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Reproduced with permission from the author and 15 Journal of Law and Commerce (1995) 1-126

excerpts from

Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing

Franco Ferrari [*]

(. . .)

[Contracts for the sale of made-to-order goods and services]
[Article 3(1)]

Even though the sales contract as defined above still constitutes the "commercial contract par excellence" [363] and, consequently, the "pillar of the entire system of commercial relations," [364] it is undergoing a change. [365] This change is due to the fact that modern trade not only calls for ready-made-goods, but also for goods to be manufactured and, therefore, for the "sale" of labor and services as well. [366] This is why it is fair to state that the sales contract tends to become more and more a service contract. [367]

The tendency to consider sales contracts also those contracts "which require further activities besides the traditional exchange of goods with money'' [368] has been evident for years not only in the various legal systems, [369] but also in regard to the efforts made in order to unify the international sales law. [370] Indeed, the Draft Conventions of 1935 [371] and 1939, [372] as well as that of 1956 [373] and finally the ULIS of 1964 [374] included a provision dealing with the relation between sales contracts and transactions which call for the manufacture or production of goods. That is why it is not surprising that the draftsmen of the CISG extended its applicability [375] to the point that the CISG also governs contracts which are considered to be work contracts: [376] Article 3(1) CISG deals with the Convention's applicability to contracts for the supply of goods to be manufactured or produced, whereas Article 3(2) CISG deals with contracts that include the supply of labor or other services amongst the obligations of the "seller."

As pointed out, the CISG contains some provisions which "confront the scholar with contractual schemes which have uncertain functional characteristics" [377] and "which therefore raise the problem of whether such contracts fall under the sphere of application of the Uniform Sales Law." [378] This is true, above all, in the cases where the seller is liable not only for the delivery of the goods, that is, for a dare, but also for providing labor or services. [379] But it is also true for those cases in which the buyer has to deliver parts of the materials needed for the production of the goods.

Among the contracts falling under the latter category are those contemplated by Article 3(1) CISG, [380] i.e., the contracts for the supply of goods to be manufactured or produced. [381] But there is a limit to the CISG's applicability to these contracts. Indeed, Article 3(1) CISG itself excludes that the contracts where the party who "buys" the goods to be manufactured or produced supplies a "substantial part" of the materials necessary for the manufacture or production can be considered sales. [382] Even though this provision extends the CISGs applicability to other than "classical" sales contracts, [383] it raises some problems as well, [384] since it does not provide for specific criteria to be used in determining whether the materials supplied by the buyer constitute a "substantial part" of the goods necessary to manufacture or produce the goods. [385] Despite this lack of definiteness, it is commonly understood that the supply of accessories does not exclude the CISG's applicability. [386] Conversely, where all the materials are supplied by the buyer, there is no doubt that the CISG is inapplicable. [387]

In order to overcome the difficulties due to the indefiniteness of the concept of "substantial part," [388] legal scholars have tried to identify its main characteristics. In this respect, some authors stated that the "substantial part" is to be looked upon merely from a quantitative point of view." [389] It is here suggested, however, that when one has to determine whether the materials provided by the buyer constitute a "substantial part," a qualitative criterion should be used as well, [390] not unlike under the 1964 Hague Conventions. [391] Consequently, "the materials to be provided by the buyer may constitute a substantial part of the goods sold even where their value represents less than 50 per cent of the value of the goods." [392] This does not mean, however, that 15 per cent is sufficient to be considered "substantial," [393] as suggested by Professor Honnold. [394]

Although several courts have already applied Article 3(1) CISG [BGH (Germany) 15 February 1995; ICC Arbitral Award 7660 of 1994; OLG Frankfurt (Germany) 17 September 1991], [395] they have not yet elaborated on the concept of "substantial part." In one case, for instance, the CISG was held inapplicable to a contract according to which the French seller had to manufacture goods according to the Italian buyer's specifications [Cour d'appel Chambèry (France) 25 May 1993]. [396] The court held the CISG inapplicable on the grounds that the buyer had provided a "substantial part" of the materials necessary for the manufacture, [397] but in doing so, it did not define what percentage of the materials constituted a substantial part. [398] It appears, however, that the court considered the plans and instructions handed to the "seller" by the "buyer" as being a "substantial part" of the materials necessary for the production of the goods, an analogization which has been rightly criticized. [399]

(. . .)

