Reproduced from 17 International Business Lawyer (1989) 497-500 with the kind permission of the International Bar Association, London, © International Bar Association.
Glower W. Jones
Smith, Currie & Hancock
The international sale of goods has often been complex due to varying legal systems. The United Nations Convention on Contracts for the International Sale of Goods provides a trend to simplify international sales transactions. The Convention was adopted in 1980 in Vienna and represents the growing trend to remove barriers to international trade. The Convention became effective 1 January 1988 in the United States, one of 16 nations in which the Convention has come into force. The Convention applies to international contracts made in countries adopting the Convention unless the parties specify the Convention shall not apply to contracts for the international sale of goods.
The Convention provides a uniform set of rules in a neutral framework, favouring neither the buyer nor the seller. This framework provides an outline for negotiations of more specific terms as may be desired by the parties. The Convention harmonises otherwise conflicting rules, practices and trade procedures in an effort to stabilise and encourage international trade. Greater legal certainty will result from the Convention. That certainty will provide a more stable trade relationship.
The Convention embodies concepts from various trade practices, regulations and laws. It is more alike than different from the Uniform Commercial Code (UCC) developed in the United States beginning in the early 1900s. The Uniform Commercial Code became effective in 1962 and has since been accepted by most states within the United States and has provided the basis for the development of case law interpretations of the UCC regulations.
Like the Convention, the Sales article of the UCC applies to 'transactions in goods'. The Convention applies to 'contracts for sale of goods'. This distinguishes between contracts involving services. Under the UCC, American decisions have applied the sales rules based upon the predominant feature of the transaction even though the sale of a good may also include the performance of a service provided the service is incidental to the transaction.
Certain types of sales are excluded under both the UCC and the Convention. The Convention excludes consumer goods, those for personal, family or household use. Sales by auction, execution, ships, aircraft, electricity, along with the sale of stock shares and investment securities, negotiable instruments or money are excluded by the Convention.
By contrast, the UCC excludes secured transactions, sales to consumers and farmers, insurance contracts, suretyship, bankruptcy, construction contracts, and excludes contracts for the sale of real estate or security interests in real estate since these are not 'transactions in goods'.
The Convention specifically does not apply to contracts in which the 'preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services'.
The Convention and the Uniform Commercial Code provide a comprehensive set of provisions governing form and formation of contracts, construction of contracts, performance, breach and remedies. The Convention sets forth fundamentals of contract law for international sales transactions. As to warranties, the Convention and the UCC use different terminology.
A warranty is an assurance by a party of the existence of a fact upon which the other party may rely. The intended purpose is to relieve the party of any duty to determine facts independent from the warranty which is a part of the transaction. The seller typically provides a warranty to the buyer. A warranty constitutes a promise to indemnify the other party if the warrantied fact proves untrue.
The warranty may be written, verbal [page 497] or implied. An implied warranty is imposed by law. The UCC provides both express warranties and implied warranties. In contrast, the Convention does not use the word 'warranty' but provides similar obligations. In addition to express warranties, the UCC provides for an implied warranty of merchantability  and for an implied warranty of fitness for a particular purpose. The express and implied warranties relate to the quality of the goods and whether the seller has provided the required quality.
The UCC provides:
'(1) The express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis for the bargain creates an express warranty that goods shall conform to the affirmation or promise.
(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as 'warrant' or 'guarantee' or that he have a specific intention to make a warranty, but an indication merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.' (UCC § 2-313).
An express warranty requires affirmative action by the seller. A representation, affirmation or promise are specific methods of creating a warranty, but common ways to create express warranties include advertisements, sales brochures  and essentially any other document or statement promising that the goods conformed to a certain quality. A sample or a model is an express warranty as specified by the UCC.
The UCC does not require that the buyer rely on a warranty specifically. The affirmation or promise forming the basis for the warranty must be 'part of the basis of the bargain', a requirement that may engender factual disputes.
Article 35 of the Convention combines the concept of the obligations [page 498] of express and implied warranties. For express warranties, Article 35 provides:
'(1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.
(2) Except where parties have agreed otherwise, the goods do not conform with the contract
unless they [implied warranties omitted, see infra].
(c) possess the qualities of goods which the seller has held out to the buyer as a sample or model;
(d) are contained or packaged in the manner usual for such goods, or where there is no such manner, and the manner adequate to preserve and protect the goods.'
