E LAW | Murdoch University Electronic Journal of Law - Copyright PolicyIs the Sale of Goods (Vienna Convention) Act the perfect
tool to manage cross border legal risks faced by Australian Firms?
This paper examines in detail the application of the International Convention
for the Sale of Goods (CISG) in the Australian context. The problem with
an attempt to create a uniform set of rules is the fact that not all nations
have developed the same level of sophistication in their international
trade usage. Furthermore not all nations operate under the same or similar
political system. Many writers[1]
in the early development of the CISG predicted that the loose terminology
of the CISG will lead to interpretations of the CISG based on their own
economic legal and political orientation.[2]
In my view this prediction does not appear to become true. The growing
number of interpretations of many courts indicate a move towards a uniform
interpretation of the CISG. Scholarly writings of more recent vintage help
this process enormously. Courts, specially in Europe, have taken notice
of these writings and this paper attempts to indicate that such a uniform
interpretation is also possible within the Australian legal system.
The Sale of Goods (Vienna Convention) Act (CISG) has now been in operation
for eleven years. [3]
It has created enormous interest amongst overseas scholars. There is little
scholarly writing and no case law of significance in Australia to help
business and guide the legal profession in the application of the CISG[4]
However in Europe, (notably Germany) and the United States, the reverse
is the case. In a recent paper, the Australian Law Reform Commission (ALRC)
stated that the first principle of an international agreement "which aims
to improve commercial law at either a procedural or substantive level should
have as one of its expected outcomes the reduction or better management
of cross border legal risks faced by Australian firms"[5]
Harmonization of laws is a desirable and expected outcome of international
agreements. Some factors have been identified which limit the effectiveness
of harmonization through conventions such as the CISG. One of the factors
identified by the ALRC is that "effective harmonization does not require
uniformity but does require a common conceptual basis."[6]
Such a conceptual basis varies between common law countries and civil law
countries and there is a danger that harmonization is only superficially
effective. It is therefore not surprising to read that "the person looking
at the currently effective Uniform Law from a certain distance will be
surprised by its selective and fragmentary nature"[7]
The expected benefit of any convention, and the CISG is no exception, depends
on the fact that it is implemented in a manner contemplated by those preparing
it.[8]
The fact is that the CISG cannot be viewed an interpreted in isolation.
If it is based on domestic law diverging judicial interpretations would
lead to a fragmented approach and uniformity could not be achieved. International
development plays an important part in interpreting and understanding the
CISG. In such a way cross border legal risks are reduced and the business
community will gain the benefits which can be achieved through the CISG.
These benefits are by no means certain or guaranteed and ongoing development
and interpretation not on a national but international level will contribute
towards a workable solution.
This paper attempts to highlight the problems
in the application of the CISG. It also attempts to show that this Convention
can be incorporated into the Australian legal framework and has the potential
to decrease cross border legal risks. The most important factor in the
development of a common conceptual basis will be a new approach to interpretation
and remedies which are not yet applied in domestic dispute resolutions.
Von Doussa J. in a Federal Court Decision[9]
(the CISG applied to the contract of the sale of goods) found it important
enough to point out that the pleadings "are expressed in the language and
concepts of the common law, not in those of the Convention".[10]
Counsel made only passing reference to the Convention. He also added that
the provisions of the Convention replace the common law concepts and common
law remedies.[11]
It appears that the judiciary has recognised the importance of harmonisation
of law through the concepts expressed in the CISG. To fully appreciate
the CISG it is of importance to make some comparative comments with domestic
law namely the Goods Act.[12]
As the CISG is not applicable to all international sale of goods, an understanding
of both acts is necessary. However it must be said that the common law
of contract cannot be ignored either. It is imperative for practitioners
(contract drafters and litigators) to understand the CISG in order to avoid
claims in negligence. The application of the CISG can produce potentially
different outcomes and an American case is very instructive to illuminate
this point.[13]
Counsel delayed raising the point that the transaction was governed by
the CISG. The court applied domestic law and the seller did win in controversial
circumstances. He may still loose the case on appeal in front of the Oregon
Supreme Court as the defendant will rely on the statute of fraud. Under
the CISG such a question would have been a non-issue pursuant to article
11. Under American domestic law the statute of fraud, contract formation,
parol evidence, the effect of missing contractual terms and remedies are
some areas which produce outcome-determinative changes.[14]
In Victoria[15]
s.9 of the Goods Act, which was based on s.17 of the Statute of Fraud has
been repealed with the introduction of the CISG. However other areas, like
in the U.S. do produce different results and need watching.
