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Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 63-70. Reproduced with permission of the publisher, Kluwer Law International, The Hague.

Article 4

Issues Covered and Excluded; Validity
Effect on Property Interests of Third Persons

Text of Article
A. Obligations "Arising From" the Contract
      (1) Manufacturer's Participation in the Sale
B. Issues Excluded from Convention
      (1) Validity
            (a) Remedies for Fraud
            (b) Competency; Authority of an Agent
            (c) Harsh, Unanticipated Application
            (d) The Convention and Domestic Law: Cross-References
      (2) Effect of the Contract on Property in the Goods

§ 61 Articles 1–3 identify the transactions that are subject to the Convention while Article 4 defines the issues to which the Convention applies. Article 4 states that the Convention "governs only" the following: (1) "the formation of the contract" (Part II of the Convention) and (2) "the rights and obligations of the seller and the buyer arising from such a contract" (Part III of the Convention). As we shall see, paragraphs (a) and (b) specifically exclude two issues that lie on the fringes of the sales contract.

Article 4 [1]

"This Convention 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 of any of its provisions or of any usage;

(b) the effect which the contract may have on the property in the goods sold."

§62 A. Obligations "Arising From" the Contract

The general statement in Article 4 that the Convention "governs only...the rights and obligations of the seller and the buyer arising from..." the contract of sale will be given further content by provisions that exclude specified issues, such as paragraphs (a) and (b) of the present article and Article 5 (liability for death or personal injury). Other points on the line defining the issues embraced by the Convention are fixed by the substantive provisions in Part III (Arts. 25–88).

A subtle and important problem arises when a domestic law provides legal consequences for the very same operative facts that invoke the rules of the Convention, when the rule of domestic law bears a label other than [page 63] "contract." The question whether such a domestic rule remains in effect as an alternative to the provisions of the Convention is elusive, and can best be considered in a specific context. One example will be provided by domestic rules that bear a label such as "product liability." Article 5, infra at §71, which excludes from the Convention liability "for death or personal injury," will provide a concrete setting for examining the above question.

§63 (1) Manufacturer’s Participation in the Sale

In recent decades some legal systems have established contractual rights for buyers against manufacturers for damage or loss caused by defects in goods which the buyer purchased from a retail dealer or other distributor. At the outset this development responded to the plight of consumers who suffer personal injury from dangerous products—an area that lies outside the Convention because of the general exclusion of consumer purchases (Art. 2(a)) and the further exclusion (Art. 5, §71, infra ) of the liability of "the seller for the death or personal injury caused by the goods to any person." However, in some legal systems this development has made manufacturers liable, without regard to negligence, for economic loss caused by defective products purchased from a dealer or other distributor.[2]

The first edition of this work concluded that this development under the Convention was barred by the language of Article 4 that the Convention "governs only the formation of the contract of sale and the obligations of the seller and the buyer arising from such a contract." See, e.g., B sued manufacturer (M) for defects in a machine B purchased from S. B’s suit was dismissed because B had not contracted with M. GER LG Düsseldorf, 31 O 231/94, 23 June 1994. UNILEX D. 1994-16. (For US domestic cases rejecting this approach, see, e.g., Reitz, 75 Wash.U.L.Rev. 357 at 361 (1997).)

Further reflection calls for reexamination in some commercial settings. For example, some manufacturers (and similar mass distributors such as importers) provide dealers with a written "guarantee" or "warranty" by the manufacturer and instruct dealers to give buyers the manufacturer’s "guarantee" in connection with the sale. One purpose is to encourage sales because of the confidence that prospective buyers have in a guarantee to them by a well-known manufacturer. A second, less evident,[page 64] purpose is to limit their responsibility (e.g.) to the replacement of defective parts for a specified limited period and thereby to bar claims for consequential damages caused by defects in the goods.

Such a "guarantee" by the manufacturer to the buyer clearly creates a contract between these parties in connection with the sale of goods. The difficult problem is whether the manufacturer is a "seller" within the language of Article 4 in view of the fact that the dealer executed the contract with the buyer, delivered the goods and received the price.

Some tribunals applying the Convention, like some tribunals applying domestic laws governing the "sale of goods", may be impressed by the fact that the delivery of a "guarantee" through a local dealer was part of a larger setting in which the manufacturer played a dominant role in the sale—by franchise agreements controlling aspects of the dealer’s performance and by mass-media advertising addressed to prospective buyers. Indeed, advertising appeals are typically designed to say or imply: "Go to our dealers and buy our product. If you do you will get a good product." This in substance is an offer of a unilateral contract: "If you will do X you will get Y."