[Contracts for the sale of labor and services]
[Article 3(2)]

The applicability of the Vienna Sales Convention extends not only to contracts for the sale of made-to-order goods. Article 3(2) CISG [400] extends it also to contracts where the "seller" is also obliged to supply services or labor. [401] This provision, which is innovative in respect to the ULIS, [402] was introduced in order to solve the problems arisen under the 1964 Hague Conventions concerning their applicability to contracts for the supply and installation of goods, [403] such as turn-key contracts [404] and Lieferverträge mit Montageverpflichtung [405] known in German law. [406]

The criterion to be employed in deciding whether the CISG is applicable to contracts for the supply of goods and labor or services is the "preponderance" of the obligations regarding the supply of services or labor. [407] This criterion seems to generate less difficulties than the "substantial part" criterion laid down in Article 3(1) CISG. [408] Indeed, it seems merely to refer to the comparison between the economic value of the obligations regarding the supply of labor and services and the economic value of the obligations regarding the delivery of the goods. [409] "The sale price of the goods to be delivered must [in other words] be compared with the fee for labor and services, as if two separate contracts have been made," [410] a principle which has already found support in case law [ICC Arbitral Award 7153 of 1992]. [411] Thus, where the economic value of the obligation regarding the supply of labor or services is "preponderant," i.e., where it is more than 50 per cent [412] -- this is usually the case in the turn-key contracts [413] and Lieferverträge mit Montageverbindung [414]Cthe CISG is inapplicable. [415]

An issue closely related to the one just examined is whether a contract for the supply of both goods and services or labor is entirely governed by (or excluded from) the CISG or whether the CISG always governs at least the part concerning the supply of goods. [416] Even though both legal scholars [417] and the Official Records of the United Nations Conference [418] assert that this question should be answered by resorting to the relevant rules of domestic law, the better view seems to be to the contrary, i.e., the question of severability should be answered by resorting to the principles of the CISG. [419] Otherwise, the mandate (set forth in Article 7(1) of the CISG) to promote uniformity in the Convention's application would not be sufficiently honored. [420] However, since the Vienna Sales Convention as well as most domestic laws resort to party autonomy as the principal criterion in order to solve the problem de quo, [421] the differing views will hardly lead to different results, [422] at least from a practical point of view. [423]

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Go to entire text of Ferrari commentary


FOOTNOTES

* Professor of Comparative Private Law, Katholieke Universiteit Brabant, Tilburg, the Netherlands; J.D. (Honors), University of Bologna, Italy; LL.M., University of Augsburg, Germany. Copyright, Franco Ferrari.

(. . .)

363. Galgano, supra note 5, at 6.

364. Memmo, supra note 6, at 181.

365. For a similar affirmation, see Ferrari, supra note 159, at 77 ff., with further references.

366. For a similar affirmation, see Honnold, supra note 25, at 105, stating that "a modern sales law must include transactions which call for the manufacture or production of goods. . . ."

Note that a similar statement can already be found in Kahn, supra note 19, at 693; Rabel, supra note 164, at 54.

367. See Ferrari, supra note 159, at 78.

368. Memmo, supra note 6, at 189.

369. In this respect, it is sufficient to note that already in 1936, Rabel, supra note 164, at 54, stated that "the contract by virtue of which the entrepreneur binds himself to produce goods by using a material he has to provide is considered a sales contract in England, Scandinavia and in the United States."