Ultimately the challenge in the application and interpretation of the CISG
will be the ability of the Courts to apply scholarly writings and overseas
case law to Australian legal concepts. This will produce new case law and
some sense of certainty and predictability will be established. At this
stage, fifty-three countries have adopted and ratified the CISG. Not all
of Australia's major trading partners have adopted the Convention[16]
which makes it all the more important that the choice of law question is
investigated and understood. Such a choice requires a clear understanding
of three factors. Firstly, what is the applicable private law, secondly
what is its relationship to the CISG and thirdly, how is the CISG interpreted
by the applicable foreign courts and tribunals?[17]
To add weight to such an investigation is the fact that most international
contracts include a choice of forum clause to facilitate possible arbitration.
In such an event, unless stipulated differently, the domestic law of the
forum will apply.
Any contract for the sale of goods cannot exist without a governing law
which is based on the application of domestic private law. Which domestic
private law is applicable depends on the conflict of law rule. There are
basically two possible situations: (i) the contract is silent on the choice
of law, or (ii) the contract stipulates a particular forum or choice of
law. In a contract that does not stipulate the governing law, the Australian
conflict of law rule states that the private international law of the State
which has the closest connection to the contract will be applied.[18]
In the above case, it was found that the sellers place of business has
the closest connection to the contract. A buyer would find it difficult
to show that he has the closer connection to the contract than the seller.
The Australian conflict of law rule in essence is also applied in other
countries. For example Germany, one of Australia's trading partners, has
domestic legislation in place where the choice of law clearly stipulates
the "closest connection".[19]
To illustrate this point, a recent Swiss decision can be quoted.[20]
In order to determine the applicable law, the choice of law question had
to be resolved. The arbitrator tackled the problem by applying the law
of the forum namely Swiss law first. According to Swiss domestic law, he
had to apply the Hague Convention which led him to apply Russian domestic
law. As the CISG is part of Russian domestic law, the arbitrator could
apply the CISG as the governing law. If the parties stipulate their choice
of law in a contract then Australian courts will usually follow the express
wishes of the contractual parties. The notable exemption is contained in
Golden Acres Ltd v Queensland Estates Pty Ltd (1969) Qd R 378 where Hoare
J states: "Where the parties expressly stipulate that the contract shall
be governed by a particular law, it has been held that that law will be
the proper law of the contract provided that the selection is bona fide
and that there is no infringement of public policy"[21]
In Australia the CISG has become part of the domestic law pursuant to ss.5
and 6 of the Sale of Goods (Vienna Convention) Act.[22]
Section 6 in brief states that "the provisions of the Convention prevail
over any other law in force in Victoria" and s.5 proclaims that the provisions
of the Convention have the force of law in Victoria. The Trade Practices
Act (Cth) in s.66A repeats in essence the above. The Goods Act and any
other relevant laws will only apply to those contracts or parts of contracts
that are not covered by the CISG.
When we consider whether the CISG is to be applied several questions need
answering. Firstly is the CISG applicable pursuant to article 1 of the
Convention? Secondly has the State of the particular forum applied for
reservations which make certain articles of the Convention inapplicable
and thirdly is the subject matter of the dispute covered by the CISG .
As the CISG is still relatively untested it remains to be seen whether
the Australian courts will apply the Convention in all applicable situations
pursuant to s.6. Other jurisdictions certainly have not applied the CISG
in all relevant cases. One example can be quoted to illustrate this point.
In a U.S case, the CISG was clearly the applicable law as both parties
to the contract lived in a Contracting State. The seller commenced proceedings
based on law of Oregon. Subsequently he tried to correct the error and
raised the argument that the CISG is applicable. The court held that the
point was raised too late and (wrongly) applied domestic law. [23]
As mentioned above the Convention as a whole or any section or parts may
be excluded or varied according to article 6. Why then study the application
of the CISG? There are basically two reasons. Firstly, an attempt to exclude
the CISG is not necessarily automatic or certain. As s.6 stipulates that
the Convention has the force of law and prevails over any other law, a
court would need to look at the reason of invoking article 6. [24]
It is possible that the court could apply Golden Acres Ltd. v Queensland
Estate Pty Ltd.[25]
and rule that the choice of invoking article 6 is against public policy.
Secondly, many contracts are standard form contracts and a buyer may find
himself in a position where he has no choice but to accept an application
of the CISG in one form or another. It has been generally accepted that
pursuant to article 6 an agreement will prevail over the application of
the CISG.[26]
However party autonomy is not unlimited. Article 7 contains an important
principle namely the principle of good faith. Care needs to be taken when,
through a contractual term, an article (or articles) of the CISG have been
replaced or modified. An Austrian arbitration case can be used to illustrate
this point where Bonell was the sole arbitrator.[27]
Articles 38 and [29]
were modified by reducing the period of lodgment of complaints as to defects
of the goods. This case illustrates the "workings" of article 7 in a wider
context. The contract essentially was divided into two deliveries and the
enforcement of the contractual term was only effective on the second delivery.