The seller is not liable for any lack of conformity if the buyer knew or 'could not have been unaware' of lack of conformity of the goods at the time of the contract.
The Convention language supports the case authorities under the UCC which consider the facts of the transaction and the knowledge of the buyer regarding the statement alleged to be a warranty and the courts will consider circumstances and knowledge of both the seller and the buyer.
Implied warranties are imposed by law, not by agreement of the parties. The implied warranty for the sale of goods has similarity to tort liability. Products liability cases may relate to either a commercial sale or to a tort claim. The tort case requires proof of negligence. The cause and extent of the injury must be proved in either a warranty or a tort case. The Convention is not applicable to liability of the seller for death or personal injury caused by the goods to any person (Article 5).
Under the UCC, the most frequently cited warranty is the implied 'warranty of merchantability' which protects a buyer where the goods fail to conform to the normal commercial standards. It allows the buyer reasonably to rely upon a knowledgeable seller. The Uniform Commercial Code provides:
'§ 2.134. Implied Warranty:
Merchantability; Usage of trade --
(1) Unless excluded or modified (§ 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to the goods of that kind. Under this section, the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.
(2) Goods to be merchantable must .be at least such as
(a) pass without objection in the trade under the contract description; and
(b) in the case of fungible goods are of fair average quality within the description; and
(c) are fit for the ordinary purposes for which goods are used; and
(d) run within the variations permitted by the agreement, or even kind, quality and quantity within each unit and among all units involved; and
(e) are adequately contained, packaged and labelled as the agreement may require; and
(f) conform to the promises or affirmations of fact made on the container or label if any.
(3) Unless excluded or modified (§ 2-316), other implied warranties may arise from course of dealing or usage of trade.' [UCC § 2-314].
This warranty only applies when a seller is a merchant 'with the respect to goods of that kind'. The UCC defines 'merchant' essentially as a person who regularly deals in the kind of goods involved and holds himself out as having special knowledge or skill (UCC § 2-104(1)). The merchantability warranty does not apply to an isolated sale of goods and does not apply to services.
By comparison, the Convention includes implied warranties with the express warranties in Article 35 which provides the seller must deliver goods which are of the quantity, quality and description required by the contract and except where otherwise agree the goods do not conform with the contract unless they:
'(a) are fit for the purpose for which goods of the same description would ordinarily be used.'
This language tracks almost precisely the UCC warranty of merchantability that goods must be fit for the 'ordinary purposes for which such goods are used'.
FITNESS FOR A PARTICULAR PURPOSE
The implied warranty for fitness for a particular purpose is provided by the Uniform Commercial Code as follows:
'§ 2-315. Implied Warranty: Fitness For a Particular Purpose -- Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill of judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.'
This warranty differs from the warranty of merchantability that goods are fit for the ordinary purpose for which such goods are used and expands that warranty to goods for a particular purpose. This warranty requires the seller know the purpose of the buyer and have reason to believe the buyer relies upon the seller's skill or judgment. For the warranty to apply, the buyer must rely on the seller's judgment or skill.
The Convention does not use the term 'warranty' but provides, unless the parties have agreed otherwise, that the goods do not conform with the contract unless they:
'(b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgement' (Article 35(2)(b)).
It is clear that the language of the Convention closely tracks those provisions of the implied warranty of merchantability and the implied warranty of fitness for a particular purpose found in the Uniform Commercial Code in the United States.
A significant difference may lie with provisions for exclusion of modifications of warranties. The UCC provides that exclusions or modifications of the implied warranty of merchantability 'must be conspicuous' and '... to exclude or modify any implied warranty of fitness, the exclusion must be by writing and conspicuous' (UCC § 2-316). No similar provision requiring conspicuous notice of the limitation or exclusion of a warranty is set forth in the Convention.
Under the Uniform Commercial Code, the basic concept is that the non-breaching party be put in as good a position as if the other party had fully performed (UCC § 1-106). The breach of warranty provisions are covered as remedies to a buyer (UCC § 2-714 and 715) and include direct damages and, in a proper case, incidental and consequential damages. Incidental damages are normal commercial expenses involved with the transaction such as inspection, transportation and custody charges. Consequential damages may include any loss resulting from the general or particular requirements and the needs of the buyer which the seller, had reason to know at the time of contracting and which could not reasonably be prevented. Injury to person or property approximately resulting from the breach of a warranty is also covered as a consequential damage (UCC § 2-715).
