Jonas Stüssi / Yasemin Varel02.10.2017

Attention! Vienna Sales Convention

This article is part of our publication «Paragraph» from July 2017. Read the full «Paragraph» article

Introduction
Today, in the case of cross-border trade, contracting parties versed in business typically stipulate which national law governs the legal relationship between the parties. Nonetheless, within the scope of their choice of law election, the parties regularly fail to more specifically state which national laws and treaties are intended to be covered or excluded by this choice of law. The parties are then under the impression that they are within the protection of the national code of obligations that they are familiar with. They overlook in this regard, however, that by choosing to apply a country’s law, they may, depending on the circumstances, be automatically making their legal relationship subject to the Vienna Sales Convention and thereby derogating away the code of obligations that they are familiar with and that they actually intended to have apply. If disputes subsequently arise between the contracting parties, the dispute will be adjudged not under the national code of obligations but, instead, be adjudged under the Vienna Sales Convention. This can decisively worsen or improve the legal position of the buyer or of the seller versus that under the national law that the parties thought they had chosen. This article is intended to provide a high-level overview of the Vienna Sales Convention.

1. What is the Vienna Sales Convention?
The Vienna Sales Convention—officially, the “United Nations Convention on Contracts for the International Sale of Goods” or, in short, “CISG”—is an international treaty on the determinative law governing the international sale of goods. It was concluded on 11 April 1980 in Vienna. In the meantime, 85 countries—including Switzerland and most Western trading nations—have ratified the CISG and thereby declared the CISG to constitute part of their national law, such that the Vienna Sales Convention has become one of the most important State treaties. It is intended to harmonize international laws in the cross-border sale of goods. In contrast to the Swiss Federal Private International Law Act, the Vienna Sales Convention does not govern which country’s law applies to a particular legal relationship. Instead, the Vienna Sales Convention sets out provisions that directly govern the rights and obligations of the contracting parties and that, in so doing, directly replace, in whole or in part, provisions of national law such as, for example, the provisions of the Swiss Code of Obligations (“CO”).

2. Scope of application of the Vienna Sales Convention
The Vienna Sales Convention applies to contracts for the international sale of goods if the seller and the buyer have their places of business or their habitual residences in different Contracting States. Similarly, the Vienna Sales Convention applies to contracts for the international sale of goods if the rules of private international law of the court or of its State that one of the parties calls upon requires the application of the laws of a different State that has ratified the Vienna Sales Convention. Consequently, the Vienna Sales Convention can apply even if both parties, only one party or neither of the parties has its place of business in a Contracting State.

If, for example, a seller domiciled in Liechtenstein and a buyer domiciled in India declare that Swiss law applies to an agreement, due to the choice of Swiss law, they have automatically also declared the Vienna Sales Convention to apply to the contractual relationship. This applies even though neither Liechtenstein nor India has ratified the Vienne Sales Convention and even though the Contracting Parties are not domiciled in a Contracting State of the Vienna Sales Convention.

3. Automatic Apllication
Thus, if international private law or a choice of law agreed upon by the parties means that Swiss law governs the legal relationship in question, the Vienna Sales Convention is automatically included as part of Swiss law and therefore applies as the special law for international sales contracts. For this reason, the choice of national law, such as, for example, “German law” or “Swiss law”, does not result in the exclusion of the Vienna Sales Convention but instead leads to its inclusion.

If a machine manufacturer with its place of business in India, for example, sells a machine to a company with its place of business in Switzerland and the parties validly agree on a choice of “Swiss law” to govern the contract, the rights and obligations of the parties will be determined under the Vienna Sales Convention to the extent they are not specified in the contract. Because the choice of Swiss law automatically also includes the Vienna Sales Convention. This is the case (as seen above) even if India has not ratified the Vienna Sales Convention.

4. Scope of application of the Vienna Sales Convention
The Vienna Sales Convention covers sales contracts and supply contracts in an international context only to the extent that the contract in question involves moveable goods. It does not apply to consumer purchases, i.e., to the sale of goods for personal use. On the other hand, it is irrelevant whether the goods already exist or must still be manufactured. The Vienna Sales Convention also does not apply in the following areas: sales by auctions, sales by execution, sales of securities or means of payment, sales of seagoing vessels and aircraft, and the sale of electricity.

5. Regulatory Area
The Vienna Sales Convention does not govern crossborder sales contracts on a comprehensive basis. It does not cover important legal issues that arise in the case of sales contracts: no rules exist, for example, with respect to the period of limitation, the validity of the contract, the transfer of property in the goods and product liability for personal injuries. Unless the parties have governed these topics by way of contract, the gaps in rules will be closed by the national law that applies to the contract on a secondary basis.

