerned with the balance of payments, may not describe the goods or other obligations of the parties with sufficient definiteness to constitute a contract of sale. See §56.2 and Article 14, §133 infra. See UNCITRAL Legal Guide on Drawing up Contracts in International Countertrade Transactions (Ch. III of 1990 draft considers alternative approaches to contract. A/CN.9/332); Kritzer Manual Ch. 25; Loeber in Weidring Conf. (1986) 299–315. [page 53]
§ 56.2 (3) Framework Agreements for Future Orders and Deliveries; Franchise Agreements
Example 2B. A supplier (S) and a distributor (D) make a "framework" agreement that will govern any orders and deliveries by S to D but does not require D to order or S to deliver any specified quantity of goods.
This agreement, without more, does not constitute a "contract of sale" under Article 1 and is not governed by the Convention. (The definiteness required of offers is discussed under Article 14 at §§134–137, infra. ) However, if orders are thereafter made and accepted, the "framework" agreement can supply the detailed terms of the transaction to supplement or modify the provisions of the Convention. (See: GER Düsseldorf, 6 U 152/95, 11 July 1996. CISG is not applicable to framework agreement, but is applicable to individual contracts.) See Article 6, §§74–84. If the "framework" agreement was made before the date of the Convention’s entry into force, under Article 99 the Convention would govern orders and contracts made after that date but not before.
The arrangements and practices involved in franchise and dealership relationships are too varied for thorough treatment here. Dealers sometimes sue for losses incurred in preparing for a franchise arrangement that is expected on the basis of representations that fall short of promises. These claims present some of the problems presented by outlays during negotiations that fail to ripen into contract—the problem known in some legal systems as culpa in contrahendo. These problems arise from such diverse settings that they are dealt with or excluded by provisions of Part II on Formation of the Contract. Other problems arise out of termination clauses in franchise agreements that are challenged as so harsh as to violate standards of conscionability—problems of contract validity that Article 4(a) leaves to domestic law. See §§64–69 (validity) and §§4–95 (good faith). In addition, close examination of the facts may show that the issue does not arise out of a "contract of sale of goods" and therefore falls outside of the scope of the Convention.
Efficient handling of some types of goods (e.g. oil, grain) calls for their storage or their shipment in quantities greater than the units needed for sale. Units of such goods (e.g. bushels of No. 2 Durham wheat, barrels of No. 3 heating oil) are sufficiently uniform ("fungible") [page 54] throughout a tank or bulk carrier that contracts of sale may be framed not merely in quantities of generic goods (e.g. 1,000 bushels of No. 1 Durham wheat) but instead in terms of quantities or shares of the contents of an identified bulk ("tank #63"; "tanker North Star sailing June 1").
These transactions are clearly "contracts of sale of goods" within Article 1 and no provision excludes them from the Convention. Thus, failure to deliver goods of the agreed quality or quantity and failure to receive and pay for the goods and many related questions are governed by the Convention. The only substantial question is whether sales of quantities or shares in an identified bulk of fungible goods can satisfy the "identification" requirements of Articles 67(1) and 69(3) governing risk of loss. See §§371, 378, infra.
Computer "hardware" is clearly "goods" subject to CISG. See, e.g. GER OLG Koblenz, 2 U 1230/91, 17 September 1993: CISG is applicable to computer "chips". See also: Schlechtriem, Com. (1998) 23.
The issues are more subtle when the transaction involves "software"— e.g. the tiny silicon "chips" that can bring the "hardware" to life. These "chips", although minute, are tangible; when sold they are "goods" subject to sale. See: GER. LG München, 8 HKO 24667/93, 8 February 1995. CISG applies to "standard software". CLOUT 131, UNILEX D. 1995-3.1. See: Fakes, A., 3 Software L.J. 559-614 (1990); Primak, L.S., 11 Comp. L.J. 197-231 (1991); Bonell/Ligouri ULR (1996-1) 149, id. (1997-2) 388. Cf. License agreements: Lockhart & McKenna, 70 Mich. L. J. 646-655 (1991).
Sale of an enterprise may include the transfer of "good will" and other intangibles and, sometimes, the assumption of debts; sale of equipment or "goods" such as inventory may be of secondary importance. In these cases, the attempt to apply CISG to a part of the transaction may not be feasible.
