Source: http://www.cisgac.com/cisgac-opinion-no4/
Timestamp: 2019-04-25 10:30:06+00:00

Document:
Quantification of the term "substantial part"
Interpretation of the term "materials necessary for such manufacture or production"
To be cited as: CISG-AC Opinion no 4, Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG), 24 October 2004.
Rapporteur: Professor Pilar Perales Viscasillas, Universidad Carlos III de Madrid.
Adopted by the CISG-AC on the 7th meeting held in Madrid with no dissent.
d. Finally, the relationship between Article 3(1) and Article 3(2) CISG.
2.3. Several scholars have considered that "substantial part" means economic value . the materials provided by the buyer ought to be higher in value (price) as compared to those provided by the seller in order to exclude the CISG. This criterion has also been followed by some cases.
2.12. More problematic within the meaning of the term "materials" is the inclusion or exclusion of the technology, technical specifications, drawings, formulas and designs necessary for the production of the goods. Case law and legal writers are in disagreement. The controversy began with a French decision (Cour d´appel de Chambéry, 25 May 1993) that did not consider the CISG applicable on the basis that the production of the goods had to be made following the designs provided by the buyer. In the opinion of the French court, the designs amounted to a substantial part of the materials in the sense of Article 3(1) CISG. It appears from the report of the case that the It appears from the report of the case that the only "material" provided by the buyer were the designs.
(1) If both parties supply materials to be used in the manufacture of goods for one of the parties, what are the relevant factors under Art. 3(1) to draw the line between a sales contract governed by the Convention and a service contract governed by domestic law?
(2) If a party has undertaken to deliver goods and to provide services, what are the relevant factors under Art. 3(2) CISG determining the applicability of the CISG instead of domestic law in such cases?
(3) What is the relation between paras. (1) and (2) of Art. 3 CISG?
2. In this situation, the rules of the Convention apply to the non-performance or malperformance of the buyer with the necessary adaptations. See: SCHLECHTRIEM/SCHWENZER/Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd ed., Oxford: 2005, Art. 3 nº 3.
3. The English text of Article 4 of the Hague Convention on the Law Applicable to International Sales Contracts (22 December 1986) is identical to Article 3 CISG. However, in this instance, the French text does not use the term "part essentielle" (as in Article 3(1) CISG), but "part importante". Article 6 of the 1974 UN Convention on the Limitation Period in the International Sale of Goods is almost identical to Art. 3 CISG. The Spanish version follows the French rather than the English version and therefore the standard used is "parte esencial" instead of "parte sustancial" (substantial part) as in CISG.
4. Warren KHOO, Article 3, nº2.2, in Cessaro Massimo Bianca and Michael Joachim Bonell (eds.), Commentary on the International Sales Law. The 1980 Vienna Sales Convention, Milano: Giuffrè, 1987.
5. Jorge ADAME GODDARD, El contrato de compraventa internacional, México: Mc Graw-Hill, 1994, p. 50.
6. See among others: John O. HONNOLD, Uniform Law for International Sale under the 1980 United Nations Convention, The Hague: Kluwer Law International, 3d ed, 1999, nº 106. Some scholars also use the "essential" test as a secondary criterion after the economic value test: Fritz ENDERLEIN/Dietrich MASKOW, International Sales Law, Oceana, 1992, pp. 36-37.
8. Arbitration Court of the Chamber of Commerce and Industry of Budapest, 5 December 1995 (VB/94131) (Hungary): supply of waste containers to be produced by the seller, the value of the materials supplied by the buyer only amounted to approximately 10% of the total value of the containers to be produced, hence the CISG was applicable by virtue of Art. 3(1); HG Zürich, 8 April 1999 (Switzerland); and ICC 8855/1997, JDI, 2000, 4, p. 1070, with J. Arnaldez observations, stating that Art. 3(1) refers to "la part prépondérante, c'est-à-dire la valeur essentielle".
9. There are case law and legal commentaries that have considered that the French term "part essentielle" implies an interpretation based upon the quality/functionality of the materials provided by the parties. For example: Bernard AUDIT, La vente internationale de marchandises (Convention des Nations-Unies du 11 Avril 1980), Droit des Affaires. Paris: L.G.D.J., 1990, nº 25, pp. 25-26. And OLG München, 3 December 1999 (Germany), where the Court considered the essential criterion on the basis of the French text: "The few tools which were to be supplied by the [buyer] are neither with respect to their value nor their function essential ones -the French text of the Convention speaks of "part essentielle" -not "substantial parts "-- as stated in the English text -- of the plant to be delivered".
