International Sale of Goods

Contents

Introduction .................................................................................................................................. 2

Different contexts of contract law .............................................................................................. 4

Governing law of international sales ........................................................................................ 7

Harmonising international sales law: The CISG ..................................................................... 9

Express delivery terms: The Incoterms ................................................................................... 13

Incoterms obligations ................................................................................................................ 15

Default/implied delivery terms................................................................................................ 17

Passage of ownership ................................................................................................................ 18

Seller’s obligations under the CISG ......................................................................................... 19

Buyer’s obligations under the CISG ........................................................................................ 20

Examination and notice............................................................................................................. 21

Remedies under the CISG ......................................................................................................... 22

Restitution of non-conforming goods ..................................................................................... 24

Non-conforming goods and shortfall in delivery ................................................................. 25

Late delivery ............................................................................................................................... 26

Force majeure and impediment ............................................................................................... 27

Chapter summary ...................................................................................................................... 29

Appendix: Workshop activities ............................................................................................... 29

Legal problem-solving explained ........................................................................................ 29

Case 1 ....................................................................................................................................... 31
Case 2 ....................................................................................................................................... 32
Practice questions ................................................................................................................... 35
Other significant cases ........................................................................................................... 36

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Introduction

6.1 Any sale of goods is an exercise in translation: from economic concepts to legal

concepts and then re-translation from concepts to practical legal solutions that achieve

the actual transfer of capital, goods and services in fulfilment of the needs and wants of

each party involved in the exchange. Domestic sales of goods are, however,

significantly easier to translate as there is, usually, a common set of well-understood

socio-political aims and economic policies already embodied in a uniform set of binding

rules that are enforced and enforceable: the law. The disputes that occur in domestic

sales of goods thus tend to be about the application of the law and the interpretation of

the evidence rather than the determination of socio-political aims and the applicability

of a particular law at all. On the other hand, international sales of goods by their very

nature do not share these common understandings. Each state has its own socio-

political history and aims, diverse versions of economic policies and dissimilar customs

and legal systems.

From a legal perspective, the cross-border transfer of capital, goods and services is akin

to Through the Looking-Glass, and What the Lawyers Found There, to paraphrase Lewis

Carroll’s sequel to Alice’s Adventures in Wonderland. It is a fantastical world of rules and

norms generally understood and agreed between sovereigns, but only tenuously

connected to the elements of enforcement and enforceability necessary for law properly

so called. It is a world where sometimes there is no connection to the law at all; practical

outcomes are achieved without the certainty that the law is supposed to provide, but

rather by the operation of economic paradigms, such as Ricardo’s theory of comparative

advantage.

6.2 For this very reason, the United Nations Convention on Contracts for the

International Sale of Goods (CISG) is designed as a set of replaceable rules for ordinary

business people transacting across borders when dealing with unfamiliar jurisdictions.

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From a practitioner’s perspective, the CISG would usually become relevant and even

useful in an after-the-fact situation. The following sections in this chapter will describe

the CISG provisions in further details.

In the meantime, to get started, imagine your client Jane, a businesswoman who

regularly buys and sells goods in the international markets, seeks advice after she

receives a shipment of porcelain geese from China. Jane attends at your offices in

Melbourne, Australia and shows you a printout of an email she sent to her supplier, Mr

Xu. In the email Jane remarks on Mr Xu’s website advertisement selling one goose for

US$1 and then inquires about the cost of buying 500 geese from Mr Xu. A week later

Jane receives 500 porcelain geese and an invoice for US$600, which includes air freight

costs. Jane is a goose farmer. She was expecting to receive a proposal for the purchase

and delivery of 500 live geese.

Ordinarily, when dealing with an Australian sale of goods, a practitioner would tell

Jane to simply return the goods and refuse to pay the invoice on the basis that no

contract had been formed. This would be a reasonable course of action under the

Australian law of contract. In this instance, though, it may be that the laws of China

approach the issue differently and it is entirely possible that under Chinese law there is

a valid contract and Jane is obliged to take the porcelain geese and pay Mr Xu his

US$600. Few practitioners will be aware of the conceptual frameworks and complexities

of Chinese contract law, and even fewer would be competent or willing to offer legal

advice on a foreign jurisdiction’s laws; just as Mr Xu’s Chinese lawyers are unlikely to

be aware of the conceptual frameworks and complexities of Australian law.

It is precisely for this type of scenario that the CISG was drawn up: two (or more)

business people (not lawyers) in two (or more) foreign jurisdictions corresponding to

agree the sale of goods across borders. The CISG was intended to give these business

people, or rather their respective lawyers and courts, a common conceptual framework

and set of rules to determine whether a contract for the sale of goods was formed, and if

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so, how to go about establishing the essential terms of that contract and the remedies for

failures of various obligations undertaken by the parties in that contract. Thus, the CISG

is neither comprehensive nor mandatory; rather, it is a set of default replaceable rules

used to bridge the divide between different legal systems and their diverse histories.

But this brings us back to the fundamental question: what is a contract? And this

question can only be answered from the perspective of a particular domestic legal

system: in Jane’s case, the perspective of Australian law, and in Mr Xu’s case, the

perspective of Chinese law.

Different contexts of contract law

6.3 In Australia, as with most, if not all, jurisdictions historically originating from the

British legal system, a contract is a legally binding promise or agreement.1 The essence

of the theory of contract is a voluntary assumption of a legally enforceable duty 2 and its

concomitant notion of freedom recognised by the law.3 The freedom to contract, as it is

commonly referred to, shares several characteristics with other freedoms enjoyed by

individuals under the modern concept of a Western liberal democracy, namely the free

will to decide whether to contract; the right to negotiate contractual terms of any kind

within the bounds of the law; and the right to have the decisions and negotiations as

1 Foster v Wheeler (1887) 36 Ch D 695 at 698 per Kekewich J; Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co
Ltd [1915] AC 847 at 855; [1914-15] All ER Rep 333; 84 LJKB 1680; 113 LT 386 per Lord Dunedin;
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105; 187 ALR 92 at 99; 76 ALJR 465;
[2002] HCA 8; BC200200663 per Gaudron, McHugh, Hayne and Callinan JJ.
2 Australian Woollen Mills Pty Ltd v Commonwealth (1955) 93 CLR 546; 30 ALJ 36; BC5500230, PC; Toyota

Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 169; BC9300781 per Tadgell J,
SC(Vic).
3 Printing & Numerical Registering Co v Sampson (1875) LR 19 Eq 462 at 465 per Sir Jessel MR; Redmond v

Wynne (1892) 13 LR (NSW) (L) 39 at 46, 47; 8 WN (NSW) 103. See also Head v Kelk [1962] NSWR 1363;
[1963] SR (NSW) 340 at 352; (1961) 80 WN (NSW) 290; Biotechnology Australia Pty Ltd v Pace (1988) 15
NSWLR 130 at 133; 26 IR 411 per Kirby P, CA(NSW); Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 194;
4 ACSR 431; 9 ACLC 539 per Kirby P, CA(NSW); Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24
NSWLR 1 at 26 per Kirby P (Waddell AJA agreeing), CA(NSW).