6. Optional Nature and Exclusion
The Vienna Sales Convention is optional in nature. The parties may restructure the provisions of the Vienna Sales Convention or exclude them, in whole or in part. To exclude the Vienna Sales Convention in its entirety, or even just exclude it in part, what is needed is an unambiguous expression of the actual intent of the parties. In the past, the courts found that an exclusion was intended when the parties expressly declared the “Swiss Code of Obligations” to be applicable (this, in contrast to when the parties declare “Swiss law” to apply). Nonetheless, it is recommendable to explicitly exclude the Vienna Sales Convention if this is what is intended. The burden of proof with respect to the exclusion of the Vienna Sales Convention is borne by the party who is invoking the exclusion.

7. Obligations of the Seller under the Vienna Sales Convention
The seller is under an obligation pursuant to the contract to deliver goods to the buyer that are in conformity with the quantity, quality and description required by the contract and that are contained or packaged in the manner required by the contract. Further, the seller is under an obligation to hand over to the seller all documents relating to the goods and to transfer the property in the goods to the seller (Art. 30 of the CISG). The goods must be free of any rights or claims of a third party (Art. 42 of the CISG).

The conformity of the delivered goods is primarily determined based on the contract. If the parties have not specified the characteristics of the goods by way of contract, Article 35 subparagraph 2 of the Vienna Sales Convention CISG sets out certain objective minimum standards with respect to the quality of the goods. According to this provision, the goods and the packaging conform with the contract only:

  1. If the goods are fit for the purposes for which goods of the same description would ordinarily be used;
  2. If the goods are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract;
  3. If the goods possess the qualities of goods that the seller has held out to the buyer as a sample or model;
  4. If the goods are contained or packaged in the manner usual for such goods or where there is no such manner, in a manner adequate to preserve and protect the goods.

8. Obligations of the Buyer under the Vienna Sales Convention
The obligations of the buyer are governed by Articles 53- 60 of the CISG. The buyer is essentially under an obligation as required by the contract and, on a secondary basis, by the Vienna Sales Convention, to pay the purchase price and accept delivery of the goods and, accordingly, also carry out any necessary acts of cooperation.

9. Legal Remedies of the Buyer in the Event of a Breach by the Seller
In contrast to the Swiss Code of Obligations, the Vienna Sales Convention does not draw any distinction between non-performance (failure to provide the performance owed), default (delay in performance) and breach of contract (defective performance), but instead proceeds from the assumption of a uniform breach of contract situation with strict liability (without fault). In Article 25 of the CISG, the Vienna Sales Convention distinguishes between a fundamental and non-fundamental breach of contract.

A breach of contract is fundamental if it results for the other party in such detriment as to substantially deprive him of what he would have been entitled to expect under the contract. Whereas a “simple breach of contract” entitles the party claiming a breach, in particular, to damages and/or reduction in the purchase price, a “fundamental breach of contract” can give rise to a claim for avoidance of the contract or the delivery of substitute goods.

In the event of a breach of contract, the buyer has available to him, in particular, the following remedies (Art. 45 et seq. of the CISG):

  1. Subsequent repair
    In contrast to the Swiss Code of Obligations, the Vienna Sales Convention provides for a claim to subsequent repair on the part of the buyer and a right to subsequent repair on the part of the seller, unless this is unreasonable having regard to all the circumstances.
  2. Reduction in price
    If the goods do not conform with the contract, the buyer may reduce the purchase price, regardless of whether or not the purchase price has been paid. The reduction is a unilateral right on the part of the buyer that he exercises through a declaration, which is not subject to any requirements as to form.
  3. Substitute goods
    If the requirements for an effective delivery of substitute goods are met, the seller is required to exchange the defective goods through goods that conform with the contract.
  4. Conversion
    In connection with a fundamental breach of contract, the buyer can, within a reasonable time, unilaterally declare the contract avoided. In the event of a permissible avoidance of the contract, the contractual relationship is converted into a rescission relationship. Within the scope of this rescission relationship, the seller is under an obligation to refund the purchase price. The buyer has an obligation to return the object of purchase.
  5. Damages
    Under the Vienna Sales Convention, the buyer may assert damages either alone or together with other remedies (such as, for example, contract avoidance or a reduction in price). The Vienna Sales Convention does not in this regard include any definition of the term “damages” but is guided by the principle of total compensation: therefore, unless otherwise agreed, the loss that has been incurred, including foregone profit, may be asserted.