Although the Convention does not apply to the liability of the seller for the death or personal injury caused by the goods to any person (Article 5), the Convention provides an extensive list of remedies for breach of contract by the seller including the requirement of substitute goods, repair, cancellation, proportionate price reduction to the value of goods actually delivered to the value of conforming goods would have had at the time of delivery (Articles 45-52) and damages (Articles 74-77). These damages may include the loss resulting from the breach, including lost profits, but may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the contract and the matters which he knew or ought to have known to be a possible consequence of the breach of contract (Article 74). The buyer may 'cover' by purchasing replacement goods and substituting the difference between the contract price and the price of the substitute transaction, as well as the other damages that may be allowable (Article 75).
The Convention specifically requires that any party who relies on a breach of contract take measures to mitigate the loss (Article 77).
OBLIGATIONS OF GOOD FAITH, FAIR DEALING AND REASONABLENESS
Contract documents rarely contain all terms to meet any contingency that arises. The unexpected will occur in commercial transactions. Different interpretations of the written language, as well as the spoken word, often occur. Differences in languages increase the possibility of misunderstanding and misinterpretation. Good faith, fair dealing and reasonableness are implied obligations of the parties to transactions.
The purposes of the Uniform Commercial Code in the United States include the simplification, clarification and modernisation of the law governing commercial transactions (UCC 1-102). The UCC may be varied by agreement 'except that the obligations of good faith, diligence, reasonableness and care described by this Act may not be disclaimed by agreement ...' (UCC § 1-102(3)).
'Every contractor duty within this Act imposes an obligation of good faith in its performance or enforcement' (UCC § 1-203). The UCC further provides that if the contract or any clause of a contract is found by a court to be unconscionable at the time made, the court may refuse to enforce the contract (UCC 2-302). The UCC even defines:
'Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade' (UCC 2-103).
By contrast, the Convention seeks to explain, and thereby impose duties of good faith, fair dealing and reasonableness by defining action or responsibility. Statements and other conduct of a party are to be interpreted according to the intent of that party where the other party knew or could have not have been unaware of what that intent was, or otherwise to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances (Article 8). References to 'reasonable person', 'reasonable time', 'reasonable cost', and what the parties knew or 'could not have been unaware of' are specified in various articles. The commitment of the Convention to good faith and fair dealing is exemplified by such provisions as Article 25:
'A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.'
The Convention and the Uniform Commercial Code provide substantially similar practical and concise working rules for commercial sales transactions. The parties are free to vary the rules by agreement, within the margins set for reasonableness and unconscionability, but both are excellent codes of law providing legal framework to encourage efficient and fair business transactions. The Convention General Provisions characterise and summarise rules of law [page 499] and ethical values for encouragement of international commerce in Article 7:
'In the interpretation of this Convention, regard is to be had for its international character add to the need to promote uniformity in its application and the observance of good faith in international trade.'
As more nations adopt and ratify the United Nations Convention on Contracts for the International Sale of Goods, as is likely, a uniform body of international sales law and practice will continue to develop. Transaction detail will be simplified. Unexpected results will be reduced. Fewer surprises will strike the businessman. Predictability will be enhanced, giving security to lawyers, advisors and the business community of the interpretations, validity and enforcement of agreements for international sales. [page 500]
1. UCC § 2-102.
2. Convention, Art 1(1).
3. Triangle Underwriters Inc v Honeywell Inc, 604 F 2d 737 (2nd Cir 1979).
4. Convention, Art 2.
5. UCC § 2-102.
6. Convention, Art 3.
7. 17A CJS Contracts § 342 at p 325.
8. UCC § 2-213.
9. UCC § 2-314.
10. UCC § 2-315.
11. Pake v Byrd, 55 NC App 551, 286 SE 2d 588 (1982).
12. Colorado-Ute Electrical Assoc v Envirotech Co, 524 F Supp 1152 (D Colo. 1981).
13. Convention, Art 35, ¶ (3).
14. Overstreet v Norden Laboratories Inc, 669 F 2d 1286 (6th Cir 1982).