370. See, e.g., Ferrari, supra note 159, at 78.

371. See Article 2 of the 1935 Draft Convention.

372. See Article 2 of the 1939 Draft Convention.

373. See Article 10 of the 1956 Draft Convention.

374. See Article 6 ULIS: "Contracts for the supply of goods to be manufactured or produced shall be considered to be sales within the meaning of the present Law, unless the party who orders the goods undertakes to supply an essential or substantial part of the materials necessary for such manufacture or production."

375. Several authors have pointed out that comparing sales contracts for the supply of goods to be manufactured or produced as well as contracts for the supply of both goods and labor or services to "traditional" sales contracts results in the extension of the CISG's sphere of application; see, e.g., De Nova, supra note 343, at 751; Magnus, supra note 156, at 67.

376. For a similar statement, see Enderlein & Maskow, supra note 58, at 36, stating that "[the] inclusion of contracts for the delivery of goods to be manufactured (machines, manufactured goods) or produced (agricultural produce, raw materials) at the time of the conclusion of the contract in sales contracts means that the CISG can be applied also to certain contracts which are considered to be work contracts."

For a detailed discussion on the relationship between work contracts and the CISG, see Peter Gauch, Werkvertrag und "WienerKaufrecht," BAURECHT 23 ff. (1993).

377. Bernardini, supra note 21, at 85.

378. Id.

379. See also Memmo, supra note 6, at 189, stating that the CISG governs even those contracts "where the seller is bound not only to the delivery, but where he is also liable for the preliminary [phase of preparing the goods to be sold]."

380. See Ferrari, supra note 159, at 79.

381. See also OFFICIAL RECORDS OF THE UNITED NATIONS CONFERENCE, supra note 27, at 17, stating that Article 3(1) of the Uniform Sales Law "provides that the sale of goods to be manufactured or produced by the seller to the buyer's order is as much subject to the provisions of this Convention as the sale of ready-made-goods." See also Piltz, supra note 21, at 26 (stating the same).

382. See Article 3(1) CISG: "Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production."

Note, that even though the aforementioned Article was derived from a provision of the 1964 Hague Conventions, these Articles differ, at least at first sight, very much from each other, since the 1964 provision only excluded the extension of the convention's sphere of application in respect of such contracts in which the buyer did not only supply the "substantial" part, but also the "essential" part of the materials necessary for the manufacture or the production of the goods (for the text of the relevant provision, see supra in note 374). The difference is, however, only a terminological one, as will be pointed out infra in note 388.

383. For this affirmation, see already Ferrari, supra note 159, at 77-78.

384. See Magnus, supra note 156, at 69.

385. For this criticism, see also Rosett, supra note 99, at 280, stating that Article 3 explicitly includes contracts for goods to be manufactured unless the goods are incidental to supplying labor and services without providing guidance concerning the determination of the meaning of the "incidental" criterion.

For similar affirmations, see also Sergio M. Carbone & Marco Lopez de Gonzalo, Art. 3, NUOVE LEGGI CIVILI COMMENTATE 8, 8 (1989); Memmo, supra note 6, at 189.

386. For this conclusion, see also Ferrari, supra note 159, at 81; Magnus, supra note 156, at 70; Memmo, supra note 6, at 189.

387. For this solution, see Ferrari, supra note 159, at 81.

388. Note, that problems in respect of Article 3(1) can also arise for reasons different from the indefiniteness of the concept de quo. In this respect it is sufficient to recall that while the English text uses the expression "substantial part," the official French version uses the expression "partie essentielle." In this regard, see also Kritzer, supra note 56, at 73, where the author states that "[t]he problem here may be caused as much by a translation variance as by the absence of a precise definition of the term 'substantial' in the Convention."

It is doubtful, whether the French expression "partie essentielle" is intended to have a different meaning than the English expression "substantial part." For a reference to this problem, see also Honnold, supra note 25, at 106 (stating that the French expression is due to the fact that "[t]he drafters of the French version had difficulty with the concept of 'substantial' and used the phrase 'une partie essentielle'); Richards, Note, supra note 147, at 231 n.152.

