02 - Asynchronous Recording 1 - CISG Coverage and Interpretation

Article 3 of the CISG

Article 3(1): Contracts for Goods to Be Manufactured or Produced

• Article 3(1) of the CISG addresses contracts for the supply of goods that are to be manufactured or produced. It considers such contracts as sales unless the party ordering the goods undertakes to supply a "substantial part" of the materials necessary for their production.
• Example:
  • Apple (the buyer) orders mobile phones from a factory in China (the seller).
  • Apple provides the factory with chips, which are essential components of the phones.
  • The factory sources the plastic and other materials themselves.
  • The question is whether this transaction is governed by the CISG.
• The Core Issue: If the buyer supplies materials, the CISG applies only if those materials do not constitute a "substantial part" of what's needed for manufacturing.
• Problems with "Substantial Part":
  • Measure: It is unclear whether "substantial part" refers to weight, volume, or value.
    • Weight/Volume: Plastic may be more substantial than chips in terms of weight and volume.
    • Value: Chips could be more valuable than plastic.
  • Quantum: It's unclear what percentage constitutes "substantial."
    • The term "preponderant" is used to mean more than 50%.
    • "Substantial" could mean 10%, 20%, or 70%, leaving room for interpretation.
• Vagueness and Uncertainty: Article 3(1) is vague, which leads to uncertainty.
  • In case of a dispute, it's hard to predict whether the CISG would apply, because the meaning of "substantial" is unclear.
  • Law should provide certainty ex ante, so parties know their rights and obligations.
• Article 6 and Derogation:
  • Article 6 allows parties to derogate (i.e., opt-out) from certain CISG provisions, including the entire convention.
  • Parties can agree that Article 3(1) will not apply to their contract.
  • It is advisable to derogate from Article 3(1) due to its ambiguity.

Article 3(2): Supply of Labor or Other Services

• Article 3(2) addresses contracts where the party furnishing the goods also supplies labor or other services.
• The CISG does not apply if the "preponderant part" of the obligations consists of the supply of labor or other services.
• Example:
  • A jeans retailer (buyer) contracts with a factory in Bangladesh (seller) to:
    • Design the jeans.
    • Manufacture the jeans.
    • Apply the retailer's logo.
  • The contract involves both the manufacture of goods and the supply of design services.
• Determining Applicability:
  • The CISG applies if the service component is not the "preponderant part" of the contract.
  • "Preponderant" means more than 50%, and courts measure this by value.
  • If manufacturing costs $£80,000$ and designing costs $£20,000$, the CISG applies because design services are not preponderant.
• Example 2:
  • A company contracts to design, build, and sell a house.
    • Architectural services (design).
    • Labor (building).
    • Raw materials.
  • If raw materials cost $£70,000$, the architect costs $£20,000$, and labor costs $£10,000$, the CISG applies because labor and services ($£30,000$) are not preponderant.
  • However, if labor and services cost $£70,000$ and raw materials cost $£30,000$, the CISG does not apply.

Software Sales and the CISG

• The question is, what kinds of software sales are governed by the CISG?
• Need:
  • A sale.
  • Goods.
• Sale means transfer of ownership.
• The CISG does not specify when title passes.
• Goods refers to tangible items.

Types of Software Sales

• Sale of a physical copy.
• Online transaction of software.
• License of a software.

Analysis

• Online Transaction:
  • Downloading an app or Microsoft Office online involves no tangible goods.
  • Therefore, these transactions are not governed by the CISG.
• License of Software:
  • A license is not a transfer of ownership.
  • It's like leasing an apartment; you get rights but not ownership.
  • Therefore, licensing software is not a sale and not governed by the CISG.
• Sale of a Physical Copy:
  • If a software house creates custom software for a shop and records it on 20,000 USB drives, this is a sale of goods.
  • There is a transfer of ownership of the software and the USB drives are tangible.
  • The CISG would apply, unless the service of programming the software is the preponderant part of the contract under Article 3(2).

Franchise Agreements

• Franchise agreements (e.g., becoming a McDonald's franchisee) do not fall under the CISG.
• A franchise is more like a license; you get the right to use the name, trademark, and know-how, but you don't become the owner.

Variation of Default Rules (Article 6)

• Article 6 allows parties to derogate from the CISG.
• If the CISG applies (Article 1A: international sale of goods, both parties in contracting states), parties can still agree that certain articles (e.g., 3(1)) will not apply.

Opting Out

• Parties can derogate from part or all of the convention, to not be governed by the CISG.
• If parties specify the contract is governed by French law, the CISG still applies because it's part of French law.
• To exclude the CISG, parties must state that the contract is governed by French domestic law to the exclusion of the CISG.

Opting In

• If the CISG does not automatically apply (e.g., parties in South Africa and the UK, neither are contracting states), opting in is more complex.
• It depends on the conflict of law rules of the forum.
• The forum will consider party autonomy (whether parties can choose the applicable law).
• It is more technical and has no clear answer.

Excluded Issues (Article 4)

Validity of a Contract

• The CISG does not govern the validity of a contract; this is left to domestic law.
• Due to disagreements during drafting, no consensus on a single set of rules for validity was achieved.
• Examples:
  • A contract concluded under physical duress (e.g., at gunpoint) may be invalid under domestic law.
  • A contract for illegal goods (e.g., drugs) is invalid.

Passage of Title

• The CISG requires a sale (transfer of ownership) but doesn't specify when title passes.
• Does title transfer when the contract is signed, when goods are shipped, when goods are received, or when payment is made?
• This is left to domestic law.

Article 5

• The CISG does not deal with personal injury or death.

Interpretative Philosophy

• The interpretative philosophy of the convention will be discussed in the week 3 recording.