CISG Advisory Council Opinion No. 4

Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG)

3. Article 3(2) CISG: contracts for the supply of labour and other services

3.1. A seller often has to perform services ancillary to delivery such as packaging, dispatching the goods, concluding contracts with carriers, etc. These services do not alter the qualification of the contractual relations between the parties as a sale. However, frequently the seller undertakes more, i.e. services that could also be the subject of an independent contract such as the installation of the assembly line sold,[28] installation of modular wall partitions,[27] assembly of the parts of a plant to manufacture windows,[28] training of the employees of the buyer in the operating of a machine sold, marketing of the goods to be produced by a plant sold, etc. If such services are undertaken in the same contract that contains the obligation to deliver goods and transfer property, the question arises whether such a mixed contract is governed by the Convention. Article 3(2) CISG is meant to solve this question. It excludes from the scope of the Convention contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services. Therefore, a comparison between the obligations related to the goods and the obligations of labour or services is needed in order to see whether the Convention applies. The Convention presupposes a single unified contract, but it has to be analyzed first whether the different obligations are indeed part of a single, albeit mixed contract. This is an issue of contract interpretation. If there is one contract for the supply of goods and services, the Convention applies to the contract as a whole (Article 3(2) CISG).[29] However, if the parties intended to conclude two separate contracts, the Convention would be applicable to the sales contract, so long as the other requirements for its application were met.

3.2. There are several issues of interpretation in regard to Article 3(2) CISG. The first one is the interpretation of the words "preponderant part" ("principal", "prépondérante"). The interpretation is difficult due to three factors: the standard to be applied ( economic value or essential criterion); the mixing up of the interpretation of the words "preponderant" and "substantial" by legal writers; and the quantification in percentages.

3.3. Although, there are certain doubts as to the application of the economic value criterion since a proposal from the UK, that was finally withdrawn, tried to substitute the term "preponderant" for "major part in value",[30] the economic value approach is correct. The UK proposal did not find support among the delegates because of the change of the word "preponderant" for "major part",[31] not because it adopted the economic value criterion.[32] An "economic value" [33] criterion prevails, and the relevant time to assess the value would be the conclusion of the contract. The essential criterion should only be considered where the economic value is impossible or inappropriate to apply taking into account the circumstances of the case.

3.4. The word "preponderant" should not be quantified by predetermined percentages of values but on the basis of an overall assessment. In its interpretation, as well as in the interpretation of the parties' agreements, the intention of the parties as expressed in the documents and the formation of the contract should be taken into account as well. Among the relevant factors to be considered by courts and arbitral tribunals are: the denomination and entire content of the contract,[34] the structure of the price,[35] and the weight given by the parties to the different obligations under the contract.[36] If, however, a fixed percentage of value is used, a percentage of 50% or below should be disregarded in order to exclude the Convention. Furthermore, a percentage slightly above 50% would not be generally decisive to exclude the CISG. The value of the services rendered ought to be preponderant.

3.5. Whether the so-called turnkey contract (contratos llave en mano, clé en main, Lieferverträge mit Montagverplichtung) falls under Article 3(2) CISG is highly controversial. Although some authors have stated that Article 3(2) was introduced in order to exclude those types of contracts from the Convention,[37] a case-by-case analysis is needed, and thus, disregarding the denomination, each situation would require an special examination to see whether or not the test of Article 3(2) CISG is satisfied.[38]

4. The relationship between paragraphs (1) and (2) CISG

4.1. Paragraphs (1) and (2) of Article 3 CISG govern different matters. A relationship between them might be derived from the use of the singular of the word "obligation" in some of the authentic texts of the Convention. The French text and the Arabic text use the singular, while the other official languages, except for the Chinese text which is linguistically neutral on this point, use the plural form. The impact of the use of the word "obligation" in singular has clear implications in the interpretation of the text. The singular might invite an interpretation that labour and other services have to be compared instead of labour and services on the one hand and furnishing of goods on the other hand. Or even worse, it might be that the use of the singular might create a relationship between paragraphs (1) and (2) of Article 3 CISG in the sense that the work obligation in manufacturing the goods would be compared with the delivery obligations. The intention of the drafters was to refer to the plural form, and therefore the use of the singular should be rejected.[39]

4.2. Also an incorrect relationship has been created by legal writers and case law [40] in contracts for goods to be manufactured or produced by the seller: the weight of the interpretation is on the term "materials" and not on the obligation of manufacturing the goods. However, the process of manufacturing or producing the goods requires some kind of work/labour obligations that might be and has been wrongfully included in the analysis of paragraph (2) of Article 3 CISG.[41] Some cases have also drawn a link between paragraph (1) and paragraph (2) of Article 3 CISG on the basis of the distinction between standard goods and custom-made goods.[42] If the goods are standard, no activity of production is made by the seller and therefore there is no performance of services or work.[43] However, such a distinction is not adopted by the Convention.