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expressed in the contract honoured by force of the law, without interference by the

government or state. Broadly speaking, in the Western legal tradition a contractual

obligation is thus the consensual assumption of a legally enforceable duty for the due

performance of a promise, or the truth or falsity (as the case may be) of a past or present

fact. The corollary of this concept of freedom to contract is that contractual

responsibility cannot be imposed on persons who are not parties to contracts, unless

they have consented to such liability. This is known as the privity of contract principle.

6.4 For example, under Australian law there must be offer, acceptance, consideration

and an intention to create legal relations to establish the essentials of a contract. The

CISG regime contains rules that vary from, and sometimes is at odds with, the common

law. The CISG does not require consideration in the formation of the contract: the

promise of which is the price for which the promise of the other is bought, and therefore

the promise given is for value and is enforceable. If the transaction involves a sale of

goods, but the intentions of the parties cannot be ascertained from the contract, then in

Australia reference must be had to the various State legislative sale of goods regimes.4

Generally, unless the contract states otherwise, under the common law there is an

assumption that risk passes with title. In practice, this assumption is unsuitable for

international sales of goods. Accordingly, across-the-borders risk generally passes to the

buyer when the goods are handed over to the first carrier for transmission to the buyer

(if the contract involves carriage of goods); or when the seller places the goods at the

buyer’s disposal at the seller’s place of business or at the place where the goods were

4 The legislative regime in force in all Australian jurisdictions is based on the English Sale of Goods Act

1893, commonly referred to as SGR, including: Sale of Goods Act 1895 (WA); Sale of Goods Act 1895 (SA);

Sale of Goods Act 1896 (Qld); Sale of Goods Act 1896 (Tas); Sale of Goods Act 1923 (NSW); Sale of Goods Act

1954 (ACT); Sale of Goods Act 1972 (NT); and Goods Act 1958 (Vic). There are some differences between the

various Acts, but overall there is a high degree of uniformity both in terms of the various pieces of

legislation and the judicial interpretations and development of the law.

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manufactured or produced. More on this later in the chapter. The problem of when risk

to goods passes, is particularly important in the case of goods sold in transit. Such sales

occur commonly with bulk commodities that are bought and sold and resold during

transit through derivative transactions (transacting on the basis of the sale documents

that represent and evidence title to the goods). Some goods may be the subject of a

hundred individual transactions dealing with part or all of the goods during the time

they are embarked and the time they are off-loaded at a port (or ports) eg oil shipments.

6.5 In the following sections we look at the governing law of an international

commercial contract, with a specific focus on the CISG operation. Then we consider the

basic terms of an international commercial contract, especially the handling of delivery

risks through industry-based rules such as the Incoterms 2010.

Further details will be provided to explain the principal legal rights, obligations and

remedies available to firms in key international commercial contracts. In particular, we

address the following issues:

• When does ownership pass from seller to buyer? That is, the seller’s and buyer’s

obligations under either the CISG or domestic law.

• What happens when an international commercial contract does not work out?

That is, the remedies and damages under the CISG.

• How do you get out of an international commercial contract? That is, the

fundamental breaches and other ways to avoiding a contract.

• What if the CISG does not apply and the governing law is a domestic one? As an

example, we refer to the Goods Act 1958 (Vic) in the following sections, which is

applies in the Australian State of Victoria.

6.6 Our starting point for the legal context of the international sale of goods is to

consider why delivery is the key legal issue. In this respect, some typical international

sale of goods scenarios show the importance of contractual terms that deal with

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delivery and associated risks. We are considering a sale of bottled water (referred to as

the goods) from a Fijian producer (the seller) to an Australian wholesaler (the buyer).

• Scenario A: the seller (S) prepares the order and delivers the goods to the port

for shipment, but neither the buyer (B) nor S has arranged the necessary export

permits. Customs won’t allow the goods to depart.

• Scenario B: S delivers the goods to a ship for carriage to Australia, sends the

shipping documents to B by courier, and B pays. However, the goods have been

badly damaged during transit.

• Scenario C: S delivers the goods to the ship, couriers the documents, and B pays.

But B discovers that the shipment amounts to only half of the order.

This sounds a bit tricky, so let’s try to tackle these problems from the root question:

what is the governing law of an international contract?

Governing law of international sales

6.7 “Governing law” or “proper law” of the contract refers to the domestic system of

laws which acts as the framework for the contract’s interpretation and application. All

countries have rules that are part of their own framework of “private international law”

– which means that individual countries can determine what the governing law of an

international contract is or otherwise. However, rules to determine the governing law of

an international contract have developed with stark similarities in order to facilitate

trade and minimise transaction costs. For instance, Australia, the EU, China, the US and

Malaysia use the same three-step test to determine the governing law of an

international contract. Before we delve into these three steps, note that the governing

law does not determine where a dispute can be heard (this is called choice of forum).

Instead, the governing law only determines what law will be applied to define the

substantive obligations, rights and/or remedies of the parties. It is not always

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straightforward to determine the governing law of a contract between traders in

different countries, and thus litigations may easily arise. When mediation and other

informal means of dispute resolution do not work, then parties end up taking their case

to court.

In general, courts are likely to determine the governing law of a contract between

traders in different countries through a three-step test.

1. The court looks at the contract itself, to ask: Is there an express term

designating the governing law of the contract? This is called a “choice of law”

clause.

2. The court looks at the contract and surrounding documents, to ask: Is

there a clear mutual intention that the governing law of the contract is a

particular country’s law?

3. Finally, the court asks: Which domestic system of laws does the contract

have the most real and substantial connection to? In other words, in which

country are the majority of obligations under the contract to be performed? That

is for instance, where are the goods manufactured, packed, delivered?

6.8 For example, let’s see how this three-step test may work in the following basic

scenario. The facts revolve around the sale of 20 tonnes of apples, grown and packed on

farms throughout Victoria, Australia. The cost of apples is A$750 per tonne. The

Victorian seller agrees to deliver goods to a ship nominated by a Fijian buyer at the Port

of Melbourne. The Fijian buyer agrees to organise and pay for carriage from Melbourne

to Fiji. The payment is meant to be made via transfer of funds to the Victorian seller’s

Australian account upon receipt of shipping documents that provide delivery of apples

to the ship in good order. If things went wrong between the Victorian seller and the

Fijian buyer, what would the court do? The court would follow the three-step test,

finding out that:

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 1. In the contract between the Victorian seller and the Fijian buyer there is no

express choice of law clause.