As far as the first delivery was concerned it was found that the seller
made statements to the buyer from which the latter "could reasonably infer
that the seller would not set up the defense of late notice".[28]
The tribunal cited article 7(1) and (2) and invoked the principle of estoppel,
an application of the general principle of good faith on which the convention
is based.29 This is an interesting position specially for common law lawyers
who are used to the four corner rule.
Article 7 is not only applicable in conjunction with article 6 but is always
applicable whenever there is either a question of interpretation,[30]
or a gap in the CISG needs to be filled.[31]
The importance of article 7(1) lies in the fact that, as a rule, interpretation
must promote "uniformity in its application and the observance of good
faith in international trade." Most commentators do not restrict the application
of this article to the interpretation of the CISG alone, the rule is widened
to include good faith as a standard for the interpretation of the contract,
as well as for the entire legal relationship between the parties.[32]
Such a position is not surprising at all. We only have to look at German
law where in a commentary to article 242 in the BGB "good faith" (treu
und glauben) is viewed as a principle or legal right which is mandatory
and cannot be varied or excluded by the parties.[33]
In brief, any action by one party which is contrary to a prior conduct
or is contrary to international usage in an industry is prohibited. Pursuant
to article 7(2), there must be a uniform interpretation of the provisions
of the Convention and a uniform approach to "gap filling".[34]
The method of gap filling is stipulated in the two limbs of article 7(2).
If the matter is not governed by the Convention, private international
law will provide the applicable law. If, on the other hand, the convention
deals with the mater but it is not expressly settled, they are to be settled
in conformity with the general principles on which the article in question
is based. If say article [35]
were excluded, private international law would need to be consulted. In
our case it would be the Goods Act or possibly the Trade Practices Act.
It could be argued that, as gap-filling is applied, all applications and
interpretations of private international law would need to be in "observance
of good faith in international trade."35 An interpretation or application
of domestic law without regard to the international character of the contract
would be inappropriate. How far this argument will carry is not known as
it still remains to be seen whether judges in Australia will interpret
the private international law as stipulated by Article 7.[36]
It is encouraging to note that Von Dousa J. has done so by specifically
mentioning the applicability of article 7.[37]
The Convention, however, does not give much guidance to a court faced with
the interpretation of its rules.[38]
This seems to be a serious obstacle to uniformity of legal rules dealing
with international sales if local courts apply and interpret the CISG with
the jurisprudence of their own domestic legal system in mind. The legal
profession may well be faced with having to deal with different interpretations
of the CISG depending in which country a dispute settlement takes place.
It has been further suggested that an implicit exclusion is possible.[39]
The court would need to be convinced that the exclusion is real and not
theoretical, fictitious or hypothetical.[40]
An ad hoc Arbitral Tribunal in Florence in 1994 held that the specific
choice of Italian law amounted to an implicit exclusion of the CISG. [41]
However suggesting that a particular national law is applicable does not
exclude the CISG pursuant to article 6. One of the arbitrators in the Italian
case clearly stated (as a dissenting view) that the choice of Italian law
amounted to an application of the CISG pursuant to article 1(1)(b). This
position has been confirmed in several German decisions.[42]
In Australia such an outcome is highly improbable as the Sale of Goods
(Vienna Convention) Act in ss. 5 and 6 indicate that the Convention will
prevail over any other law in force in Victoria. Ferrari does suggest that
the choice of law of a non contracting state and the use of standard form
contracts can lead to an implicit exclusion of the CISG.[43]
However case law seems to contradict such a view. A German court explicitly
stated that the application of the CISG pursuant to article 6 can only
"be excluded if that was the actual and not the hypothetical intention
of the parties."[44]
In Belgium, the court held that a clause in a standard commercial letter
of confirmation was an express exclusion clause. [45]
It will take time before the issues emanating from article 6 are settled.
Case law at this stage is only of some help but certainly insufficient
to make an authoritative statement as to the interpretation and application
of article 6. How far article 7 will lend itself to counter an exclusion
or deviation pursuant to article 6 needs to be seen.
To make an informed choice of law, it is important for any contractual
party to understand the applicability of the CISG. Article 1, which has
two important limbs, explains the sphere of application. Article 1(1)(a)
is the less controversial one and states in effect that the Convention
will apply to contracts where the parties have their place of business
in Contracting States. In a United States case [46]
the Circuit Court of Appeals confirmed that the Convention is applicable
pursuant to article 1 when the contract was silent on the choice of law
and both States were parties to the Convention. Article 1(1)(b) extends
the application of the CISG to situations "when the rules of private international
law lead to the application of the law of a Contracting State". [47]
The implication of the above is that if a buyer contracts with a seller
of a state which is a signatory to the convention, the CISG will apply
despite the fact that the State of the buyer is not a Contracting State.