The "essential" criterion has been used as complementary to the economic value criterion by some legal writers, although others consider the essential criterion to be at the same level as the economic criterion: See among the most recent commentaries: Francisco OLIVA BLAZQUEZ, Compraventa internacional de mercaderías (Ambito de aplicación del Convenio de Viena de 1980, Valencia: Tirant lo blanch, 2002, p. 194. The essential criterion is rejected by: KHOO, Article 3, nº 2.2: ("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").
10. ICC 11256/ESR/MS, 15 September 2003 (Los Angeles) (unpublished) (on file with the rapporteur) considered the CISG inapplicable on the basis of Art. 3(1). It concluded that the motors provided by the buyer were a substantial part of the materials necessary for the manufacture of the trucks, because they were necessary for the product to be considered a "vehicle".
11. See SCHLECHTRIEM/SCHWENZER/Schlechtriem, Article 3, nº 3 a).
12. HONNOLD, Uniform Law, nº 59. See example 3B, in which the value of the chromium -- an essential ingredient for the manufacture of stainless steel -- comprised 15% of the total value of the materials used in manufacturing the goods. Prof. Honnold states that "a tribunal might well conclude that 15% is 'substantial' but the evaluation of such questions of degree is difficult to predict". As will be shown, the 15% standard as well as any other standard below 50% should be considered too low in the interpretation of the words "substantial part" (see, infra 2.10).
13. ADAME, p. 51, who also states that if the value represents a percentage of 35%, the Court would need to decide whether or not it is substantial on a case-by-case basis.
14. See for all: ENDERLEIN/MASKOW, p. 36.
15. Peter SCHLECHTRIEM, The UN-Convention on Contracts for the International Sale of Goods, Vienna: Manz, 1986, p. 31: "preponderant in this sense should be considerably more than 50% of the price"; and SCHLECHTRIEM/Herber, Commentary on the UN Convention on the International Sale of Goods (CISG), 1st ed., Oxford: 1998, Art. 3, nº 4.
16. HG Zürich, 8 April 1999 (Switzerland), referring to Art. 3(1) CISG, stated that: "The CISG is also applicable if the materials to be delivered are a good deal less in proportion to the price of the goods and therefore the manufacture is the crucial factor herein".
17. Fixed percentages were mentioned only three times during the preparatory work of the Convention. One was in relation to Article 3(2) CISG, Mr. Sevón (Finland) referred to a UK proposal to substitute the words "preponderant part" for "major part in value"; he said that: "Under that proposal 51 per cent of the value of a contract would decide the nature of that contract. The existing text was not so rigid" (A/CONF.97/C.1/SR.2, p. 242; also in John O. HONNOLD, Documentary History of the Uniform Law for International Sales, Deventer/Netherlands: Kluwer Law and Taxation Publishers, 1989, p. 463). It seems that for the Finnish delegate "major part in value" meant that it should take more than 51% in value to exclude the Convention. The other two interventions were made in relation to paragraph (1) of Article 3 CISG. Mr. Rognlien, of Norway, proposed the exclusion of the Convention only when the buyer undertook to supply "all or the substantial part" (A/CONF.97/C.1/L.13, p. 84; also in HONNOLD, Documentary History, p. 656). In order to explain that proposal, Mr. Rognlien, stated that the word "substantial" might be replaced by "major", indicating that the proportion must be over 50% (Official Records, p. 243; also in HONNOLD, Documentary History, p. 464). It seems that for the Norwegian and Finnish delegations, the definition of "major" is over 50%. The last intervention was made by Mr. Herber (Federal Republic of Germany), who in relation to the Norwegian proposal stated: "His delegation had not previously held the view that it must necessarily imply over 50 per cent. If the original text was unclear, his delegation could support the Norwegian proposal" (Official Records, p. 243, also in HONNOLD, Documentary History, p. 464).
18. This tendency can be observed in several recent national and international instruments: EU Directive 1999/44, 25 May 1999, of the European Parliament and of the Council on certain aspects of the sale of consumer goods and associated guarantees (OJ L 171, 7 July 1999, pp.12 et seq), Art. 1.4: "Contracts for the supply of consumer goods to be manufactured or produced shall also be deemed contracts of sale for the purpose of this Directive "; Principles of European Sales Law, Draft 14, June 2004. Utrecht Working Team on Sales Law, subgroup of the Sales, Services and Long-Term contracts group, Article 1:102(1) follows the text of Art. 3.1 CISG. Paragraph 2 of Article 1:102 adopts the same criteria as the Directive 1999/44: "In a consumer transaction any contract for the supply of goods to be manufactured or produced is to be considered as a contract of sale". See also new section 651 BGB (German Civil Code) (Application of Sales Law): "The provision concerning the sale of goods applies to a contract for the supply of moveable things that are to be produced or manufactured (...). Where the moveable things to be produced or manufactured are specific goods, sections 642, 643, 645 and 650 apply, except that the relevant time under sections 446 and 447 replaces the time of acceptance of the work. See among the most recent legal writers: PERALES VISCASILLAS, Hacia un nuevo, pp. 1199-1224.