2. Therefore, there is no basis to suggest clear mutual intention to select a

governing law.

3. There is no other avenue, but to apply the “closest connection” test, which

finds that the goods are grown and packed in Victoria, Australia. Hence the law

of Victoria, Australia would be determined to be the governing law.

Harmonising international sales law: The CISG

6.9 The importance of the governing law is evident when considering how significantly

sales laws and remedies differ from country to country. Hence the choice of law clause

by the parties will manage the legal risk entailed with non-compliance of contractual

obligations. When there is no choice of law clause, the decision is left to the courts.

However, can businesses always know, understand and to any rate rely on the

variations of law that exist among their trade partners? Clearly this is not the case,

therefore we have a strong call for harmonising the rules that apply to international

contracts. And here the CISG comes into play. As mentioned above, CISG stands for the

United Nations Convention on Contracts for the International Sale of Goods. The CISG

is an international sales code that attempts to balance the interests and expectations of

buyers and sellers, and to find compromises between the different legal systems and

laws of different countries. The CISG was adopted in 1980 and entered into force in

1988. There are currently more than 80 contracting parties, and it is recommended to

check updated official information on the CISG with the UNCITRAL, which is the

United Nations Commission on International Trade Law.

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How does the CISG work?
6.10 The countries that have signed up to the CISG are obliged to incorporate the

Convention into their domestic law to apply to international sales contracts. The CISG

comprises 101 Articles subdivided in four parts.

• Part I deals with rules of the Convention’s application.

• Part II defines the rules regarding the formation of a contract (that is, offer,

acceptance and the basic elements of a contract).

• Part III establishes the obligations of the buyer and seller and related remedies.

• Part IV administers the Convention itself with respect to signature and ratification

rules.

Overall, the CISG is quite comprehensive, but there are still some structural gaps in this

legal instrument. Following is a broad overview of the main provisions in the CISG, for

which first of all we need to ask: When does the CISG apply? Article 1 of the CISG says

that the Convention applies where two parties to the sales contract have their place of

business in two different (nation) states and either both states are “contracting parties”

(to the CISG) or the application of the rules of private international law led to the

application of the law of a contracting party.

6.11 On the other hand, we need to ask: When does the CISG not apply? Article 2 specifies

that the CISG only applies to sales of goods, but not by auction, and with the exclusion

of financial instruments, as well as of consumer goods (ie goods for personal, domestic

or household use) and ships and aircrafts. The CISG does not apply also to services,

labour or processing contracts, and does not cover claims and compensation for

personal injury (as per Article 5). Furthermore, the CISG is a flexible instrument. In fact,

the contracting parties can exclude or vary the effect of CISG provisions, as they can

contract out or tailor the applicable provisions. For instance, the contracting parties can

establish that express terms of the contract will override the CISG provisions. Therefore,

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this means that the CISG is there mainly to fill the gaps and silences in a contract to

avoid any legal uncertainty that may hinder business activities.

6.12 Before we proceed with the next international sales issues, let’s consider a few

scenarios to exercise our judgment on the CISG application.

Every time we stumble upon an international contract of sale, we should ask: Does the

CISG apply? Let’s try to answer this question with regards to the three basic scenarios:

1. An Australian trader with a branch office in Shanghai purchases goods

from a Chinese company based in Beijing for shipment of vases from China to

Australia.

2. A contract governed by the law of England between a firm based in

London and a firm based in Australia for the sale of electricity generated in

Victoria to be supplied to Tasmania.

3. A contract governed by the law of the US between a US company and an

Indian company for the sale of computer parts.

In order to determine whether the CISG applies or otherwise, it is necessary to pose the

following questions:

• Do both parties have their place of business in different states?

▪ AND

• (a) Are both states parties to the CISG?

▪ OR

• (b) Is the CISG part of the governing law of the contract – in other words, has the

governing law state incorporated the CISG into its domestic law?

• Is it an international contract for the sale of goods within the meaning of the

CISG? (as per exclusions in Article 2). Thus, you have to ask:
- If it is a sale, are the goods of an excluded type?
- Have the parties excluded or varied the application of the CISG?

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All considering, the CISG only applies to the first scenario described above. But

remember that ultimately certain express terms of the contract can exclude or modify

the application of the CISG, which means that individual contracts can override the

CISG provided that it is done so expressly.

6.13 Moving on, the final and key question to address the CISG application problem is:

What did the parties actually agree? Before we proceed any further, let’s quickly refresh

your memory on the basics of contract law. Thus, the contract terms indicate the

obligations of each party, and constitute legally binding statements and promises.

Contract terms can be divided into express terms, which essentially are explicit

promises by the parties, be they written or even oral. Then we have implied terms,

which means that they are not incorporated expressly by the parties, and thus they are

implied into the contract by international or domestic law, as for instance the CISG or

the Goods Act 1958 (Vic) provisions. Note that in the context of international trade there

is a tendency to focus on material terms with an increasing use of standard terms. To

this avail, the important terms that we need to especially look up in international

contracts for the sale of goods are the following:

1. The choice of law clause (which is the express selection of governing law).

2. The choice of forum clause (which defines where disputes will be settled.

3. We need to find the method of payment clauses (discussed in Chapter 8).

4. The delivery terms, in particular the express terms, also called Incoterms 2010.

This is the focus of the following sections in this chapter, together with the

default obligations and remedies that the CISG incorporates into international

contracts for the sale of goods.

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Express delivery terms: The Incoterms

6.14 Clearly to make and then trade even a simple pair of shoes in today’s connected

global economy takes so many different human and automated operations that surely

something may easily go wrong. Therefore, now it’s time to turn our attention to the

express delivery terms and ask the crucial question of international trade: What could

possibly go wrong in the transfer of goods? So, if we consider anything that can possibly go

wrong in the cross-border delivery of goods, it is easy to see the importance of setting

special terms in international contracts for the sale of goods, what we call the Incoterms

2010.

The Incoterms rules have become an essential part of the daily language of trade. They

have been incorporated into contracts for the sale of goods worldwide and provide

rules and guidance to all traders (importers, exporters and transporters), professionals

(such as lawyers, auditors and insurers) and academics (scholars and students) of

international trade. In short, the Incoterms rules are specialised standard delivery terms

for international sales of goods. The first version was drafted by the International

Chamber of Commerce (ICC) in 1936. The current version is Incoterms 2010 and to

operate they must be specifically incorporated into the traders’ contract: this means

that, once a rule is expressly included, the parties agree to the related obligations and

rights as specified by the standards.

Incoterms are almost always used by international traders because they make life (and

business) easier. In fact, Incoterms take the simple form of three capital letters as a

shorthand way of clearly designating the delivery obligations of the seller and the

buyer. For example, the international traders’ price lists will often specify different

prices according to the type of delivery term that the goods are sold under: so, usually:

• Where the seller agrees to take on more of the obligations, the goods unit

price is more expensive.