The same applies if the choice of a forum is a Contracting state. To avoid
article 1, and hence the application of the CISG, the contract must stipulate
a non-Contracting State as the choice of law. Recent interpretations by
courts have shown that the articles of the CISG cannot be read in a vacuum.[48]
Specifically article 7 must always be kept in mind as it will assist in
the interpretation and filling of gaps. The question of acceding to the
convention may have a bearing on the application of article 1 which requires
the assistance of article 100(2).
In a French decision,[49]
the Court of Grenoble applied article 1(1)(b) and not article 1(1)(a).
When the matter was brought before the court, both Spain and France were
Contracting States, however only France but not Spain had acceded to the
CISG at the time of concluding the contract, as stipulated by article 100(2).
This made it imperative to use article 1(1)(b) and not (a).[50]
In an interesting arbitration decision[51]
between a German seller and a Spanish buyer, the arbitrator applied article
1(1)(a)[52]
to contracts made after August 1, 1991 and article 1(1)(b) to those made
after January 1, 1991. [53]
Contracts made before January 1, 1991 had to be dealt with under German
Civil Law (choice of Law) as none of the two countries had ratified the
CISG. It is clear by the two quoted examples, that article 1 must be applied
carefully to avoid a wrongful application of the CISG.[54]
There is however a complication, which must be considered. Article 92(1)
allows a Contracting State to exclude Part II and/or III.[55]
In effect the State is not considered a Contracting State in respect to
those parts it deleted. [56]
Furthermore article 95 allows a State to make reservations in relation
to the application of article 1(1)(b). Such a declaration was made by the
United States of America[57]
but not Australia.[58]
Reservations under article 96 lead to the exclusion of articles 11 and
29 which means that contracts must be concluded in writing.[59]
Not all international sales contracts are covered by the CISG. The sphere
of application of the CISG is governed by part I, chapter 1 and 2. Domestic
law, as expressed in the Sale of Goods Act (Goods Act) is similarly restrictive.
It must be noted that the Goods Act is not a complete statement of the
law dealing with the sale of goods. Section 4 clearly states that (unless
there are inconsistencies) the common law and equity continue to apply.
The CISG as well as the Goods Act apply only to one type of transaction
namely a "sale of goods". Domestic legislation defines these two terms
in the Goods Act under ss.6 and 4 and the CISG in article 3 and 2.
Article 3 differs markedly from the Goods Act as it goes beyond the concept
of applying to the supply of goods only. Another point worth noting is
the fact that the CISG unlike the Goods Act does not specifically define
"contract of sale" To determine which sales are governed by the Goods Act,
we need to look at the Common Law. In Hewett v Court[60]
the High Court distinguished between a contract for the sale of goods and
a contract for work done and materials supplied which is not governed by
the Goods Act. The court specifically said that: "there is a line of authority
which establishes that where a contract is not only to supply an article
but to erect or install it ... the contract is for work done and materials
supplied."[61]
As will be shown below, many if not all situations covered by article 3(2)
would fall outside the scope of the Goods Act. Furthermore situations where
the buyer supplies material (less than a substantial part) are covered
by article 3(1) but under the Goods Act such contracts are more likely
to be classed as contracts for the supply of skill and not of sale of goods.
S.6 of the Goods Act defines a contract of sale as "a contract whereby
the seller transfers or agrees to transfer the property in goods to the
buyer for a money consideration." The Act in s.6(2) distinguishes between
two different types of contract namely a contract of sale (an executed
contract) and an agreement to sell (an executory contract). The CISG by
implication does make a comment in relation to the two types of contracts
mentioned in the Goods Act.[62]
Article 1 states that the convention "applies to a contract of sale of
goods". In article 3(1) on the other hand contracts for the supply of goods
to be manufactured are considered sales, an indication that agreements
to sell are also considered a sale of goods. It appears that the CISG does
not place much importance on such a distinction. It can be argued that
the CISG merely made it clear that contracts whether executed or executory
are contracts for the sale of goods. The Goods Act on the other hand places
an importance on the distinction as it effects the sellers rights should
the buyer default on his obligations.
The CISG pursuant to article 3 goes beyond the classical principle of exchanging
goods for money but does not go as far as to cover sales of services only.
