Uniformity in the Application of CISG Provisions

MA-Thesis / Master von Daniel Fritz

Introduction:

Problems facing cross-border transactions and possible solutions:

The main prerogative for the international trader is to implement the business transaction as conveniently and quickly as possible. Besides choosing reliable business partners, a governing body of law that facilitates the transaction successfully is required. International business transactions are rarely conducted under a tailor-made law and are therefore dependent on the law that governs the transaction in terms of the rules of private international law.

Determining the applicable law of the contract is one of the major problems facing a cross-border transaction. One way in which this question can be addressed is by means of the rules of private international law. Yet, these rules are rather complex and often subject to uncertainties. Even unification of the rules of private international law is unlikely to serve the needs of modern international business. If the proper law is determined, at least one of the parties to the transaction will be faced with an unknown body of rules. This party is forced to act in alien surroundings under a law with which it is unfamiliar.

An alternative, is to unify law on the domestic level. This would avoid the difficulties in applying the rules of international private law. However, to harmonise domestic law on world wide basis is a matter of impossibility. Some divergences based on settled legal traditions are irreconcilable. Furthermore, there is the obstacle that a harmonised law may affect the concepts of another area of law. For example the issue of sales law affects the issue of transfer of property – an area of law with fundamentally varying concepts.

The adoption of uniform sales law at the international level represents a third approach. These rules only apply to a particular range of sales transactions and therefore do not compel a State to abandon all of its own legal traditions. The UN Convention on Contracts for the International Sale of Goods has established a uniform international law of this character.

The overall goal of the CISG is to harmonise domestic laws for international sales transactions. A precondition for this goal is the achievement of uniformity. The achievement of uniformity comprises a two-fold process. The mere adoption of the Convention is the first step towards the ultimate aim of achieving the broadest degree of uniformity in the law of international sales. The second step is the uniform application and interpretation of its provisions. Developing a code of uniform international law requires creating a compromise among participants of the drafting process who are experts in the field of international sales law. Uniform application, on the other hand, involves not only experts, but users with varying legal, economic and social backgrounds from every corner of the world. The huge danger is ‘the natural tendency to read international text through the lenses of domestic law.’ One commentator has expressed his scepticism towards uniform application in distinct words:

‘The uniform law from the very moment of its coming into operation starts to differ from itself. Every judge in every country is a sovereign interpreter of the text, and the judge became judge by learning the system of law of his own country. And as the speediest bird is unable to fly out of itself, so the judge is unable to forget the law that he has learned. Divergent or contradictory interpretations, like the application of different rules of different countries lead to different judgements’.

Admittedly, this statement was attributed to a specific time, namely the introduction of the unified law. However, it suggests that a judge will never be able to adapt to the method of interpretation necessary for achieving uniformity. Therefore the future development of the CISG is deemed to be a failure. This statement paints a gloomy picture. It furthermore reduces the judge to a mere machine applying domestic interpretation rules.

Another commentator even states:

‘that the CISG [as such] is actually an obstacle to uniformity in the law of international sales. The failure of the CISG to create uniformity is the result of the treaty’s misguided goal, its character as a multinational treaty, its specific provisions, and its incorporation into the United States as a self-executing treaty’.

On the other hand the majority of commentators expresses optimism concerning the future development of the CISG. However, some of them stress the necessity to scrutinise judicial decisions dealing with CISG issues. This study shall reveal how these issues are dealt with by courts and commentators descending from different legal heritage.

Aim of the study:

The aim of this study is to analyse the degree of uniformity in the application of CISG provisions.

The study will be restricted to analysing CISG case law on selected issues. Although scholarly commentary is used as an interpretative tool, this will not be the main focus of consideration in this study. The attention is focussed on a particular aspect. Do decisions of courts and arbitral tribunals provide an adequate body of material to interpret CISG provisions in a uniform manner? In other words do they ‘breathe the spirit of uniformity’?

In order to answer this question, Chapter Two will discuss the theoretical concept of achieving uniformity in the application of uniform international sales law. First, the legal character of the Convention will be addressed. This provides essential background for understanding the issue of uniformity of application. Moreover, it will deal with the meaning and standard of uniformity as well as the method to achieve it. Chapter Three will present a case analysis. The issues of applicability, interpretation of party conduct, usage and practices and the formation of contracts are chosen for this analysis. This choice was made with reference to CISG issues that are crucial to the goal of achieving uniformity. The rules of application serve as threshold for the applicability of the Convention. The issue of interpreting party conduct was chosen due to the fact that judges in almost every case need to deal with this question. Closely linked to that is the issue of usage and practices, since it impacts on the meaning of party behaviour. The last issue was chosen since all CISG matters firstly involve the formation of a contract. The cases represent both extremes on the scale of successfully applying the CISG in a uniform manner. Chapter Four will present a conclusion on the issue of uniformity in the application of CISG provisions.