Of course these facts alone do not make the manufacturer a "seller"—a contract of sale depends on the buyer’s completing a transaction with a dealer. But some tribunals may conclude that when such a transaction is completed the manufacturer, although not "the seller", has participated with the dealer in a "contract of sale" with the buyer.[3]

The supplier’s participation may be more evident—as when a representative of the manufacturer personally contacts the buyer and persuades him to purchase the manufacturer’s goods from a local dealer.[4] In many cases participation by the manufacturer is more tenuous, confined to advertising [5] and possibly control of aspects of the dealer’s business such as promotion methods, volume, stocking of repair parts, training of mechanics and, in some cases, the price to be charged.

When (as in the usual case) the buyer and dealer are in the same State the Convention would not apply to a claim against the dealer. Art. 1(1), §40, supra. Similarly, the Convention would not apply to a claim against even a foreign supplier if the supplier’s place of business applicable to this transaction (Art. 10(a)) is in the same State as the buyer. In any event,[page 65] when domestic law is favorable and the dealer is financially responsible it usually will be more convenient to confine one’s claim to a local action against the dealer. The same may be true even when the claim might jeopardize the dealer’s resources since the dealer may be able to bring in the manufacturer to defend the action and to satisfy any judgment. Thus, attempts to extend the Convention to foreign suppliers may be confined to special situations such as financial failure of the local dealer. Even here the rules on jurisdiction, private international law and domestic sales law in the buyer’s jurisdiction may meet the buyer’s needs.

In sum, it is unlikely that the Convention in the foreseeable future will play a large role in claims by buyers against manufacturers and similar remote suppliers. On the other hand, it seems hasty to conclude that the "buyer-seller" language of Article 4 will be an impassable barrier in cases where the supplier has participated substantially (although not formally) in the sale to the buyer. Domestic experience suggests that legal relations with foreign suppliers may be a field for gradual development.

§ 64 B. Issues Excluded from Convention

(1) Validity

Paragraph (a) of Article 4 excludes issues with respect to "the validity of the contract or of any of its provisions or of any usage." One obvious example is a rule of domestic law that prohibits the sale of specified products, such as heroin, and invalidates contracts relating to such illegal sales.[6] There are other applications of paragraph (a) that call for discussion.

§ 65 (a) Remedies for Fraud

The Convention does not interfere with the special rights and remedies that domestic law gives to persons who have been induced to enter into a contract by fraud. (As will be suggested under Art. 35, infra at §238, a very different problem of the relationship between the Convention and domestic law is presented by an innocent misstatement as to the quality of the goods. Preserving domestic [page 66] protection against intentional fraud could be based on the general rule of Article 4 that the Convention "governs only" the obligations "arising from [the] contract"; the conduct that gives rise to a remedy for fraud may be distinct from the making of the contract. This result is reinforced by paragraph (a) which excludes issues of "validity." Even if domestic law characterizes a contract obtained by fraud as "voidable" rather than "invalid" and gives the innocent party a choice as whether to avoid the contract, these rights are not disturbed by the Convention. The crucial point is that the Convention does not address factual situations involving fraud and should not be construed as wiping out this important field of law by implication. (Compare the discussion at (b) infra, of the relation between the Convention and domestic rules on agency.)[7]

Fraud in action: GER OLG Köln 22U4/96, 21 May 1996. A car dealer (B) bought a used car from another car dealer (S); the contract excluded warranties. B resold the car to customer (C) who discovered that the license was post-dated and that the car had more mileage than on the odometer. B paid C for the loss, and sued S. CISG applied. S’s defense invoked Art. 34(3): B "knew or could not have been unaware of the lack of conformity". This defense was rejected: (1) Under the "good faith" obligation of Art. 7(1), S cannot rely on B’s ability to discover the defect if S knew of the defect; (2) Although CISG Art. 4(1) excludes issues of validity, German law, applicable to fill gaps, invalidates a contract obtained by fraud. B was awarded damages under CISG 74. CLOUT 168, UNILEX D. 1996-5.5.

