The following materials introduce the United Nations Convention on Contracts for the International Sale of Goods (the "Convention" or "CISG"). They analyze when the Convention is applicable, and suggest how you might adjust your contract forms and contracting practices to take into account the Convention's provisions.

From the beginning, however, it is important to stress that the Convention recognizes the principle of freedom of contract. The seller and buyer may agree to exclude application of the Convention. They may agree, for example, to have domestic law govern the contract rather than the Convention. Even if they agree to make it applicable, the Convention gives precedence to the parties' contract terms. The relevant provision is Article 6, which provides:

Because it is so easy to exclude application of the Convention, it has occasionally been suggested that U.S. companies should always automatically take action exclude the Convention from their international contracts. Such advice is overly simplistic. At the very least you should determine whether domestic law or the Convention better protects your company's interests.

The U.N. Sales Convention governs (A) contracts for the sale (B) of goods when (C) the transaction is international as defined by the Convention. The Convention defines only the third of these elements. As to the first two elements, the Convention provides some guidance by its articles that exclude certain issues and types of transactions from the Convention's coverage.

A. CONTRACTS OF SALE

The drafters of the Convention apparently assumed that there is a universal understanding of what constitutes a sale. The seller must "deliver the goods, hand over any documents relating to them and transfer the property in the goods," while the buyer must "pay the price for the goods and take delivery of them." Articles 30 and 53. Cf. U.C.C. § 2-106(1): "A 'sale' consists in the passing of title from the seller to the buyer for a price."

The principal point that the Convention does make clear is that it covers the contractual aspects of a sale and not the property aspects.

A seller does, however, make certain "implied warranties" with respect to title and intellectual property rights. CISG arts. 41-42.

Questions about the borderline between a sale and other transactions will be similar to those that arise under domestic law. The lease of goods (e.g., computer hardware) is presumably not a sale because the lessor retains title to the goods. Similarly, to license a person to use property (if that property is a "good") probably is not to sell the property to that person. A sale of goods on credit with the retention of a security interest (even if called "retention of title") to secure payment of the purchase price, on the other hand, is probably a sale because title eventually will pass.

Contracts for the rendering of services are generally excluded, but Article 3 does provide a gloss on several common transaction types.

The terms substantial and preponderant are not defined.

B. GOODS

The drafters did not define goods but drafting history shows that the drafters conceived of the term as broad and flexible. This is most clearly illustrated by the French language text where the original legal language (objects mobiliers corporels) was changed to a colloquial business term (merchandises). Commentators have generally concluded that the term goods includes tangible movables.

Questions about the borderline between goods and other forms or property will be similar to those that arise under domestic law. Thus, whether the "sale" of software, either custom-made or bundled with hardware, is covered by the Convention is an issue just as it is under the Uniform Commercial Code. If the "seller" of the software adapts the software to the particular needs of a customer, it could be argued that the Convention does not apply because the preponderant part of the "seller's" obligation will be the rendering of services. CISG art. 3(2). See generally Arthur Fakes, The Application of the United Nations Convention on Contracts for the International Sale of Goods to Computer, Software, and Database Transactions, 3 Software L.J. 559 (1990).

Article 2 expressly excludes several forms of property for which regulation by the Convention was thought inappropriate: sales of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft, and electricity. CISG art. 2(d)-(f).

C. "INTERNATIONAL" CONTRACTS COVERED

Article 1(1) of the Convention sets out the rule on when the Convention is applicable:

In effect, this paragraph requires that the contract (1) be international, and (2) have some connection with a Contracting State. To avoid surprise, Article 1(2) makes an exception when a party is unaware that the other party has its place of business in a different country.

1. When is a sales contract "international"? For the purposes of the Convention, a contract is international when the seller and buyer have their places of business in different States. It will be irrelevant whether or not the goods sold move from one country to another. CISG art. 1(1)(a).

Several other articles supplement this basic test of internationality. Article 1(2) requires that both parties be on notice that their businesses are in different countries. When a party has more than one place of business, Article 10 provides rules of thumb for which place of business is relevant when determining whether the Convention governs the contract.

2. What connection must the sales transaction have to a Contracting State? If each party has its place of business in a Contracting State, the Convention applies by virtue of Article 1(1)(a). If only one party -- or if neither party -- has its place of business in a Contracting State, the Convention may still be applicable if choice-of-law rules make the law of a Contracting State the applicable law. In this latter case, paragraph (1)(b) makes the Convention rather than domestic sales law the applicable law. Thus, if a French seller sells goods to an English buyer and French law is the applicable law, the relevant sales law will be the Convention.

The United States has declared that it will not be bound by Article 1(1)(b), a reservation authorized by Article 95. As a result, a court sitting in the United States is required to apply the Convention only if the parties before it have their places of business in different Contracting States.

Where an enterprise has multiple branches, therefore, one must inquire which branch has "the closest relationship to the contract and its performance." Presumably the same inquiry would be made when an enterprise acts in a foreign jurisdiction through an agent permanently resident there. The absence of a definition of branch creates difficulties principally when an enterprise's presence in a foreign country is less than permanent.

D. EXCLUDED TRANSACTIONS AND ISSUES

Articles 2 and 3 exclude certain transactions and certain types of property from the Convention's coverage. The most important are the exclusion of consumer and service transactions. Articles 4 and 5 exclude from the Convention's coverage most products liability issues, issues of validity, and questions of what effect the contract for sale has on property claims to the goods sold.

1. Consumer transactions. Article 2(a) expressly excludes sales to persons who buy goods for personal, family, or household use unless the seller did not know that the sale is to such a person.

This definition is similar to that found in the Uniform Commercial Code, although the latter does not provide for the exception where the seller is unaware that the sale is to a consumer.

2. Products liability claims. The Convention governs only the rights and obligations of the seller and buyer to a sales contract. CISG art. 4.

By necessary implication, the Convention therefore does not cover claims against other parties in the manufacturing or distribution chain. Moreover, the Convention expressly excludes claims for death or personal injury caused by the defects in the goods sold. CISG art. 5.

3. Issues of "validity". Article 4(a) excludes issues of validity from coverage of the Convention.

These problems will be resolved by reference to domestic law. These issues include questions of fraud, duress, illegality, and unconscionability. What other issues may be called ones of validity is a matter of some concern because if this exclusion is read broadly courts would undermine the uniformity that the Convention is designed to enhance.