389. This view is held, for instance, by Thomas Carsten Ebenroth, Internationale Vertragsgestaltung im Spannungsverhältnis zwischen ABGB, IPR-Gesetz und UN-Kaufrecht, JURISTISCHE BLÄTTER 682, 684 (1986); Alejandro Garro & Alberto Zuppi, COMPRAVENTA INTERNACIONAL DE MERCADERIAS 74 (Buenos Aires 1989); Herber & Czerwenka, supra note 43, at 28; Nicole Lacasse, Le champ d'application de la Convention des Nations Unies sur les contrats de vente internationale de marchandises, in ACTES DU COLLOQUE SUR LA VENTE INTERNATIONALE 23, 29 f. (Nicole Lacasse & Louis Perret eds., Montreal 1989); Magnus, supra note 156, at 69; Piltz, supra note 21, at 26; Reinhart, supra note 139, at 20.

Some authors prefer to use a "criterion of value"; see, e.g., Honnold, supra note 25, at 106 (stating that the only commensurable relationship between the materials provided by the buyer and those necessary for the production or manufacture of the goods to be sold is one based on value); Winship, supra note 122, at 1.24 (stating that it is difficult to determine whether the materials provided by the buyer are a "substantial part" of the materials necessary for the production unless one uses a measure which looks to value). However, this criterion does not differ from the one mentioned in the text, since the latter refers to an economic evaluation of the relationship between materials provided by the buyer and those provided by the seller.

390. For this conclusion, see also Audit, supra note 38, at 26.

391. Despite the different wording of the relevant articles provided for by the CISG and the 1964 Hague Conventions respectively (for a reference to the different texts, see supra note 388), several authors hold the view that there is no difference between the decisive criteria for the applicability of the Conventions to the kinds of contracts at hand; see, e.g., Richards, Note, supra note 147, at 231 (stating that "[d]espite the deletion of 'essential' from the CISG, the nature of the materials supplied will be a factor in deciding whether a 'substantial' amount of the materials will be supplied"); Rolf Herber, Art. 3, in KOMMENTAR ZUM EINHEITLICHEN UN-KAUFRECHT, supra note 48, 68 at 69.

Arguing that there is no space for an approach which takes into account the quality of the goods provided by the buyer, see Warren Khoo, Art. 3, in COMMENTARY ON THE INTERNATIONAL SALES LAW, supra note 12, 41 at 42, stating that "[u]nder paragraph (1), unlike the parallel provision in ULIS, the materials supplied need not be essential for the manufacture or production. Nor is it sufficient to take the transaction out of the Convention that the material supplied is an essential part."

392. Carbone & Lopez de Gonzalo, supra note 385, at 8.

393. See also Magnus, supra note 156, at 70.

394. See Honnold, supra note 25, at 106, stating that "[i]t seems that a tribunal might well conclude that 15% is 'substantial.' "

For a criticism of this view, see also Enderlein & Maskow, supra note 58, at 36, stating that "[s]ubstantial is not preponderant as in Article 2; it may even be less than one half. We doubt, however, that 15 per cent will be sufficient, as believes Honnold." See also Enderlein et al., supra note 48, at 48; Ferrari, supra note 159, at 82.

395. See, e.g., BGH, February 15, 1995, published in WERTPAPIER-MITTEILUNGEN 1103 (1995); Arbitral Tribunal ICC, No. 7660, reported in UNILEX; OLG Frankfurt, September 17, 1991, published in RECHT DER INTERNATIONALEN WIRTSCHAFT 950 (1991).

396. See Witz, supra note 68, at 34-35.

397. It has been stated (Magnus, supra note 68, at 70) that the materials provided by the buyer must be necessary for the manufacture or production of the goods, i.e., it is not sufficient that they serve a different purpose, as packaging material does, for instance.

398. For a summary of this case in the light of the issues discussed in the text, i.e., the lacking definition of substantial part, see also Del Duca & Del Duca, supra note 68, at 352 f.