4.3. The work, labour or other services obligations ought to be considered as part of the obligations to manufacture or produce the goods referred to in Article 3(1) CISG. This position is confirmed by scholars [44] and the majority of the case law.[45] However, when interpreting a situation in which there is no work or services obligations involved in the manufacture or production of the goods (Article 3(1) CISG), the services prior to, concurrent with and after delivery of the goods would be analyzed under Article 3(2) CISG.

4.4. Finally, as it has been already pointed out,[46] an autonomous interpretation of paragraphs (1) and (2) of Article 3 CISG is advisable. However, it might be that in complex transactions there may be some reciprocal
influence in their interpretation and application. In those situations, the transaction as a whole should be analyzed taking into account the "pro Convention" principle. 

FOOTNOTES

27. Cour of Appeal of Lugano, 29 October 2003 (Switzerland) stating that the installation must be an optional service (art. 3(2) CISG).

28. OLG München, 3 December 1999.

29. In this situation, the legal remedies of the CISG apply to the breach of the service obligations with the necessary adaptations (Art. 7(2)), see further: Peter SCHLECHTRIEM, Interpretation, gap-filling and further development of the UN Sales Convention, May 2004, available online at http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem6.html  and Rb Hasselt, 4 February 2004 (Belgium), stating that rules on notice in the CISG apply to the services part of the contract. See also Cour of Appeal of Lugano, 29 October 2003 (Switzerland) stating that the CISG is applicable in a comprehensive manner to a contract for the delivering and installation of goods.

30. A/CONF.97/C.1/L.26, p. 84; also in HONNOLD, Documentary History, p. 656.

31. It is interesting that the Council of Ministers of the Organization for the Harmonization of Business Law In Africa (OHADA) aproved on 17th April 1997, entered into force on 1st January 1998, a Uniform Act relating to General Commercial Law. Book V (Commercial Sale) which follows very closely the CISG regime, has adopted the standard of “major part” for the English text. Article 204, which is counterpart of Article 3.2 CISG, states that "The provisions of this Book shall not apply to contracts in which the major part of the obligations of the party that delivers the goods shall be the supply of manpower or other services". The French version uses the words “part preponderante”. The Act does not reflect a provision similar to Article 3(1) CISG. It has to be noted that OHADA texts are written in French and later translated into English.

32. A/CONF.97/C.1/SR.2, p. 242; also in HONNOLD, Documentary History, p. 463. But see the intervention of Prof. Farnsworth (USA).

33. In the case law: LG Mainz, 26 November 1998 (Germany), compares the value of the crepe-cylinder with the value of the post-delivery services; OLG München, 3 December 1999 (Germany): "In the present case, the value of the agreed services for several mechanics for the period of six weeks merely constitutes a small part of the total costs for the plant of DM 1,245,000.00"; ICC 7153/1992, in which, according to Hascher, the conclusion of the Arbitral Tribunal that the contract was governed by the Convention (Art. 3(2)) was confirmed by an invoice where the price paid for the assembly of the material was of a completely secondary order of magnitude compared to that of the price of the materials (Dominique HASCHER, ICC 7153/1992. JDI, 1992, nº 4, pp. 1005-1010); Cour d´appel de Grenoble, Chambre Commerciale, 26 April 1995 (France): Art. 3(2) CISG was applicable to a sale of a warehouse in which also there was an obligation of dismantling and delivery. The price paid for the contract was 500,000 French francs, with 381,200 francs allocated to the warehouse and 118,800 francs for the dismantling and delivery); KG Bern-Laupen, 29 January 1999 (Switzerland), although wrongly comparing the cost of the materials with the manufacturing of the goods, the value of the manufacture of the goods amounted to 56.25% of the total price (400,000 French francs); KG Zug, 25 February 1999 (Switzerland) in a contract in which the seller was to provide the construction material for a roof and also its installation. The tribunal compared the labour costs with the supply costs and held that the former were not substantially higher as compared with the latter; Arbitration Award, 30 May 2000 (356/1999) (Russia). The Arbitral Tribunal considered the CISG applicable (Art. 3(2)), although the tribunal referred to Art. 3(1)) to a contract of shipment of equipment and some post-delivery services since the price of the equipment to be delivered amounted to more than 50% of the entire price of the contract; HG Zürich, 17 February 2000 (Switzerland), although it does not cite Article 3(2) CISG, the court makes a comparison of the value of the services provided by the seller; and LG München, 16 November 2000 (Germany): the contract was for the delivery and installation of pizzeria fittings into the buyer`s restaurant-facilities. The tribunal considered it to be a contract of sale governed by the Convention (Art. 3(2) CISG). After interpreting the contract and the fact that the price was unitary, e.g., no separation fee for the service, the tribunal held that: "In view of the considerable amount and value of the objects, which can be gathered from the individual prices, the delivery of goods does not diminish against the performed works, even if a longer period of time is required for the installation".