The extent of coverage of labor and service is explained in the two limbs
of article 3. Article 3(1) covers the traditional sales of goods as well
as goods "to be manufactured or produced".[63]
There is one exception which states that if the buyer supplies a "substantial"
part of the material himself then the CISG will not apply. The problem
is how do we define "substantial"? It is quite obvious that if all the
material is supplied by the buyer the CISG does not apply. It is also equally
obvious that if only some minor parts or accessories are supplied the CISG
will apply. There is still a debate whether "substantial" needs to be looked
at from a qualitative or quantitative point of view.[64]
An Austrian court dealing with this matter did not explain the meaning
of article 3(1). The court merely used the word "substantial (wesentlich)"
without explanation.[65]
However "substantial" and "wesentlich" do not translate identically. A
different meaning is obtained as wesentlich is better translated to mean
"essential" which incidentally corresponds with the French translation
of article 3(1) where "un part essentielle" is used. Claude Witz argues
that the component parts must be essential.[66]
If a court would approach the definition of "substantial" from a qualitative
point of view, the component parts could also be "essential". However quantitatively
speaking essential and substantial could diverge significantly. Perhaps
the solution can be found in the qualitative approach rather than the quantitative
one. As noted above, the application of domestic law and the CISG can lead
to different outcomes. German courts have interpreted article 3(1) in several
instances. The problem which confronted the courts was the fact that in
each of the cases the goods were custom-made.[67]
According to German domestic law BGB articles 633-50 apply (Werkvertrag)
and as such are not classed as sales contracts.[68]
The Goods Act on the other hand classes custom-made goods as "goods" as
long as the work element is not dominant. If the supply of work and material
becomes the dominant part the Goods Act does not apply. The CISG on the
other hand classed these types of contracts as sales contracts. Article
3(2) on the other hand covers sales where as part of the contract an obligation
to supply labor or services is included. That supply of labor or service
cannot be the "preponderant" part of the sellers obligation. Such contracts
are commonly called turn-key contracts[69]
where installation is part of the contractual obligation to supply goods.
Article 3(2) would not apply if the two contracts namely the supply of
goods and the supply of labor or service is distinguishable by two different
contracts. In such an event the supply of goods would be covered by the
CISG whereas the installation would be subject to domestic law. If the
two components are indistinguishable, that is, there is only one contract
covering the whole transaction, the key criterion is the interpretation
of "preponderant". It has been suggested that if the economic value of
labor or service is more than 50 per cent of the total sales price, the
CISG is inapplicable. [70]
Such a view leads to an interesting argument, namely, the question of "severability"
of contracts. Can or should a contract be divided into delivery of goods
and installation whereby the sale of goods is subject to the CISG whereas
the installation is subject to domestic law? Schlechtriem and the Official
Records of the United Nations Conference indicate that this question needs
to be solved in accordance with the applicable national law.[71]
The only stipulation, as mentioned above, relates to the origin of the
raw material. The question is: how far can article 3 be used to define
sales? In Helen Kaminski Pty. Ltd. v Marketing Australian Products the
United States District Court was asked to rule whether a distributor agreement
was subject to article 3 of the CISG. [72]
The court did not dismiss distributor agreements as such from the application
of the CISG. The question the court asked was, "could the goods be specifically
identified in the agreement or is the agreement merely a framework agreement
requiring the respondent to purchase a particular quantity or value of
goods?" The court held that the agreement did not specify goods and therefore
fell outside the CISG. If the goods were identifiable the CISG would apply.[73]
Another point which needs examining is the question of installment sales.[74]
J.S. Ziegel in his comments on Roder Zelt[75]
argued that it is an unsafe assumption to include installment sales under
the governance of the CISG just like any other contract of sale.[76]
Under US law it may be doubtful whether the CISG is applicable. Ziegel
suggests that the CISG should only apply to the sales component and not
the security aspect of the agreement[77]
This view is legally correct and cannot be faulted but put into the context
of the CISG it is in conflict with article 7(2). In my view installment
sales are a good example of where gaps pursuant to article 7(2) need to
be filled without ignoring the requirements of good faith. Ziegel suggests
that installment sales are a special form of executory contracts[78]
which are governed in Australian domestic law by s.6 of the Goods Act.
Domestic law has established that the Convention has the force of law in
Australia and will prevail in the event of inconsistencies [79]
As a result the CISG is the applicable law. The CISG in article 3 does
not specifically include installment sales nor are these sales specifically
excluded. Article 7(2) urges that matters "not expressly settled in it
are to be settled in conformity with the general principles on which it
is based". There is certainly enough room in article 3 to allow installment
sales to be settled under the CISG. It would have been instructive if Van
Doussa J. would have discussed the reason why he applied the CISG to installment
sales. However my view is that it is unsatisfactory to have part of the
contract governed by the CISG whereas the buyer's and seller's rights and
obligations are to be determined by domestic law. This is especially so
if it is questionable whether the Goods Act overrides the CISG in this
situation. It can certainly be argued that, unless specifically excluded,
the CISG should apply in preference to domestic law to all situations where
the applicability of the CISG is not clearly settled. In this way courts
will contribute to what the CISG intends to be, a truly international law.