Impact of domestic and EU unfair competition rules on individual sales: GER. BGH. ("Sup.Ct.") VIII ZR 134/96, 23 July 1997. An Italian manufacturer of fashion goods (S) granted B, a German company, the right to distribute S’s goods. B claimed that the framework agreement violated unfair competition rules. Held: validity of these agreements was not within CISG (Art. 4(a)) and did not affect S’s right to recover the proceeds of individual sales—an area governed by CISG. UNILEX D. 1997-13.

The fact that a domestic rule bears a label such as "validity" or "fraud" does not determine the question whether the rule is one of "validity" [page 67] within the meaning of Article 4(a) of the Convention. For reasons foreshadowed at the outset of this Article and to be developed in the Commentary to Article 5, the substance rather than the label or characterization of the competing rule of domestic law determines whether it is displaced by the Convention; the crucial question is whether the domestic rule is invoked by the same operative facts that invoke a rule of the Convention. For example, a domestic rule of "validity" provides that a problem raised by facts A + B has result X; the Convention also addresses the problem raised by facts A + B and gives result Y. Does Article 4 provide that the Convention "is not concerned" with this problem? See §72, infra. To illustrate the point further, suppose that domestic law gives a "contract" label to remedies for fraudulently inducing the buyer’s acceptance of goods after their return to the seller. If the Convention can not be construed to deal with these problems (see Art. 7(2), §§95102, infra ), domestic remedies are not excluded merely because they are characterized as "contract" rather than "tort". In sum, access to domestic law is neither broadened or narrowed by its label or characterization.[8]

§66 (b) Competency; Authority of an Agent

The Convention does not displace domestic rules on the effect of insanity, infancy or other disability on a party’s capacity to make a contract. The Convention does not address any of these difficult questions.

In the setting of international sales, a more important issue is the legal power of one person to represent another. The Convention does not address the complex issues that underlie questions of agency and authority. A UNIDROIT draft dealing with this topic led to a Convention on Agency in the International Sale of Goods (Geneva 1983), 22 Int. Leg. Mat. 249. However until international rules enter into force questions of authority to act for another are left to applicable domestic law. Accordingly, references in the Convention to the acts of a party include persons for whose acts the party is responsible.[9]

§ 67 (c) Harsh, Unanticipated Applications

The foregoing discussion suggests that Article 4(a), in leaving "validity" to domestic law, does [page 68] not open a large door for escape from the uniform rules of Convention. Does this mean that the Convention requires the enforcement of contract provisions that produce harsh results when conditions arise that were not anticipated when the contract was prepared? The answer depends, in part, on the approach to the interpretation of the contract, an issue that will be considered in the Commentary to Article 8, infra at §107.1. Related questions arise with respect to the quality of the goods required under the contract and the effect of contract provisions that, broadly construed, would cut deeply into the buyer’s normal expectations. (See the Commentary to Art. 35, infra at §222.) Finally, reference should be made to Article 79, which exempts a party from liability for damages when an unanticipated impediment prevents him from performing. As these cross-references suggest, within this area the law is a seamless web.

Domestic rules on validity—such as requirements of "good faith", "Treu und Glauben", "conscionability", or rules controlling contract clauses restricting responsibility for defective goods—may become inapplicable when the contract is interpreted and applied in conformity with the above provisions of the Convention. In short, failure to turn first to rules of Article 8 on construction of the contract could lead to the application of domestic law to unreal, hypothetical cases, and would restrict the scope of uniform law in violation of the rule of Article 7(1) that the Convention shall be interpreted with regard "to the need to promote uniformity in its application..." See §§8587, infra.

§69 (d) The Convention and Domestic Law: Cross-References

Other issues that might logically fit here have been deferred to Article 35 so that the discussion could take a wider view of the Convention’s rules on the obligations of the parties. Thus, under Article 35 consideration is given to the relationship between the Convention and domestic rules designed to preserve implied obligations as to quality of the goods (§230), rules on "unconscionability" (§235) and restrictions on the use of standard contract terms (§236).[10][page 69]

§70 (2) Effect of the Contract on Property in the Goods

Article 4 also provides that the Convention "is not concerned with:...(b) the effect which the contract may have on the property in the goods sold." This specific provision illustrates the general rule of Article 4 that the Convention is concerned only with the "rights and obligations of the seller and the buyer " arising from the sales contract. In addition, problems that under some domestic systems are decided by reference to the "property" concept are governed by specific provisions of the Convention. See Secretariat Commentary O.R. 17, Docy. Hist. 407 (para. 4). See also Ch. IV, Passing of Risk (Arts. 66–70) at §§359383, infra.