399. See Witz, supra note 68, at 34-35.

400. See Article 3(2) CISG: "(2) This Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnished the goods consists in the supply of labor or services."

401. For a very detailed comparative study of the categories of contracts for the supply of labor and/or services as opposed to contracts for the supply of goods, see Werner Lorenz, Contracts for the Work on Goods and Building Contracts, in 8/8 INTERNATIONAL ENCYCLOPEDIA OF COMPARATIVE LAW 1 (1980).

402. For this affirmation, see also Ferrari, supra note 159, at 82; Magnus, supra note 156, at 67; Richards, Note, supra note 147, at 233.

403. For this justification of the introduction of Article 3(2) CISG, see, e.g., Schlechtriem, supra note 92, at 31, stating that Article 3(2) "attempts to regulate a question that proved to be difficult in ULIS, namely whether a contract for both the delivery and the installation of goods is covered by the Uniform Law for International Sales."

404. That Article 3(2) has been introduced in order to solve the problems concerning the extension of the CISG's applicability to turn-key-contracts can be deduced from the statements to be found in 7 UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW YEARBOOK 98 (1976).

For a reference to the CISG's applicability to turn-key-contracts, see also Ferrari, supra note 159, at 83-84 (excluding that turn-key-contracts fall within the scope of the CISG).

405. For a detailed discussion on whether the Lieferverträge mit Montageverpflichtung were governed by the ULIS, see Ulrich Huber, Diskussionsbeitrag, in EINHEITLICHES KAUFRECHT UND NATIONALES OBLIGATIONENRECHT, supra note 16, 107 at 107-108; Memmo, supra note 6, at 191.

406. For a detailed discussion of the Lieferverträge mit Montageverpflichtung in German law, see Maria Droste, DER LIEFERVERTRÄGE MIT MONTAGEVERPFLICHTUNG (Heidelberg, 1991), where the author (at 157 ff.) also discusses the issue of the CISG's applicability to these kinds of contracts.

407. Note, that "[w]hen the terms 'labor' or 'services' are used to characterize non-sales obligations, then this is obviously done to express that human labor which is owed, irrespective of whether it has a form giving effect or not. If it is only the result of labor which is owed, like in many contracts on the preparation of scientific or technological results (project contracts), then there exists a sales contract in the sense of the CISG in any case." Enderlein & Maskow, supra note 58, at 38.

408. However, according to Schlechtriem, supra note 92, at 31, the criterion of "preponderance" as well "is likely to prove difficult to interpret and to apply. Therefore, the parties should attempt to reach clear agreement in their contract."

409. For a similar affirmation, see Ferrari, supra note 159, at 83; Garro & Zuppi, supra note 389, at 74-76; Herber & Czerwenka, supra note 43, at 29; Karollus, supra note 59, at 24; Magnus, supra note 156, at 70-71; Schlechtriem, supra note 187, at 17.

Note, however, that some authors have argued that the "preponderance" must be evaluated having regard to other criteria as well; see, e.g., Richards, Note, supra note 147, at 240, stating that in order to determine the "preponderance" of the obligations consisting in the supply of services and labor or those consisting in the supply of goods "[a] two-part test involving a quantitative judgment of the predominant part of the agreement and a subjective judgment of the intent of the parties and the purpose of the agreement should be used."

Based upon the fact that a United Kingdom's proposal to use a "major in value" criterion in order to distinguish sales contracts from the contracts for the supply of labor and services was rejected (for this proposal, see OFFICIAL RECORDS OF THE UNITED NATIONS CONFERENCE, supra note 27, at 84); Reinhart, supra note 139, at 21, states that "a quantitative criterion is not sufficient to determine the preponderance of either the obligations regarding the supply of goods or those consisting in the supply of labor or services."