What then are sales contracts? The simple answer is, international contracts
which the CISG considers to be sales contracts.
We must now turn our attention to the definition and analysis of "goods".
Article 2 excludes certain sales of goods from the sphere of application
of the CISG. In other words if not specifically excluded an item would
be classed as goods. The Goods Act on the other hand defines goods in s.3
in an inclusive way as "all chattels personal other than things in action."
Emblements and things attached to land are also considered to be goods
if they are "agreed to be severed before sale or under the contract of
sale"[80]
Basically the CISG excludes in general Consumer goods[81]
as well as specified classes of goods including negotiable instrument and
money.[82]
All sales by auction are also excluded.[83]
Practitioners need to be aware that goods are not defined in the same manner
in domestic legislation and the CISG and will lead to potentially different
outcomes Domestic legislation via the Goods Act and the Trade Practices
Act has enacted and distinguished between commercial contracts and consumer
contracts . The CISG specifically ensures that the domestic consumer protection
laws are not affected.[84]
Article 2(a) by design uses the words "personal, family or household use".
It is not sufficient to automatically exclude the CISG if the goods are
bought for non-commercial use. The wording of the article suggests that
the CISG is applicable if the goods were bought by a "business consumer"
but in domestic legislation these types of contracts are considered consumer
contracts. A point well worth noting when an applicability of the Trade
Practices Act is considered. A business consumer does not purchase goods
for personal, family or household use rather for the purpose of conducting
his commercial enterprise. Ferrari suggests that the relevant question
which needs answering relates to the purpose of the goods at the time of
purchase.[85]
Goods must be bought exclusively for personal use (and not only primarily
so) otherwise the CISG is applicable. The exclusion embodied in article
2(a) needs a careful analysis. The problem is that the purpose of the purchase
must be known or could have been known before or at the conclusion of the
contract by the seller.[86]
In other words the seller must have known or ought to have known the non-commercial
purpose of the contract. This would include a situation where the seller
clearly states that the goods are only suitable or to be used only for
non-commercial purposes. This leads us to the question of the burden of
proof. The first observation which must be made is the fact that the burden
of proof is a procedural matter and hence within the jurisdiction of domestic
law. This suggestion can be challenged by the wording of the article which
uses the word "unless". It can thus be argued that, as the convention is
not applicable for "non-commercial" purposes, the burden of proof rests
on the person who relies on "unless" which in most cases would be the seller.
The obiter in an Austrian decision appears to confirm this position.[87]
An Austrian seller sold a motor car to a Swiss buyer for personal use.
The court correctly found that the CISG was not applicable pursuant to
article 2(a). The court added that if the seller could prove that he "neither
knew or ought to have known that the goods were bought for any such use"[88]
the CISG would have been applicable. Another view which can be advanced
hinges on the language of article 2(a). Firstly the exception is worded
negatively which suggests that the party who relies on the article needs
to discharge the burden of proof. Assistance in this matter can be sought
through article 7. The observance of good faith would dictate that the
buyer needs to prove that he used the goods for non commercial purposes
and the seller would need to prove that he did not know that the goods
were bought for non commercial purposes.[89]
As far as domestic law is concerned article 2(a) must not only be read
in conjunction with the Goods Act but also with the Trade Practices Act
(TPA). The TPA is only applicable if the seller is a corporation and there
is an interstate connection. S.66A states that the CISG will prevail over
the provisions of "this Division". Using the literal approach to interpretation
the suggestion is that the CISG will only be applicable to division 2 which
deals only with conditions and warranties in consumer transactions.
Secondly the seller (or buyer in exceptional circumstances) must prove
the exception set out in article 2(a). If successful the CISG will only
apply to goods not excluded by article 2(b) to (f). Just to mention one
difference, s.4(1) of the TPA includes ships and aircraft into the definition
of goods whereas the CISG excludes these items specifically in article
2(e). The conclusion which can be drawn is that the application of the
CISG into areas governed by the TPA is limited to application of article
2 to conditions and warranties in consumer transaction pursuant to division
2. To return to the CISG, article 2(d) to (f) lists an exclusion of sales
which is based on the nature of the goods. The purpose of article 2(d)
is to avoid a conflict with domestic laws.[90]
The Goods Act in s.3 also excludes a similar group of goods namely "things
in action and money" and it appears that it tracks the provisions of the
CISG. Article 2(e) and (f) pose some problems namely one of definition.