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 • Where the buyer agrees to take on more of the obligations, the goods unit

price is cheaper.

6.15 There are 11 rules in the Incoterms 2010, and each has its own shorthand

abbreviation. There are two ways of “grouping” Incoterms, either according to how

they apportion obligations of the buyer and seller; or according to what modes of

transport they are appropriate for (ie waterway only or multi-modal). At a glance, the

11 Incoterms detail different delivery obligations of the buyer (B) and seller (S) as

following, going progressively from most favourable to seller to most favourable to

buyer. The star indicates that those Incoterms are appropriate for waterway only.

• EXW (Ex works): Seller is only responsible for making the goods available on the

seller’s premises and buyer bears the full risk from the factory to the destination.

• FCA (Free carrier): Seller is responsible for the delivery of goods to the

nominated carrier by the buyer, risk is transferred as soon as loading has taken

place.

• FAS (Free alongside ship): Seller is responsible for the delivery of the goods at

the quay alongside the ship, from this onwards risk lies with the buyer.

• FOB (Free on board): Seller is responsible for the delivery of the goods loaded on

board of the ship, risk is transferred as soon as the goods have been set down

inside the ship.

• CFR (Cost and freight): Seller covers cost, freight and duty paid to the main port

of destination. Risk is transferred as soon as the goods have been set down inside

the ship

• CIF (Cost, insurance and freight): Seller covers cost, insurance, freight and duty

paid to the main port of destination. Risk is transferred as soon as the goods have

been set down inside the ship.

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 • CPT (Carriage paid to): Seller delivers the goods to the carrier at agreed place of

delivery and pays for transport to the main destination. Risk is transferred at the

place of delivery, where seller pays the transport to the final destination.

• CIP (Carriage and insurance paid to): Seller delivers the goods to the carrier at

the agreed place of delivery and pays for transport and insurance to the main

destination. Risk is transferred at the place of delivery.

• DAT (Delivered at terminal): Seller delivers the goods unloaded at the specified

place in the agreed terminal, risk is transferred as soon as the goods have been

unloaded.

• DAP (Delivered at place): Seller delivers the goods to the agreed place and risk

is transferred as soon as the goods have been unloaded.

• DDP (Delivered duty paid): Seller is responsible for bringing the goods to the

destination, paying any duty and making the goods available to the buyer. Risk

is transferred as soon as the buyer has access to the goods.

In summary, it is possible to group the respective delivery and risk obligations by the

first letter of the abbreviations. So, we have one E term (EXW), three D terms (DAT,

DAP and DDP), three F terms (FCA, FAS and FOB) and four C terms (CPT, CIP, CFR

and CIF).

Next, we look more specifically at the individual Incoterms obligations.

Incoterms obligations

6.16 Each Incoterm has 10 sub-parts, dealing with different aspects of the delivery

process, thus specifying the buyer’s and seller’s obligations. The key contractual

obligations arising from the Incoterms sub-parts are the following:

• obligation to provide goods in conformity with contract (always the

seller’s obligation);

• payment of price as required in contract (always the buyer’s obligation);

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 • licences, authorities and formalities (the seller is usually responsible for

the import side, whereas the buyer is responsible for the export side); and

• contract of carriage and insurance (with significant differences across the

various Incoterms).

The two most important sub-parts of each Incoterm deal with (1) delivery and taking

delivery; and (2) transfer of risks. More specifically each Incoterm sets out what the

sellers must do to discharge their delivery duty and the buyers to accept delivery. Each

Incoterm also specifies the point of delivery and when risk for loss of or damage to

goods shifts from sellers to buyers. This means that if the goods are lost or damaged

enroute, the party that bears the risk bears the loss. It is crucial to understand that the

transfer of risk and the bearing of risk is a question of fact, not of responsibility or fault.

This means that it does not matter who is at fault for the loss of a cargo, the liability falls

on the party indicated by the applicable Incoterm. Then of course, the liable party can

try to recover the damage from the party at fault, but this process would essentially sit

outside the contract of carriage.

6.17 The Incoterms may sound complex, but in practice they are a clever and nimble

way to deal with the risks of poor or unfortunate trade. Hence, the crucial question to

understanding the express delivery terms set by Incoterms 2010 is: Who bears the risk?

Let’s try to get back on solid ground with a simple scenario as following.

Wei Lin in China and Sally in Australia sign a contract for the sale of 4000 square metres

of ceramic tiles. The two parties include EXW 2010 Incoterm in their contract from

Factory 1, in Foshan, Guangdong province in China. After a couple of months, Wei Lin

informs Sally that the goods are ready for pick up from her factory. That night there is a

gas explosion, which sparks a fire in Wei Lin’s factory. The fire destroys the pallets

containing the ceramic tiles ready to be shipped to Australia. The gas explosion is

caused by the gas company’s poor maintenance of public gas pipes that run adjacent to

16
the factory. Here we have our problem: the goods are destroyed after the contract was

signed, but before the goods were shipped. The key question then becomes: is Wei Lin

still required to supply ceramic tiles or is Sally required to pay for the destroyed goods?

How can you address this problem? First of all, you should consider whether Wei Lin

has fulfilled her delivery obligations or otherwise. Then you need to consider the

transfer in risk issue: in other words, has the risk in the goods passed from the seller

(Wei Lin) to the buyer (Sally)? The task of an international trade lawyer is to identify

risk and delivery under the relevant Incoterm and apply them to the facts. Only then

can you ascertain who bears the risk. Take a look at the relevant Incoterm risk and

delivery information above: who is going to be out of pocket in this basic scenario?

Default/implied delivery terms

6.18 By now it should be clear why most international trade transactions include

express delivery terms, using in the vast majority of cases one of the 11 Incoterms. But

let’s consider: What if the parties have not agreed on any delivery terms? This can get a bit

tricky, however if the CISG applies, we can use the default terms in the CISG. Of

particular relevance in this matter will be the following provisions:

• Article 53 CISG for the obligation of S to deliver and of B to accept goods;

• Articles 31-34 for the determination of the delivery point; and

• Articles 66-69 for the default rules on passing of risk.

On the other hand, if the CISG does not apply, then the provisions in the governing law

country will determine delivery and risk issues.

For instance, if an international contract has the most substantial connections to

Melbourne, Australia and the CISG does not apply, we would have to adopt the Goods

Act 1958 (Vic), in particular ss 23-25, which generically provide that delivery is complete

and the risk passes when ownership passes. But even then, it still remains to see when

17
ownership passes according to the default (or implied) delivery terms. This is indeed

what we address in the next sections.