In conformity with this principle, the Convention (Arts. 41 and 42) deals with the seller’s obligation to the buyer that the goods be free of third-party claims. Whether the sale to the buyer cuts off outstanding property interests of third persons is not dealt with by the Convention. Efforts to establish uniform international rules on the rights of good faith purchasers have not yet been successful; in the meantime, this question must be left to applicable domestic law.[11]

As we shall see, the Convention gives one party to the sales contract rights over goods held by the other party that, under domestic law, may affect the rights of third persons. For example, Article 46, §§279286 infra, gives a buyer the right to require the seller to deliver goods that the seller wrongfully withholds; Article 81(2), §444 infra, gives a seller the right to claim restitution of goods for which the buyer fails to pay. Article 4 makes it clear that the Convention does not govern the effect of these remedial rights on the claims of third persons. However, domestic law must respect these rights as between the seller and buyer; if such rights between the parties prevail over the claims of creditors or other third parties under domestic law, domestic tribunals should give the same effect to rights established by the Convention. See infra at §444.[page 70]

FOOTNOTES: Chapter on Article 4

1. This article is substantially the same as Art. 4 of the 1978 Draft. Cf. ULIS 8.

2. This development has included importers and similar suppliers as well as manufacturers but, for simplicity, is discussed in terms of manufacturers.

3. See Benjamin §§1037–38 (3d ed. 1987); White & Summers §11–7 (3d ed. 1988).

4. Benjamin, §1035 (3d ed. 1987) citing Shanklin Pier v. Detel Products, [1951] 2 K. B. 854; Ruud 8 U.C.L.A.L. Rev. 251 (1961).

5. Ruud, supra, at 255; Pritchard v. Liggett & Myers, 295 F. 2d 292 (3ed Cir. 1961) (explicit promise of quality in mass advertising).

6. The substance of CISG 4(a) appeared in Article 7(1) of the W. G. "Sales" draft and Article 6(b) of the UNCITRAL "Sales" draft, VIII YB 30, 31, Docy. Hist. 323, 324. The W. G. 9th Sess. (1977) considered but rejected inclusion of provisions on mistake and duress in a UNIDROIT draft Law on Validity (LUV). VIII YB 105–109, Docy. Hist. 269–273. For the S-G Report on the UNIDROIT draft see VIII YB 90–93, 104–109, Docy. Hist. 254–257, 268–273.

7. General remedies for fraud are not provided by the "good faith" provision of Art. 7(1), infra at §87, since this bears only on the interpretation of provisions of the Convention. The range of domestic remedies for fraud is suggested in II Zweigert & Kötz 1987) 106–110, 302, 308, 316; David, French Law 197–198. Cf. (U.S.A.) UCC 1–103 (Code supplemented by principles of fraud as part of general body of common law). See also: UNIDROIT, draft Principles of International Contracts, Ch. IV, Mistake, Fraud, Threat and Gross Disparity (Study L, Doc. 43, UNIDROIT 1989).

8. Schlechtriem, Com. (1998) 45; Khoo, B-B Commentary 47–48; Sec. Commy. O. R. 17, Docy. Hist. 407 (para. 2: Convention prevails over domestic rules of "validity").

9. Nicholas in B-B Commentary 483–484. See Schlesinger et al. Comparative Law (1988) 768–793, II Zweigert & Kötz (1987) Ch. 9; Conell, The 1983 Geneva Convention on Agency, 32 Am. J. Comp. L. 717 (1984).

10. For other aspects of the relationship between the Convention and domestic law see: Art. 5 at §72, Art. 7 at §96, Art. 16 at §145, Art. 28 at §194, Art. 46 at §281, Art. 62 at §348, and Art. 78 at §420.

11. UNDROIT has prepared a Draft Uniform Law on the Protection of the Bona Fide Purchaser of Corporeal Movables. UNIDROIT Yearbook, 1967–1968, Vol. I, 222. More recent work has concentrated on stolen or illegally exported cultural objects. UNIDROIT News Bulletin (N. 81–82, Jan.–Ap. 1990).

Pace Law School Institute of International Commercial Law - Last updated February 23, 2005
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