Table of Contents:

	Chapter 1: Introduction	5
1.1	Problems facing cross-border transactions and possible solutions	5
1.2	Aim of the study	7
	Chapter 2: Theoretical concept of uniformity	9
2.1	Significance of the principle of uniformity	9
2.2	Legal Character of the Convention	10
2.3	Method	11
2.3.1	Introductory remarks	11
2.3.2	Article 7(1) CISG	12
2.4	Standard of uniformity	14
2.5	Recognition of the method by courts	17
	Chapter 3: Review of CISG jurisprudence	23
3.1	Research basis	23
3.2	Interpreting party conduct, usage and practices	23
3.2.1	Interpreting party conduct	23
3.2.2	Usage and established practice	26
3.3	Application issues	28
3.3.1	Article 1: sale of goods	28
3.3.2	Distribution agreements	29
3.3.3	Goods under the Convention	30
3.3.4	Article 3(1): substantial part	32
3.3.5	Article 3(2): preponderant part	34
3.3.6	Article 6: exclusion of the Convention	35
3.3.7	Observation on the application issues	39
3.4	Formation issues	40
3.4.1	Standard terms	40
3.4.2	Commercial letters of conformation	42
3.4.3	Determination of the parties to the contract	44
3.4.4	Impact of article 55 on contract formation	45
	Chapter 4: Observations and final conclusion	49
	Bibliography	51
	Index of cases	54

Text Sample:

Chapter 3.3.2, Distribution agreements:

Most courts ruled that distribution agreements fall outside the scope of the Convention. They do not fit into the scheme of exchange of money for goods. In essence, these agreements comprise organising the distribution of goods. However, one Italian Supreme Court decision considered this type of agreement to fall within the scope of the CISG. The parties defined the contract as an atypical agreement. The buyer was obliged to purchase a certain quantity of products and to distribute them. The court considered the element involving the sale of goods as well as the element representing the distribution to be essential. Nonetheless, the Convention was declared to be applicable. To some extent this varies from the majority of decisions involving distribution agreements. According to these decisions the Convention can only apply if the element of sale forms the preponderant part of the agreement. The Italian court did not provide any explanation for its ruling, save to remark that both elements are deemed essential. However, whether this suffices to make the entire agreement subject to the Convention is questionable.

One U.S. Federal District Court elaborated on the issue of a distribution agreement. The court’s obiter dictum indicates that it would not assign these agreements to the CISG. It is stressed that the Convention requires the disposition of identified goods. This coincides with the above requirement of exchange of goods, what in effect requires to dispose of the goods. In addition, the contract must define terms regarding quantity and price. These are exactly the terms that are missing within the distribution agreement, since it only provides a certain framework agreement. That is why one can deduce that the U.S. court would be prepared to correctly exclude this type of agreement from the sphere of application.

Although one has to support this outcome, the court’s reasoning seems to neglect an important principle of interpretation. It was submitted that there is no pertinent case law dealing with distribution agreements.

‘[T]here appears to be no judicial authority determining the reach of the CISG and, in particular, whether it applies to distributor agreements’.

However, a German Appellate Court decision had addressed the same question before. It held that the distribution agreement must be distinguished from the subsequent sales contract. This shows that the U.S. court’s statement of non-existing case law is unfounded or only refers to the lack of case law in the U.S. itself. However, considering only domestic case law is not in accordance with the principle of promoting uniformity in the application of the CISG. Preferably, the U.S. court should have referred to existing case law on distribution agreements in the context of the Convention.

Goods under the Convention:

The Convention does not define the term ‘goods’. Regarding the question of what can be treated as ‘goods’ in terms of the Convention, an abundant case load is available. In general, the term is interpreted quite widely. Despite the particular areas of software contracts and tangibility of the goods, there is much consensus.

A German appellate court decision interpreted the concept of goods very liberal by applying the Convention to a contract involving the sale of computer chips. The same decision considered every type of software to fall within the scope of the CISG.

‘The term ‘goods’ is to be interpreted widely, it comprises all objects, that can be subject of a commercial sale, also computer software’.

Other courts held that only standard software is deemed to be goods under the Convention. The Appellate Court gave no reason why the term ‘goods’ is to be interpreted widely. One can assume that the court intended to ensure the widest possible application of the CISG to achieve the goal of promoting uniformity. However, this consideration is not sufficient to stretch the meaning of goods so far. In stating that ‘goods” cover everything that can be subject to commercial sale, the court contravenes the wording of Article 2 CISG. Certain goods subject to commercial sale, for example ships, vessels, hovercraft or aircraft are expressly excluded. This alone shows that ‘goods’ do not cover all items that are merchantable. It implies that the court’s definition is too extensive. The court missed the opportunity to interpret the term ‘goods’ with reference to the text of the Convention, but employed an unnecessary generalisation.

As to the problem of custom-made software an interpretation ‘within the four corners’ of the Convention can provide a solution as well. A closer look at the majority of German decisions stating that this type of software cannot be considered to be ‘goods’ under article 1, reveals that these rulings were based on domestic notions of interpretation. The German Supreme Court (BGH) held that custom-made software is not governed by the domestic rules of sales law, but the law of contracts for work and services. This is also the majority view of the German commentaries. It appears that this distinction was employed without hesitation for purposes of interpreting ‘goods” under the CISG as well.

Although the courts came to the correct result, i.e. custom-made software is not subject to the Convention, the judges seemed to be influenced in their reasoning by familiar domestic legal views. Article 7(1), however, requires one to first look at the text of the Convention itself without recourse to domestic aspects of law. Interpreting article 3(2) can help to substantiate that custom-made software is excluded from the scope of the CISG. To produce this type of software requires developing a tailor-made programme. The sales element, namely delivery and transfer of property, is only one part of the transaction. The characterising transfer that is taking place is not the transfer of property in goods but transfer of intellectual property. Therefore it is very likely that the preponderant part of the obligation is the creation of the software in accordance with the customer’s specifications, which in effect is the supply of work and services. This consideration excludes custom-made software by arguing along the lines of the text of article 3(2) of the Convention. This indicated that the courts seemed to have taken the convenient way of domestic recourse instead of recognising the specific requirements for interpretation of the Convention.