What is a ship or vessel? The CISG does not give much help and some commentators
suggest that not all ships or vessels are excluded. Ferrari[91]
suggests that a row boat is not excluded. He links the definition of ships
or vessels to the purpose of its use. The transport of goods or persons
by such vessels seems to be of importance to determine whether a watercraft
is a ship or vessel.[92]
It could be suggested that courts would tend to look at domestic legislation
to determine the definition of a ship in accordance with article 7. In
Australia it is settled law that a ship is defined by the Navigation Act
1912 (Cth) in s.6(1), s.12(1) and by case law. It would be unusual for
a court to disregard such an authoritative definition. To note is the fact
that a ship, which is not registered, has been declared to fall under the
definition of goods pursuant to the Goods Act.[93]
It can be argued that, as Ferrari suggested, the purpose of the ship is
important. An unregistered ship cannot be used to transport people and
goods pursuant to the Navigation Act therefore such a ship even under the
CISG would be classed as goods pursuant to article 2. What seems to be
settled is the fact that the sales of parts of ships and aircraft are not
excluded from the application of the CISG. The Hungarian Supreme Court
in a ruling confirmed the above view. [94]
The conclusion which can be drawn from the above is that the CISG does
not define "goods" in a clear an unambiguous way. There is also not enough
case law at hand to draw a clear conclusion either. But it is also equally
clear that "goods" cannot be defined by resorting to domestic law as uniformity
in the application of the CISG could not be achieved.
As stated above the CISG only applies to contracts of sales of goods. What
remains to be discussed is how the CISG treats "contracts". Article 4 makes
it clear that the CISG only govern two aspects of "contracts", namely the
formation of a contract and the rights and obligations of the seller and
buyer arising from such contracts.[95]
Article 4(a) and (b) proceed to particularly exclude the validity of the
contract[96]
and "the effect which the contract may have on the property in the goods
sold".[97]
It has been said that a contract in general probably cannot exist without
a governing law.[98]
There is however a possibility of a conflict with article 11 which provides
that contracts of sale do not need to be evidenced in writing. In Victoria
this is a non issue as the Goods Act has abolished the relevant section
and Australia has not made a declaration to exclude article 11. Overseas
court decisions have not yet explained article 4 in detail however some
observations can be made at this stage. In Argentina, the court argued
that the CISG is not applicable to the determination of jurisdictional
question pursuant to article 4. [99]
The question arose because the choice of forum clause was contained in
a form which was sent to the buyer without warning and was never signed
by the buyer. In essence the court concluded that the question was one
of validity of contract and hence excluded from the CISG. In a Swiss decision
the court concluded that mistake affects the validity of the contract which
makes the CISG inapplicable. [100]
The question of mistake in conjunction with article 4(a) needs careful
analysis and mistake as to the quality of goods pursuant to s.19(a) of
the Goods Act is used to illustrate this point. A breach of the implied
condition of fitness for purpose could lead in most cases to the avoidance
of the contract. Swiss, German, French and Austrian Law lead in essence
to the same conclusion. [101]
This problem needs to be looked at logically from the beginning. S.19(a)
or in general, the Goods Act is overridden by the CISG pursuant to s.6
of the Sale of Goods (Vienna Convention) Act. The CISG pursuant to article
4 declares that it is not concerned with the validity of contracts. In
such an event private international law must be applied which is in this
case s.19(a). If we follow this simple line of reasoning we will find that
s.19(a) is in conflict with article 35. The question of remedies of the
buyer poses another problem. It has been suggested that remedies would
be governed by the CISG [102]
which would add to the complication. As this seems to be an interpretive
problem, article 7 needs to be consulted in conjunction with article 4.
Article 7(1) at first glance does not appear to be of strictly legal nature.
As seen above it is regarded as a principle, hence a standard for the interpretation
of an agreement. It more than urges those who interpret the CISG to keep
in mind that regard must be had to promote uniformity and observe good
faith in international trade. The above article tends to create a state
of mind, which is conducive to interpret the CISG, not with the language
of domestic law, but with the wider view of uniformity in international
trade. Article 7(2) has two limbs concerning questions of "matters governed
by this convention, which are not expressly settled". Firstly, it must
be settled on the general principles on which the CISG and specific rules
are based. Secondly if there are no general principles then the matter
must be settled in accordance with private international law. It has been
established above that article 4(a) particularly excludes the validity
of the contract . Looking at article 7(2) it must be said that the matter
is governed by the convention namely validity is excluded. In other words
the matter is explicitly settled in article 4(a). If we now pursuant to
article 7(2) exclude mistake as to quality from the CISG we are in essence
in conflict with article 7(1) and as stated above such an interpretation
brings domestic law in conflict with articles 35 to 52.[103]
We are still trapped in our circular argument.