Passage of ownership

6.19 In law the transfer of legal ownership of goods does not necessarily pass with

physical possession. For instance, I lend you my phone. Do you “own” it once you have

physical possession of it? Clearly not, unless we have properly performed a contract of

sale. Nevertheless, it is less straightforward to ascertain when ownership passes from

seller to buyer in an international contract for the sale of goods. Perhaps on delivery? Or

on possession? Or simply on payment? The first thing to do is to look at the contract: is

there an express term? For instance, there may be a reservation of title clause that says:

“Property does not pass until goods are paid for in full”. There you are, now we know

that, in this case, ownership only passes upon full payment, no less. On the other hand,

if there is no express term in the contract, can the CISG help? The answer is no, because

the CISG does not apply. In fact, if there is no express term in the contract, the question

of the passage of ownership will be determined by an implied term governed by default

provisions in domestic law. For example, in Melbourne, Australia we would apply the

Goods Act 1958 (Vic). In this case, the Victorian law will deem the property to pass when

the parties intend it to, as it is stated in ss 22-23 of the Goods Act. At this point we should

note that, in international contracts, the parties are usually “deemed” to intend the

property to pass when the goods are delivered, that is most often, when they are

handed over to a carrier at the port of departure, or even before.

18
Seller’s obligations under the CISG

6.20 We have just pointed out that if there is no express term in the contract, the

domestic law will apply. Thus, in the presence of express terms of delivery and risk,

there are many cases in which we can apply the CISG. In such case, we should ask:

What are the seller’s obligations under the CISG? First of all, we have Article 30, which

states that the seller has to deliver goods and hand over any documents of title.

Furthermore, Article 33 specifies the obligation for the seller to deliver goods on or by

the date fixed or determinable in the contract or within a reasonable period after the

conclusion of the contract. Most significantly, Article 35 states the overarching

obligation for the seller to deliver goods in conformity with the contract.

We need to say something more on Article 35, because it is not always straightforward

to determine the contractual conformity of the goods in question. In general, we can say

that goods are deemed conforming only when they are of the quantity, quality,

description and packaging as required by the contract, unless otherwise agreed. This

means that the goods do not conform, unless they are fit for ordinary purpose; or for the

purpose made expressly or impliedly known to the seller at the time of the conclusion

of the contract, unless the goods in question possess the qualities of the goods in the

sample, or the goods in question are packaged in a manner adequate to preserve and

protect the goods. It should be added that if the buyer was aware or “could not have

been unaware” of non-conformity when the contract was made, the seller is not liable.

For example, this is the case of buying seconds, which are goods that are below the

ordinary standard of production. The seller is liable for non-conformity that exists at the

time that the risk passes, even if the non-conformity is not apparent. For instance,

consider a scenario of the sale of ceramic tiles which are damaged by the inland carrier

prior to loading on board and the passing of risk. The seller is still liable for non-

conformity of the ceramic tiles. Similarly, the seller is liable also when the ceramic tiles

19
are damaged during the manufacture and the fault only becomes apparent after the

buyer receives and tests the goods. Furthermore, the seller is liable for any non-

conformity that arises after the risk passes if it is due to a breach of the seller’s

obligations. For instance, the ceramic tiles crack on voyage (that is, after the risk

transfers) due to poor packaging of goods by seller. Unfortunately, this is a very

common occurrence in the import-export industry. Finally, Articles 41 and 42 establish

that the seller has to deliver the goods free from any third party rights.

To sum up, under the CISG the buyer has to deliver the goods and hand over the

documents on time, in conformity with the contract and free from third party rights.

Next, we turn to the buyer’s obligations under the CISG.

Buyer’s obligations under the CISG

6.21 Remember that if there is no express term in the contract, the domestic law will

apply. Thus, in the presence of express terms of delivery and risk, there are many cases

in which we can apply the CISG. Among the main provisions, we have Article 53,

which establishes that the buyer must pay for goods and take delivery as agreed in the

contract and under the relevant provisions of the CISG. Then, Articles 54 and 55 state

that the buyer has to pay the price specified in the contract and at the time agreed. If no

price is agreed, then the buyer has to pay a price at which the goods would normally be

sold under comparable trading terms. If no time of payment is agreed, then the buyer

has to pay when the goods or documents controlling goods are placed at the buyer’s

disposal. On the other hand, Article 58 specifies that the buyer does not have to pay

until they have inspected the goods, unless otherwise agreed or procedures for

payment indicate otherwise. Furthermore, Article 38 says that the buyer must inspect

the goods in as short a period as practicable and where goods are non-conformant, the

buyer must give notice of non-conformity to the seller in reasonable time. More

20
specifically, according to Article 39, the buyer loses the right of action for breach of

contract if they do not inspect the goods and notify the seller of any non-conformity

within a reasonable period of time. To sum up, under the CISG the buyer has to pay the

price for and take delivery of the goods as agreed in the contract or otherwise implied,

but only after inspecting the goods, and if necessary to give notice of non-conformity of

the goods.

Examination and notice

6.22 Note that the buyer’s obligations described in Articles 38 and 39 are also called

“Examination & notice”. In brief, the notice that follows examination of the goods must

clearly specify the nature of non-conformity in a “reasonable” period of time. But then

we need to ask: What is a “reasonable” period of time? Of course, what is a reasonable

timeline can be determined only within the context of each transaction, and if there is a

dispute in this regard, an independent arbitrator will commonly resolve the issue, or, as

a last resort, a competent court of law. At any rate, the seller cannot rely on the buyer’s

breach of Articles 38 or 39 if they knew of the non-conformity when they delivered the

goods, as specified in Article 40. Moreover, the buyer may still be able to claim damages

if they can show a reasonable excuse as to why the goods were not inspected or the

notice was not provided in reasonable time. There is an American case, the Meat Packers

case (or technically, Chicago Prime v Northam) that well illustrates the application of

Articles 38, 39 and 40. Full details of this case are included in the Appendix for practice

purposes. At this stage, suffice to say that the Meat Packers case is particularly

significant because it clearly affirms that judicial decisions from other countries

interpreting a treaty term (in this case the CISG) are “entitled to considerable weight”.

21
Remedies under the CISG

6.23 The first issue that we tackled in this chapter was about the passage of ownership,

and thus we focused on the seller’s and buyer’s obligation under the CISG.

Now it’s time to turn to the overarching issue surrounding the contractual obligations,

which is to ask: What happens if the contract does not work out? If an international contract

for the sale of goods breaks, we need to look at applicable remedies and related

damages. In the international commercial context, the CISG provides a comprehensive

set of remedies. Nevertheless, the availability of remedies reflects a principal aim of the

CISG, which is “to preserve the contract”. In fact, just consider the transaction costs and

inconvenience of terminating a contract and of returning or replacing the affected

goods. Therefore, the available remedies depend on the nature and seriousness of the

breach, and the CISG provides for two tiers of remedies:

• First, avoiding the contract or demanding substitute goods is available only in

the occurrence of a serious breach, which we term as a “fundamental” breach.