10. Remedies of the Seller in the Event of a breachg of duty by the Buyer
A breach of duty on the part of the buyer consists of either failing to pay the purchase price or refusing to accept the goods.

In Articles 62–65 of the CISG, the Vienna Sales Convention makes an entire series of remedies available to the seller. Within the scope of concurrent performance, the seller may in particular, in the event of non-payment by the buyer, make delivery of the goods conditional on payment of the purchase price and, accordingly, retain the goods until payment has been made. In addition to contract avoidance in the case of a fundamental breach of contract (first, however, usually after an unsuccessful lapse of an additional grace period for performance), the seller also has the right, on a cumulative basis, to assert claims for damages.

11. Recommendations with Respect to Central Issues

  1. To the extent that a contract party wishes to include or exclude the applicability of the Vienna Sales Convention, he should ensure during the negotiation phase of the contract that the inclusion or exclusion is unambiguously declared in the contract itself. A choice of law clause that ensures that the Swiss Code of Obligations applies to the contractual relationship could be formulated as follows: This contract and the interpretation and enforceability hereof shall be governed by substantive Swiss law to the exclusion of (i) international treaties, including the United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 (CISG), and to the exclusion of (ii) conflict-of-law rules.
  2. With respect to liability for damages under the Vienna Sales Convention, the distinction between direct and indirect damages is in and of itself irrelevant because indirect damages are also required to be compensated. If the seller therefore wishes to limit his damages to direct damages, he must do this by way of contract. In this regard, however, attention should be paid to the fact that the demarcation between direct and indirect damages provides for extensive scope. Therefore, the parties are welladvised to define, already in the contract, exactly what is meant by direct damages and exactly what is meant by indirect damages.

12. Summary
The extent to which the Vienna Sales Convention offers a legal system that is more favorable for the seller or the buyer in the individual instance than the code of obligations that will instead apply must be reviewed in the specific case, in light of the overall circumstances, before the contract is entered into. Based on such review, a decision is to be taken as to whether or not it makes sense for the Vienna Sales Convention to apply and, accordingly, whether it should be included or excluded. In any event, the applicability of the Vienna Sales Convention should not be left to chance. In the end, it is only possible to assess one’s own legal position if it is clear under which law the assessment is to be made.

«Thinkabouts» in connection with the enforcement by legal proceedings of claims under the Vienna Sales Convention from the perspective of the buyer

The conduct of the parties directly following a breach of contract (for example, upon the discovery of defects) can be decisive with respect to the success of enforcement by way of legal proceedings or the defense against claims resulting from the breach of contract. Certain problematic areas that the buyer should consider carefully in advance of litigation or upon the commencement of a lawsuit will be highlighted below.

1. Deadlines to be observed
The enforcement of claims under the Vienna Sales Convention depends on the adherence to various deadlines. If these deadlines are not met, this will lead as a rule to the forfeiture or time bar of the claims of the buyer. The claims in this case can no longer be judicially enforced. Particular attention is to be paid to the following deadlines:

  1. The examination period
    The examination period under Article 38 of the CISG stipulates the period within which the buyer must inspect the goods for obvious and recognizable non-conformity with the contract. The examination of the goods also constitutes the basis for the notice of non-conformity.
    The examination period begins to run, as a rule, at the time that the goods are made available to the buyer at the agreed-upon delivery location. The duration of the period largely depends on the period within which a careful buyer would reasonably carry out the examination under the given circumstances of the case at hand.
    The duration of the examination period is measured by various criteria. What should be taken into account in this respect are the type of goods, the complexity of the goods and the obvious nature of the non-conformity. As a rule of thumb, in the case of non-perishable goods and goods that are not subject to strong price fluctuations, an examination period of between one and two weeks is deemed to be reasonable. If the goods consist of commodities or complex machinery, however, an examination period of several weeks up to several months may be reasonable.
     
  2. The notice period
    The notice period determines the period within which obvious or latent non-conformity must, after discovery, be notified to the seller. Pursuant to Article 39 subparagraph 1 of the CISG, the notice must be given within a reasonable time after the buyer has or ought to have discovered the non-conformity. The duration is therefore not defined in absolute terms. As a rough guide, a notice period of one month can be assumed in the case of non-perishable goods that are easy to examine and that are not subject to strong price fluctuations.
    Upon receipt of the goods, therefore, a «overall notice period», composed of an examination period and a notice period, for the notification of obvious and recognizable non-conformity begins to run for the buyer. Latent defects, thus, non-conformity that was not recognizable in connection with the ordinary examination, must be notified within a reasonable time after they are discovered (and within the cut-off period, see below).
     