Another result may be achieved
if we re-examine article 4. It can be argued that the important part of
article 4 is that the convention "only" governs the formation and "particularly
excludes" the validity. My view is that "only" is not to be confused with
"exclusively" as some writers have suggested.[104]
Article 4 does not exclusively govern the formation as it also governs
rights and obligations of buyer and seller. "Only" needs to be interpreted
as a restrictive function, limited to the formation of the contract and
the rights and obligations of the buyer and seller. The restrictive function
is not only placed upon the CISG it equally applies to domestic legislation.
In simple terms the CISG governs the formation of the contract. If there
is a question of validity then domestic legislation will supply the necessary
solution. As far as the determination of the rights and obligations of
the seller and buyer is concerned the CISG will supply the necessary legislation.
This argument is strengthened if we read article 7(1) where uniformity
in the application of the CISG is promoted. The above argument is supported
by a Hungarian decision.[105]
The buyer contested the sellers claims on three grounds: error, lack of
conformity of the goods to the contract terms and disproportionate value
of the obligation between the opposing parties. The question of error and
disproportionate value was decided on the basis of the Hungarian Civil
Code as the CISG does not cover such subject matter. However the question
of lack of conformity was settled pursuant to article 36 The conclusion
reached by Niggeman that the CISG excludes questions of validity is correct.
However in my view the principle that one may include under article 4(a)
"nullity for error about a substantial quality of the goods"[106]
is open to challenge.
Just to remind us where other countries stand in the development and interpretation
of the CISG the United States of America may be used as an example. After
10 years only two cases have been reported where in the United States the
CISG has been applied[107]
but this number has increased to 14 in the last two years.[108]
It appears that a clear trend is emerging in the judicial approach to the
interpretation of the CISG. Originally, the U.S. Circuit Court[109]
discussed two lines of reasoning in interpreting and applying the CISG.
In its first line of reasoning, the court argued that if the language of
the CISG tracks the UCC then domestic case law can be used to help fill
the gap. The CISG uses the term "possible consequence" in article 74, which
is not a UCC term. The UCC uses the terms "incidental damage" or "probable
consequence". In interpreting article 74 domestic interpretation of the
UCC will be looked at and used as guidance.[110]
As a second line of reasoning, the Circuit Court relied on scholarly writings
on the subject. The court concluded that even if the CISG rule is directly
inspired by domestic law, the "court should not fall back on its domestic
law, but interpret the rule by reference to the Convention."[111]
It appears that the court set the stage to interpret the CISG according
to article 7 but ignored its introduction and proceeded to analyze the
case as it would interpret the Uniform Commercial Code and only consulted
exclusively U.S. Commentators and case law.[112]
The Circuit Court, though mindful of the international character in the
interpretation of the Convention and the need to promote uniformity in
its application, was unable to overcome its own ethnocentric bias.[113]
Harry Fletchner [114]
pointed to the fact that the courts have not yet secured an international
outlook. According to Fletchner: "The judiciary of other countries, particularly
in Europe, may have a leg up on achieving the proper viewpoint because
they have long been forced to deal with cross-border transactions and foreign
law" [115]
However in MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino,
S.p.A.[116]
Professor Kritzer[117]
commented that the reasoning of the court in its approach to the CISG differs
significantly from previous decisions. Firstly the court quoted and applied
scholarly writings. Secondly the court observed and applied CISG case law
(CISG jurisprudence). U.S. cases are discussed and the court also called
for an attention to decisions of other States as a source of "persuasive
authority." [118]
Foreign decisions have shown that it is critical for importers/exporters
and the commercial lawyer to be familiar with the CISG in order to minimize
legal risks. There are certainly areas where the CISG tracks domestic legislation
in the sale of goods whereas other areas will produce potentially different
outcomes. As an example in MCC-Marble Ceramic Center, Inc. v. Ceramico
Nuovo D'Agostino, S.p.A.[119]
the court indicated that the CISG precludes the application of the parole
evidence rule. Interpretations and applications of the CISG can produce
a new body of international law. Evidence of such a development is reflected
in the fact that significant trade blocks such as the EC have adopted the
CISG as the de facto sales law.[120]
There are signs that the CISG can be implemented in Australia in line with
international development. If the first significant case in Australia is
an indication, the judiciary is aware of the conceptual differences and
has shown that legal thinking in Australia can accommodate the CISG. The
Convention is certainly not the perfect tool to manage cross border legal
risks. However by ignoring or wrongly developing the CISG the legal uncertainties
will be increased. In my view, overseas developments have gathered momentum
and sufficient case law is at hand to irreversibly establish the CISG as
a de facto international sales law. The last word should perhaps belong
to Professor Karollus who stated that the CISG "is well on the way to becoming
the Magna Carta of international trade." [121]