See: ARB: Hung. Ch. of Comm., Ct. of Arbn., AZVb 92205, 20 December 1993. Witz, Premières Applications 33; Ferrari, 15 JCL (1995) 67 n.448.[page 55]
FOOTNOTES: Chapter on Article 2
1. This article is substantially the same as Art. 2 of the 1978 Draft. Cf. ULIS 5 (no provision comparable to paragraphs (a) and (b)).
2. W/G2 paras. 51, 57, II YB 55, 56, Docy. Hist. 61, 62; Sec. Commy. para. 2, O.R. 16, Docy. Hist. 406.
3. W/G 2 para. 58, II YB 56, Docy. Hist. 62. Sales at a commodity exchange are not sales "by auction," but rather rapidfire communication of offers and acceptances. For the special problems typical of auction sales see (U.S.A.) UCC 2–328; (U.K.) SGA (1893) 58; Ont. L. Ref. Com., I Sales 86–90.
4. W/G 2 para. 54, II YB 56, Docy. Hist. 62. Cf. (U.S.A.) UCC 9–504 (secured party, under specified circumstances, may resell the collateral), UCC 7–210, 7–308 (enforcement at private sale of lien of warehouseman and of carrier). In any event, such sales will usually be made to a buyer with a place of business in the same State as the seller and will fall outside the Convention since they are not international. (See Art. 1(1), supra at §39.)
5. W/G 2 para. 55, II YB 56, UNCITRAL X (1977) Annex I, paras. 29–32, VIII YB 27; SR. 1 para. (e); SR. 2 paras. 5–16, Docy. Hist., 320.
6. W/G para. 55, II YB 56, UNICTRAL X (1977) Annex I, paras. 29–32, VIII YB 27; Docy. Hist. 320.
7. Schlechtriem, 1986 Commentary 30. See also Schlechtriem, Com. (1998) 35–37; Winship, Aircraft and CISG, 50 J. Air L. & Commerce 1053 (1985).
8. A sales contract calling for the delivery of corn, machinery or the like by handing over a bill of lading, warehouse receipt or other similar document is, of course, a contract for the sale of "goods". See Art. 34, §§217–220, infra; Sec. Commy para. 8, O. R. 16, Docy Hist. 406.
9. UNCITRAL X (1977) para. 35, VIII Yearbook 27, Docy Hist. 320 Cf. Report, 1985 Hague PIL Convention 23 n. 22; "Delegates were clear that ‘gas’ constituted ‘goods’." Sale of oil is covered. See Skelton, CISG and Crude Oil Traderes, 9 Houston Journ. Int. L. 101 (1986).
10. See, accord., Report, Hague 1985 PIL Convention 23, paras, 34–35.
11. See also Von Mehren & Rivkin, International Sale of Minerals, 25 Int. Arb. No. 3, 49 (1985).
12. Benjamin §§34–39. See also: Winship in Parker Colloq. §1.02 pp. I–24, n. 49, citing Secretariat Studies; Ont. L. Ref. Com. Sales, Vol. I p. 65; Proposed Act; §2.6(1) "The price may be paid in money or otherwise ". Accord: Proposed Uniform Sale of Goods Act for Canada, §11(1): The price may be paid "in money or otherwise ". Uniform Law Conference of Canada, 1982 Proceedings, Appendix III p. 538. UCC (U.S.A.) 2–304 ("money or otherwise"). Finnish Sales Act (1987) Sec. I.
13. Professor Schlechtriem, on the other hand, suggests that barter transactions are not "contracts of sale" under Article 1. Schlechtriem, 1986 Commentary 24 and n. 41b. The present writer would agree that the complexity of some barter or counter-trade arrangements may suggest exclusion of the Convention based on the parties implied intent. See Arts. 6 and 8, infra. See Schlechtriem, Com. (1998) 22–23, n. 30.
14. The question would scarcely be worth mentioning but for the fact that language of the (U. K.) Sale of Goods Act has led to doubt of its applicability to such transactions. Benjamin §§119. Contra: Ont. L. Ref. Com. I, 44–45; Draft Uniform Sale of Goods Act §8, Uniform Law Conference of Canada (Proceedings, 1982) 537; (U. S. A.) UCC2-105(4), 1–201 (definition of "fungible").