34. See ICC 7153/1992. The tribunal held that a contract for the furnishing and assembly of materials for a hotel was governed by the CISG, since the contract made it very clear that it was a sales contract.

35. See LG München, 16 November 2000 (Germany): the contract was for the delivery and installation of pizzeria fittings into the buyer`s restaurant-facilities. The tribunal stated that the contract was governed by the CISG: "According to the written contract, the price for the "entire delivery" was determined by the addition of the individual prices for individual Articles. The "construction", that is, the installation of the fittings, was included in the overall price, as was the shipping; a service fee was not invoiced. This indicates that the preponderant part of the seller`s obligation was the delivery of the fitting Articles and not the work rendered during the installation".

36. This was precisely the holding of the LG Mainz 26 November 1998 (Germany) in interpreting "preponderant part" under Art. 3(2) CISG. In the case, the price of the production/delivery/and post-services of a crepe-cylinder was a unitary price and the court found it impossible to ascertain the value of the seller`s obligations under the contract. Therefore, the tribunal took into account both the contractual documents and the circumstances of the formation of the contract in order to ascertain whether the parties saw the preponderant part of the seller`s obligation in the delivery of the crepe-cylinder or in the services accompanying the delivery. In this regard, the tribunal pointed out that the production and delivery obligations were very detailed in the contract as opposed to the post-services obligations.
See also: OLG München, 3 December 1999 (Germany): "Additionaly, the particular interest that the purchasing party place on an obligation, e.g., the characteristic obligation can be decisive (Herber, note 5 on Art. 3 CISG; Staudinger/Magnus, BGB, 13th ed., note 21 on Art. 3 CISG)". And Corte di Cassazione, 9 June 1995 (Italy), considering "the essential aim of the contract and its meaning that, relative to it, the delivery and contribution of doing assume, considering the result the parties wanted to accomplish".

37. SCHLECHTRIEM/Herber, Art. 3, nº 8.

38. In the case law, HG Zürich, 9 July 2002 (Germany) does seem to automatically exclude the Convention in the presence of a turnkey contract. In the case, the seller had the obligation to plan, deliver, assemble, supervise the assembly, and put into operation a complete plant for the breaking down and separation of food-cardboard packaging. The tribunal regarded this as a turnkey contract that was not governed by the Convention (Art. 3(2)): "It goes without saying that the supply of labour for the assembly, supervision of the assembly and the putting into operation of the plant plays a very important role in such a project. Oftentimes, the functioning, respectively the correct adjustment of the various plant parts and their coordination with each other can only be undertaken when the plant is already effectively in operation (...).Accordingly, the assembly, adaptation, instruction and similar works constitute a considerable part of the contractual performance. In accordance with scholarly opinion, the court therefore assumes that the CISG is not supposed to apply to turnkey contracts, which do not so much provide for an exchange of goods against payment, but rather for a network of mutual duties to collaborate with and assist the other part (…)".

39. The use of the singular is also seen in the French version of Art. 4.2 of the Hague Convention on the Law Applicable to International Sale of Goods, 1986. Note, however, that the French text of the 1974 Limitation Convention on the International Sale of Goods (Art. 6(1)) uses the plural. See, among the scholars: Peter SCHLECHTRIEM, Internationales Kaufrecht, Mohr, Siebeck, 2003, pp. 21-22, footnote 39.

40. For example, as shown before, the discussion of what is substantial part is wrongfully mixed with the discussion of what is preponderant part.