19. ICC 8855/1997, JDI, 2000, 4, p. 1070, with J. Arnaldez observations. The court said: "La distinction mentionnée à l'Article 3, paragraphe 1 de la Convention est fondée sur l'origine des matériaux de fabrication et non sur la nature particulière du procédé de fabrication ou de ses conditions".
20. See, e.g.,: Ulrich C. SCHROETER, Vienna Sales Convention: Applicability to "Mixed Contracts" and Interaction with the 1968 Brussels Convention. Vindobona Journal of International Comercial Law and Arbitration, 2001, p. 74, with further citations.
21. A/CONF.97/C.1/L.26, p. 84; also in HONNOLD, Documentary History, p. 656.
22. See impliedly the Swiss Federal Supreme Court, 17 October 2000 analyzing a contract of sale of lockers to be manufactured by the seller following the buyer's drawings. The Federal Supreme Court did not discuss the CISG's applicability that was denied by the Appellate Court on the basis of Art. 3(2) CISG, e.g., the supply of services (installation work) was considered to be the preponderant part.
23. OLG München, 3 December 1999 (Germany) is an example of this situation. Under the contract, the seller had to manufacture and deliver a window production plant (also there were some post-delivery obligations). According to the contract, the buyer had also the obligation to deliver some tools and drawings of the types of windows to be produced by the plant. When analyzing paragraph (1) of Article 3 CISG, the tribunal did not refer to the drawings. There are two possible explanations to that silence: first, that the tribunal did not consider the drawings to be within the concept of materials in Art. 3(1) CISG, or a second reading in line with the concept that accessory materials do not qualify as "materials necessary for such manufacture or production": the drawings to be provided by the buyer were not for the production of the window plant (object of the contract) but of the types of windows to be produced by the plant.
24. The term "raw materials" appeared for the first time in several Hague Conventions on the Law Applicable to the Contract of Sale (Art. 1 Convention sur la loi applicable aux ventes à caractère international d'objets mobiliers corporels, 15 June 1955; Art. 1 Convention sur la loi applicable au transfert de la propriété en cas de vente à caractère international d'objets mobiliers corporels, 15 April 1958; and Art. 1 Convention sur la compétence du for contractuel en cas de vente à caractère international d'objets mobiliers corporels, 15 April 1958). These texts provided that: "Pour son application sont assimilés aux ventes les contrats de livraison d'objets mobiliers corporels à fabriquer ou à produire, lorsque la partie qui s'oblige à livrer doit fournir les matières premières nécessaires à la fabrication ou à la production". That text was the basis for the deliberation of the 1964 Uniform Laws (ULIS, and ULF), that decided to refer just to the term "materials".
25. LG Mainz, 26 November 1998 (Germany) provides an example. In this case, the parties agreed on the production and delivery of a crepe-cylinder for the production of tissue paper and there were also accesory obligations: "loading, transport, unloading, installation, insurance until the end of the installation, the waste management of the old cylinder as well as extra work under additional agreements". Although the discussion was in relation with Article 3(2) CISG, it is stated that: "The court is aware that before the cylinder (which had been fitted for [buyer's] individual needs) was produced and delivered, a major engineering effort as well as planning and conceptual work was required. However, these engineering efforts contributed to the production and delivery of the unit, determine its value, and therefore do not change the fact that the focus of the contract was the cylinder itself. [Seller's] further contractual obligations (transport, installation, maintenance) are therefore accessory obligations that pale in comparison to the value of the manufactured cylinder. This assessment leads to the application of the United Nations Convention on Contracts for the International Sale of Goods (cf. v. Caemmerer/Schlechtriem, Einheitliches UN-Kaufrecht, 2nd ed., Art. 3 n. 8)". Impliedly, the same approach is found in OLG Köln, 26 August 1994 (Germany), where a contract for the elaboration and delivery of a market analysis was not considered within the scope of the Convention because it cannot be considered a sale of goods, and also was not a contract within Art. 3(1) CISG. A sensu contrario, it is implied from the case that when the ideas (intellectual work) are included in the goods, the contract might be governed by the Convention.

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