In this respect, note that avoiding the contract is a remedy of last resort, which releases

the parties from their obligations under the contract. In other words, it dissolves the

contract.

• The second tier of remedies provides for corrective remedies and damages,

which are usually available for any breach that is deemed non-fundamental to

the contract.

Thus, the two tiers of remedies under the CISG pertain to: (1) a fundamental breach;

and (2) a non-fundamental breach.

6.24 In the first tier, fundamental breach, the remedies are essentially aimed at avoiding

the contract, as per Articles 49 and 64. But note that avoiding the contract is also

available for “anticipatory” fundamental breach (Articles 72 and 73), which means even

before the fundamental breach actually occurs, but it is highly likely that it will. On the

22
other hand, Article 46.2 allows the buyer to demand replacement goods or corrective

remedies as per a non-fundamental breach, or other damages as stated in Articles 74 to

77. At this point we need to specify what exactly makes a contractual breach

fundamental. According to Article 25 of the CISG, a breach is fundamental if it results in

such detriment to the other party as substantially to deprive them of what they are

entitled to expect under the contract. This is so, unless the party in breach did not

reasonably foresee such a result.

Let’s try to break down this definition and analyse how to establish fundamental breach

with the judge’s hat on. To do so, we need to test first the substantial deprivation of what

a party is entitled to expect under the contract. Secondly, the test is about the fact that

the party in breach did not reasonably foresee such a result. Hence, the seller’s defence will

be essentially a test of foreseeability, which traditionally relies on the legal fiction of the

reasonable person of the same kind in the same circumstances. To sum up, the legal test

to establish a fundamental breach first has to ascertain whether there is a substantial

deprivation, and only in the affirmative case will it conclusively determine the

foreseeability of the consequences of the breach.

In terms of substantial deprivation, the delivery of non-conforming goods will always

be a breach of contract, but when is it a fundamental breach? A fundamental breach

thus depends on the consequences of the breach, which indeed amounts to a substantial

deprivation of what the buyer was entitled to expect. The first test focuses on the degree

of detriment suffered by the injured party, as measured against what was agreed in the

contract. So, it is a case-by-case test. In the Appendix below you will find a number of

selected cases for practice purposes.

6.25 In the second tier of remedies under the CISG, non-fundamental breach, a party

cannot avoid the contract, but can only demand corrective remedies and related

damages. In particular, the seller can volunteer the replacement of goods (Article 46.3),

has the right to make up shortcomings of an early delivery (Article 37), can “complete”

23
specifications of an order (Article 65), and may make up or repair an order (Article 48).

On the other hand, the buyer can reduce the price (Article 50), can provide more time

(Articles 47 and 63), and can require the performance of the contract (Article 46.1).

Furthermore, either the seller or the buyer can “suspend” the contract in some

circumstances, as specified in Article 71, and demand damages as per Articles 74 to 77.

We noticed earlier that damages are available for both fundamental and non-

fundamental breach, in particular as Article 74 affirms that an injured party is entitled

to damages for the amount equal to a party’s loss, and this can include loss of profits. At

any rate, damages are limited to what is foreseen or foreseeable, and Articles 75 and 76

specifically provide for damages associated with additional costs of purchasing

replacement or reselling goods where the contract has been avoided. Finally, Article 77

requires the injured party to take measures to mitigate loss, such as to sell or preserve

goods.

Restitution of non-conforming goods

6.26 If the buyer avoids the contract or demands replacement goods where there is a

fundamental breach, it is consequent to ask: What happens to the non-conforming goods?

According to Article 82 of the CISG, the buyer must make restitution of non-conforming

goods. This means that the buyer loses the right to avoid the contract or demand

replacement goods if it is impossible to “make restitution” of the goods substantially in

the condition in which the goods were received. In other words, excess or damaged

goods must be preserved and then returned unless it is impossible to do so, and not

because of the buyer’s act or omission. For example, goods may perish due to

examination or may be used or sold before the non-conformity becomes apparent.

Furthermore, both parties have the duty to preserve the goods, regardless of who is in

breach. In particular, Article 86 says that the buyer must preserve the goods rejected for

24
non-conformity, whereas Article 85 specifies that the seller also has an obligation to

preserve the goods, for instance in cases where the buyer unduly delays the collection

of goods. Nonetheless, both parties can claim reasonable expenses for the preservation

of goods from the party in breach, as per Article 87. Finally, Article 88 provides that, if

goods are perishable, the party in possession must take reasonable steps to sell them

before it is too late.

Non-conforming goods and shortfall in delivery

6.27 Apart from the general test based on substantial deprivation and reasonable

foreseeability of consequences, other causes for avoiding an international contract for

the sale of goods are the non-conformity of goods and the shortfall in delivery. In this

respect, our question is: When do shortfall and non-conforming goods amount to a

fundamental breach? The key factors to consider for damaged or defective goods include:

• What is the purpose of the goods?

• Are the goods still sellable, and can they still be used?

• What is the nature of the goods?

• Were there any express stipulations in the contract?

• Is there acute economic loss?

Again, in practice there will be a case-by-case determination of whether the buyer can

avoid the contract altogether or merely ask for corrective remedies. In fact, even if the

goods are conforming, there may be a shortfall in delivery, and thus we need to ask:

When is a shortfall in delivery a fundamental breach? To answer this, first we need to

consider whether the goods are all of a “piece” or otherwise. Take for example furniture

sold in disassembled state, that is packaged in 25 crates and then the seller fails to send

all 25 crates. Or think of a sale of 1000 phones, with only 500 being delivered. Do these

shortfalls all amount to a fundamental breach? As usual, to find a definitive answer we

25
would need to consider other possible contractual terms, and then the specific

commercial context. However, the issue is not only about whether the goods are all of a

piece, as there is also the problem of what to make of the contract when only part of the

shipment does not conform. Article 51 of the CISG states that the buyer can only avoid

the contract in respect of the portion of goods that is missing or non-conforming. For

instance, the buyer ordered 1000 phones from the seller. Half of the phones are

damaged beyond repair due to the seller’s poor packaging. The buyer may avoid the

contract in respect of the non-conforming goods, yet the rest of the contract will

continue anyway.

Late delivery

6.28 We have been talking of non-conforming goods and shortfall in delivery, and now

it is time to ask: When is late delivery a fundamental breach? Late delivery is not usually a

fundamental breach, especially when no precise date is agreed by the parties, as it is in

the case of staggered (or spread-out) deliveries. However, if timely delivery is a special

interest of the buyer and it was foreseeable that late delivery would substantially

deprive the buyer of contractual benefits, then late delivery may constitute a

fundamental breach. In any case, the late delivery test is likely to ask the following

questions:

• Is time of the essence and expressed in the contract?

• Does time relate to the purpose or nature of the goods?