41. ADAME, p. 51, states that paragraph (2) may be applied to the situations referred to in paragraph (1) of Article 3 CISG. This has been done by LG München, 16 November 2000 (Germany): the contract was for the delivery and installation of pizzeria fittings into the buyer`s restaurant facilities, the court analyzed the manufacture of the fittings as part of the seller`s obligations under Art. 3(2) CISG; OGH, 27 October 1994 (Austria) in a contract for manufacturing brushes and brooms with raw materials provided by the buyer, the CISG was held inapplicable on the grounds that the buyer supplied a substantial part (Art. 3(1)) and that the processing of the raw materials was the main obligation of the seller (Art. 3(2)); and Kreisgericht Bern-Laupen, 29 January 1999 (Switzerland), where the tribunal did not consider the CISG applicable on the grounds that the manufacturing of the machine was the characteristic element of the contract (Art. 3(2) CISG), e.g., the interest of the buyer was mainly in the production of the machine.
It seems to be also the position of HG Kanton Aargau, 5 November 2002 (Switzerland), in which the CISG was considered to be applicable on the basis of Art. 3(1) CISG in a contract for the production, labelling, positioning, service and removal of three inflatable triumphal archs; the court stated that the substantial subject matter of the contract was the production of the goods.

42. This approach has been wrongfully followed by some cases, particularly, from Germany, when considering the application of the Convention to software contracts. Although this Opinion does not deal with software contracts, the cases serve as an illustration of the different treatment accorded standard goods and custom-made goods.
- For cases considering that standard software is governed by the CISG, but not custom-made software, see: OLG Köln, 16 October 1992 (Germany); OLG Köln, 26 August 1994 (Germany); and LG München, 8 February 1995 (Germany).
- On the other hand, HG Zürich, 17 February 2000 (Switzerland): considered the sale of software as well as the joint purchase of software and hardware as a sale of goods within the CISG, citing Articles 1, 3(1), and 51.

43. See LG München, 16 November 2000 (Germany): the contract was for the delivery and installation of pizzeria fittings into the buyer`s restaurant facilities. The court stated that: "It follows that the fitting objects were not designed by the (seller), but that they were standard goods which were only adjusted in their measurements to the customer`s requirements and the conditions of the restaurant facilities. Consequently, the production of the objects also did not constitute a performance of works or services, which is in the fore in contrast to the delivery of goods". In OLG München, 3 December 1999 (Germany) the tribunal, when analyzing the term "substantial part", considered relevant the fact that the plant to be produced was of a standard model.

44. Contracts that require production, assembly, and delivery of a machine are governed by Article 3(1) CISG. See, among others, HONNOLD, Uniform Law, nº 60.1, footnote nº 4: "As a result of the basic rule of Art. 3(1), labor costs in manufacturing the machinery would be irrelevant; such costs are not the "supply of labour or other services" under Art. 3(2)").
The solution is logical because otherwise it might be that the contract is considered to be governed by the Convention by virtue of Art. 3(1) CISG, but excluded applying paragraph (2).

45. ICC 7660/1994: A contract for the production, delivery, and installation of a complete automatic assembly line for batteries is governed by Art. 3(1) CISG; Cour d`appel de Paris, 14 June 2001 (France), in which the parties agreed to the manufacture of 128 decorated crystal panels to be installed in the wall of a hotel in Egypt. The tribunal held that the contract was not a contract d`entreprise, as stated by the Court of First Instance, but a contract of sale. The tribunal stated that Art. 3(2) CISG did not apply since the obligation of the work done for the production of the crystal panels cannot be considered as a work or service obligation in the sense of that provision (JDI, 2002, nº 2, pp. 483 et seq., with note of Claude Witz, who also favors the approach of the court). The decision went into appeal to the Supreme Court that did not mention Art. 3 CISG (Cour de Cassation, 24 September 2003 (France)). See also: HG Zürich, 8 April 1999 (Switzerland); LG Mainz, 26 November 1998 (Germany); OLG München, 3 December 1999 (Germany); St. Gallen, Gerichtskommission Oberrheintal, 30 June 1995 (Switzerland) in reviewing a contract for the delivery and installation of four sliding gates to be used for the construction of two halls, held that the manufacture of the doors was within paragraph (1) of Art. 3, and that the installation was in paragraph (2); Tribunal de commerce de Namur, 15 January 2002 (Belgium), in a contract of sale of a "processing center" where the parties agreed to the construction of the machine in the seller`s workshops; provisional receipt; the dissembling and the transport of the parts in the establishment of the buyer; the assembling of the machine and the putting in service and the final receipt. The Court considered the contract within Art. 3(1) and did not discuss the application of Art. 3(2) CISG; and KG Schaffhausen, 25 February 2002 (Switzerland), although the Court did not refer to Art. 3(2) CISG, it considered the Convention applicable because the services (installation, transport) were of subsidiary importance as compared with the obligation to deliver the goods (four drilling apparatus items, three high-pressure pumps, two mixing machines and several replacement parts).

46. See, supra 1.2. 

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