410. Schlechtriem, supra note 92, at 31.

411. See, e.g., Arbitral Tribunal ICC, No. 7153, published in English in 14 J.L. & COM. 217 (1995), which concerned a contract concluded in 1989 by an Austrian Seller and a Yugoslavian Buyer for the furnishing and assembling of materials to be used in the construction of a hotel in Czechoslovakia (for a summary of the facts, see also Callaghan, supra note 3, at 196). However, the arbitral tribunal dealt with the issue of whether the contract was one of sale by merely stating that "given that the text of the contract is unequivocal in this respect, and that no contrary provision emerges from the plaintiff's mail, the court of arbitration assumed that the type of contract in question here was a sales contract, such that the Convention applies." Per se, this statement does not support the rule mentioned in the text. However, it has been stated that the tribunal's aforementioned conclusion "was . . . supported by a bill addressed to the defendant which made apparent that the price to be paid for the assembly of the materials was of a completely secondary order of magnitude compared to that of the purchase of the materials. The arbitrator thus correctly examined the economic value of the benefits furnished in order to conclude that the contract at issue came within the purview of the Vienna Convention." Dominique Hascher, Commentary on International Court of Arbitration, Matter No. 7153 IN 1992, 14 J.L. & COM. 220, 222-223 (1995).

412. There is no doubt among legal scholars that a "preponderant" part is more than a "substantial part" and that the former has to mean more than 50%. For similar statements, see, e.g., Enderlein & Maskow, supra note 58, at 37 (stating that "the 'preponderant' part is bigger than a substantial part and has to mean more than half"); Honnold, supra note 25, at 106 (stating that "a 'substantial' part would be less than preponderant"); Schlechtriem, supra note 92, at 32 (stating that "[p]reponderant in this sense should be considerably more than 50% of the price").

413. Several authors have pointed out that the "preponderance" test prevents the United Nations Convention to be applicable to turn-key-contracts; see, e.g., Czerwenka, supra note 194, at 145; Herber, supra note 391, at 70; Richards, Note, supra note 147, at 243.

According to some authors, however, turn-key-contracts are not per se excluded from the sphere of application of the Convention (see, e.g., Magnus, supra note 156, at 72), but only where the "preponderance" test leads, in concreto, to their exclusion; see, for instance, Peter Schlechtriem, Einheitliches UN-Kaufrecht. Das Ubereinkommen der Vereinten Nationen vom 11. April 1980 über Verträge über den internationalen Warenkauf (CISG), JURISTENZEITUNG 1037, 1039.

414. See Herber & Czerwenka, supra note 43, at 28-29.

415. See Richards, Note, supra note 147, at 234.

416. For a discussion of this issue, see, among others, Honnold, supra note 25, at 108; Magnus, supra note 156, at 68-69.

417. See, e.g., Schlechtriem, supra note 92, at 32, stating that in the contracts for the supply of goods and labor or services it is difficult "to decide whether there are, in fact, two separate contracts, and, for example, whether the delivery is subject to the Uniform Law for International Sales while the installation contract is governed by domestic law. Domestic law should decide whether these two contracts can be distinguished." (footnotes omitted, emphasis added)

This solution has also been advanced by Lacasse, supra note 389, at 31; Samson, supra note 323, at 928-929.

418. See OFFICIAL RECORDS OF THE UNITED NATIONS CONFERENCE, supra note 27, at 16-17, stating that "the question whether the seller's obligations relating to the sale of goods and those relating to the supply of labor or services can be considered as two separate contracts (under what is sometimes called the doctrine of 'severability' of contracts), will be resolved in accordance with the applicable national law."

419. See, for instance, Czerwenka, supra note 194, at 146 note 696; Herber & Czerwenka, supra note 43, at 29.

420. For this view, see also Enderlein & Maskow, supra note 48, at 38.

421. See also Magnus, supra note 156, at 68.

422. For this statement, see also Herber, supra note 391, at 70; Piltz, supra note 21, at 27; Peter Schlechtriem, Anwendungsvoraussetzungen und Anwendungsbereich des UN-Ubereinkommens über den internationalen Warenkauf (CISG), AKTUELLE JURISTISCHE PRAXIS 339, 347.

423. See Ferrari, supra note 159, at 86.


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