• Did the buyer have an obligation to provide the goods to a third party?

For instance, consider an order for Christmas trees with the last delivery date set on

December 15. If the trees arrive after Christmas, there is likely to be a fundamental

breach. In fact, Article 49 of the CISG gives the buyer a right to avoid the contract where

the seller fails to deliver within additional reasonable time provided by the buyer, and

26
the buyer has declared that they will not accept the goods thereafter. It sounds easy, but

in practice it can be very tricky to use late delivery as a fundamental breach.

6.29 Let’s briefly consider the facts and determinations of the Shoe Seller case, a 1995

German case.5 At a trade fair, an Italian seller contracted to sell shoes to a German

buyer. The seller delivered shoes later than agreed, and the buyer alleged that not all

shoes conformed to sample. The buyer claimed they were “defective in all makings”,

some were “stitched”, others “folded” and made from material causing “heavy

wrinkles”. The buyer relied on late delivery as a fundamental breach of contract for

avoiding the contract. The German Court decided in favour of the Italian seller, on the

basis that the late delivery did not constitute a fundamental breach, because time was

not of the essence of the contract, and anyway there was no special notice pursuant to

Article 49 of the CISG. In particular, the German Court stated that while delivery of

defective goods constitutes a breach of contract, it may or may not constitute a

fundamental breach. In fact, the buyer must clearly show how goods are defective and

must show how important the defect is to the buyer’s interest. This means that the

buyer’s intended use of the goods is now not possible. This case proves that the buyer

needed to show that the shoes could not be sold in order to establish fundamental

breach, and not to argue on late delivery.

Force majeure and impediment

6.30 In conclusion, if there is no way to show a fundamental breach due to non-

conforming goods, shortfall in delivery or late delivery, are there any other ways to

avoid the contract? Yes, there are, one of them is called force majeure, meaning “greater

force”. This is a last resort solution which requires proof that unforeseeable

5OLG Frankfurt 5 U15/93. See full details on the CISG Database of Pace Law School, at
<http://cisgw3.law.pace.edu/cases/940118g1.html>.

27
circumstances prevented a party from fulfilling the contract. Force majeure clauses are

often included in international contracts for the sale of goods, usually to the advantage

of the seller, especially when the buyer has a much smaller bargaining power. In

particular, a force majeure clause specifies what types of events will bring the contract

to an end and free the parties of their obligations under the contract. The most common

events include natural disasters, strikes, war, riots and governmental action. Force

majeure bears some similarity to the doctrine of frustration in common law, although it

usually extends it. To counterbalance possible abuses, however, courts are wary of

permitting powerful parties to abuse their position and will therefore interpret force

majeure clauses narrowly. This implies that courts are not likely to permit a seller to

avoid obligations under a contract due to their own negligence or wilful default.

6.31 Apart from force majeure clauses, another last resort for avoiding the contract is the

application of Article 79 of the CISG, which says that if a party can show that their

failure to perform was due to a reasonably unforeseeable impediment beyond their own

control, then the party is not liable for the failure to perform for the period during

which the impediment exists. At this point, we need to ask: What is an actionable

“impediment”? Can impediment be a war, strike, fire, legal change, volatility in

international markets, shortage of supply, or even a migraine? And besides, it still

remains to see what exactly it means that a party under impediment is not liable “for

the period during which the impediment exists”. Does it mean that Article 79 suspends

rather than terminates the obligations? Then what happens? A world war would likely

be an impediment, but should the contract be reinstated after the war? As a rule of

thumb, courts will generally interpret Article 79 narrowly, and no general rule can be

properly made, as there will be a case-by-case determination of impediment.

28
Chapter summary

6.32 This chapter explained how to work out the governing law of an international

contract for the sale of goods, focusing on what the CISG is and when it applies.

Subsequently the discussion moved on to the use of international delivery terms,

known as the Incoterms 2010, especially their operations as to when goods are delivered

and when the risk passes. Further, the chapter considered buyers’ and sellers’

obligations under the CISG, the remedies available to buyers and sellers under the

CISG, and the significance of fundamental and non-fundamental breach in the CISG

regime. It also looked at how fundamental breach can be established, as well as the

other ways to avoid an international contract for the sale of goods.

Appendix: Workshop activities

This section includes a legal problem-solving exercise based on two real cases, as well

as a list of other significant cases involving international sales disputes.

Legal problem-solving explained

Legal problem-solving6 (LPS) is:

▪ the analysis of a set of facts which trigger one or more legal issues; and

▪ the resolution of the issues, through the analysis and application of the relevant law

to the particular facts presented.

LPS models – MIRAT

▪ There are a number of LPS models all reflecting the five steps.

6Adapted from Michelle Sanson and Thalia Anthony, Connecting with Law (Oxford University Press, 3rd
ed, 2014).

29
 ▪ We are going to use the MIRAT approach which applies to each issue raised in a

legal problem, including:

1. Material fact;

2. Issues of law and policy;

3. Rule;

4. Arguments/application;

5. Tentative conclusion.

MIRAT – Questions to determine the material facts

As applicable to each research problem:

▪ WHAT happened, and what is the desired outcome?

▪ WHO was responsible for the event, and to whom did it happen?

▪ WHEN did the event happen?

▪ WHERE did the event happen?

▪ WHY did the event happen?

▪ HOW did the event happen?

MIRAT – Legal issues

▪ Need not be overly specific at this stage.

▪ The legal issues should be stated in the form of a question.

▪ It is often useful to approach the framing of the issues in terms of possible rights

and liabilities.

The MIRAT process – Rule

The rules (also called authoritative law) may include:

▪ precedent (statute or case law);

▪ legal principle; and

30
 ▪ policy.

The MIRAT process – From arguments to applied conclusions

Effective legal reasoning is key to:

▪ apply the law to the facts of the matter;

▪ examine the issues;

▪ find out the arguments and counter-arguments; and

▪ provide a conclusion.

Case 1

Date: 19 January 2001

Country: Germany

Number: 4 O 369/99

Court: Landesgericht Flensburg

Parties: Unknown

Source: Unilex case 798

Summary

A German seller and a Danish buyer concluded a contract concerning the sale of live

sheep delivered for slaughter. The sheep were delivered on time and were examined by

the buyer the day after their nightly delivery. Four days after the delivery the buyer

gave notice to the seller claiming lack of conformity, as he did not accept the condition

of the sheep and that he subsequently refused to pay the purchase price. The seller

commenced legal actions claiming payment of the full purchase price due according to

the contract with interest.

The buyer submitted that he was not bound by the contract as he had given the seller

timely notice of the lack of conformity of the sheep. The buyer argued that upon

31
examination of the sheep it had made a phone call to seller in which the buyer had

stated that it did not agree with the quality of the sheep. Furthermore, the buyer

submitted that the seller had lost his right to rely on Article 38 and 39 CISG as the seller

knew or could not have been unaware of the lack of conformity (Article 40 CISG).

Case 2

Date: 21 May 2004

Country: United States

Number: N/A

Court: US District Court, North District, Illinois, East Div

Parties: Chicago Prime Packers Inc v Northam Food Trading Co

Source: Unilex case 974

Summary

A US company (the seller) purchased from another US company 500 pounds of frozen

pork ribs which it immediately afterward resold to a Canadian meat wholesaler (the

buyer). The buyer, which through its agent had picked up the goods at the first

supplier’s factory, entrusted a US meat processor with the task of processing them.

When receiving the goods, the US meat processor stated that they were in good

condition with the exception of 21 boxes that had holes gouged in them. However, only

nine days later when beginning to process the ribs, the meat processor noticed their

poor condition and contacted both the buyer and the US Department of Agriculture

(USDA) requesting the latter to have the goods inspected. After a USDA inspector

ordered first to stop processing the ribs and finally to destroy them altogether due to

their poor condition, the buyer informed the seller that it was not willing to pay the

price for the goods. The seller, which had already paid its own supplier for the same

goods, moved for summary judgment against the buyer for the payment of the price,

32
arguing that the buyer had not given timely notice of the defects, yet the motion was

dismissed.7 At this point the seller brought a suit against the buyer for breach of

contract.

As to the applicable law, the Court held that the transaction was governed by CISG. As

to the merits of the case, the Court rejected the buyer’s objection that the goods were

spoiled at the time of transfer from the seller to the buyer so that it was under no duty

to pay the price. According to the Court, the buyer first of all failed to prove that the

goods were not conforming at the time of transfer. Moreover even if the goods had been

spoiled at the time of transfer, the buyer failed to prove both that it had examined the

goods or caused them to be examined “within as short a period as is practicable under

the circumstances”, as required under Article 38 CISG, and that it had given notice to

the seller of the alleged defects of the goods “within reasonable time after it ought to

have discovered the alleged defects” as required under Article 39 CISG. According to

the Court, the objective of CISG in requiring inspection in as short a period of time as

practicable, and notice promptly thereafter, is to avoid controversies where because of

the passage of time the condition of the goods at the time of transfer can no longer be

reliably established. Yet when that happens, the burden falls on the buyer who had the

opportunity to inspect the goods but failed to do so.

In the case at hand, the Court found that the buyer could have and should have

discovered the bad condition of the goods much earlier than it actually had, if only it

had opened some of the boxes containing the frozen ribs. However, no such inspection

had in fact taken place and the defects were discovered only nine days after delivery

when the processing of the ribs began. Consequently, also the notice of non-conformity,

though given to the seller immediately after discovery of the defects, under the

circumstances was no longer timely.

7
See US District Court, North District, Illinois, East Div 01 C 4447 of 28 May 2003, reported in Unilex.

33
As to the seller’s claim for damages, the Court held that according to Article 74 CISG

the seller should be placed in as good a position as if the buyer had properly performed

the contract, and that according to Article 78 CISG the seller was also entitled to

prejudgment interest. Recalling that the latter provision does not specify the rate of

interest to be applied, the Court pointed out that the interest issue under CISG has been

the subject of great controversy and that a variety of criteria has been proposed ranging

from the law applicable to the contract in the absence of CISG, the law of the creditor’s

place of business, the law of payment currency, trade usages observed in international

sale, to general principles of full compensation. However, since there is no single

approach used by all courts and the parties have failed to address the interest issue or

provide information necessary “to customize” a rate, the Court decided to award

interest “according to the principles used by federal courts in determining choice of law

issues”, ie the choice of law rules of the forum which in the case at hand led to the

application of the statutory interest rate of the forum State (Illinois) which is 5 per cent.

After citing statements of other US courts according to which “because there is virtually

no American case-law under the CISG, courts look to its language and to the general

principles upon which it is based in interpreting its provisions” and that “in

interpreting the Convention case law interpreting analogous provisions of Article 2 of

the Uniform Commercial Code may also inform the court where the language of the

relevant CISG provisions tracks that of the UCC” (without however UCC case law

being “per se applicable”), the Court went even further by pointing out that “in the

light of the Convention’s directive to observe the CISG’s international character and the

need to promote uniformity in its application, this court has looked to foreign case-law

for guidance in interpreting the relevant provisions of the CISG in this case” and that

“although foreign case-law is not binding on this court, it is nonetheless instructive in

deciding the issues presented here”. Consequently, in its reasoning, the Court

repeatedly referred to foreign decisions dealing with similar cases and addressing the

34
same or similar issues at stake, and since most of these decisions have been rendered by

German, Dutch or Italian courts which are not translated into English and therefore

could not be cited directly, the Court declared that it relied “upon the detailed abstracts

of those decisions provided by UNILEX, an ‘intelligent database’ of international case

law on the CISG”.

Practice questions

Your task is to research more information and documentation on the selected case, and

use relevant material, including other similar cases, to answer the following five

questions:

Question 1

What are the key facts, legal issues, rules and outcomes of the case? Make sure to

critically discuss the actual resolution of this dispute. Would you have reached a

different conclusion?

Question 2

In relation to the case, what would you have argued and negotiated on behalf of the

plaintiff to avoid a dispute in court? Make sure to recommend relevant business

strategies in relation to international sales, and other relevant issues.

Question 3

In relation to the case, what would you have argued and negotiated on behalf of the

defendant to avoid a dispute in court? Make sure to recommend relevant business

strategies in relation to international sales, and other relevant issues.

35
Question 4

How would you advise each involved party on the next practical steps to take in this

matter to minimise risks and maximise their business outcomes?

Question 5

What in your opinion are the long‐term implications of the outcome of this dispute for

the international trading system?

Other significant cases

You can repeat the above legal problem-solving exercise with the following cases that

are particularly significant because of their implications for ongoing disputes in the

global trading system. These cases are sourced from the Case Law on UNCITRAL Texts

(CLOUT) database.

• CLOUT case 308, Issue 28: Federal Court of Australia, SG 3076 of 1993 FED

No 275/95 – Roder Zelt-und Hallenkonstruktionen GmbH v Rosedown Park Pty Ltd

and Reginald R Eustace.

• CLOUT case 987, Issue 99: China International Economic and Trade

Arbitration Commission (CIETAC) 22 March 2001 (Mung bean case)

[A/CN.9/SER.C/ABSTRACTS/99].

• CLOUT case 574, Issue 51: US [Federal] District Court for the Northern

District of Illinois, 01 CV 5938, Ajax Tool Works Inc v Can Eng Manufacturing

Ltd.

36
More cases can be found in the current edition of the UNCITRAL Digest of Case

Law on the United Nations Convention on Contracts for the International Sale of

Goods.

37