  3. The cut-off period
    The cut-off period (also known as the forfeiture period or preclusion period) pursuant to Article 39 subparagraph 2 of the CISG determines the absolute timeframe within which obvious or latent non-conformity must be notified to the seller. This period cannot be checked or interrupted. After expiry of the cut-off period, the buyer loses the right in each case to rely on a lack of conformity of the goods. This so-called cut-off period amounts to two years by law It begins to run with the handing over of the goods. This period can be extended by agreement of the parties.
    If a buyer, for example, discovered non-conformity that had until then remained concealed one year and 350 days after receipt of the goods and notifies the non-conformity within a reasonable notice period of 10 days, his notice has been given within the cut-off period of a total of two years (1 year 350 days + 10 days = 1 year 360 days). If, in the same example, the buyer gives notice of the non-conformity within a reasonable notice period of 30 days (cf. above, under Section 2), he will not have given notice of the non-conformity until one year and 380 days after receipt of the goods and therefore outside of the statutory cut-off period of two years. Accordingly, in this case, he can no longer rely on the non-conformity of the goods, and the legal remedies under the Vienna Sales Convention are no longer available to him.
  4. The period of limitation
    The period of limitation stipulates within which period the remedies for non-conformity of goods pursuant to Article 45 of the CISG must be judicially asserted. The Vienna Sales Convention itself does not set out any statute of limitation rules. The time-bar is therefore assessed based on the law that applies to the claim.
    If the private international law of a State in whose courts the matter is pending stipulates that the substantive law of a contracting State to the New York UN Agreement dated 14th June 1974 on the Statute of Limitations for the International Sale of Goods is applicable, the time-bar will be assessed based on this treaty. In this case, the limitation period amounts to four years.
    Switzerland has not ratified the above-referenced UN Agreement. To the extent that Swiss law governs the contractual relationship on a subsidiary basis, the time-bar will be assessed in accordance with the limitation period under the Swiss Code of Obligations. Accordingly, claims based on a purchase contract or contract for work and materials for moveable property will as a rule be time-barred within two years (Arts. 201 and Art. 371 of the CO).


2. Substantive requirements for the notice of non-conformity
According to case law of the Swiss Federal Tribunal, a notice of non-conformity under the Vienna Sales Convention is sufficient if it indicates the nature or character of the non-conformity. In this regard, it suffices, for example, if the buyer were to give notice that a machine or specific parts thereof did not function and he indicates the corresponding symptoms. It is not necessary for the buyer to also describe the causes of the malfunction (Decisions of the Swiss Federal Tribunal (“BGE”) 130 III 258 consideration 4.3). To the extent that a goods has more than one non-conformity, notice of each non-conformity is to be given separately. The notice of non-conformity does not, unless agreed otherwise, have to comply with any specific requirements as to form. For evidentiary reasons, however, it is recommendable to put the notice of non-conformity into writing. The burden of proof with respect to timeliness and the correctness of the content of the notice of non-conformity rests with the buyer.

3. Right to subsequently repair goods on the part of the seller / setting of a grace period
Before exercising a right such as conversion, subsequent delivery, reduction in price or compensation for damages, the buyer must clarify whether the seller might, pursuant to Art. 48 of the CISG, have a right to subsequent performance and whether the buyer must tolerate the same. This is not usually the case if a fundamental breach of contract is on hand.

Unlike under the Swiss Code of Obligations, the buyer, on the other hand, is typically not required prior to exercising a right under the Vienna Sales Convention to extend a grace period to the seller before exercising the legal remedies to which he is entitled. If the buyer does, on the other hand, set a grace period for the seller, then he is bound by this and cannot exercise his rights based on breach of contract until after the period expires (cf. Art. 47 of the CISG).

4. Interest rate
A party that is in default on a potential money debt is required to pay interest thereon. It should be noted that the rate of interest is not indicated in the Vienna Sales Convention.

Under the Vienna Sales Convention, the interest on claims to damages is governed by the national law that applies to the contract on a secondary basis.

In contract, based on prevailing doctrine, the interest on a claim to reimbursement of all or part of the purchase price after the contract has been avoided or after conversion is governed by the customary interest at the place of business of the seller. If the seller has his place of business, for example, in India, this can mean that the claim to reimbursement is subject to interest at a rate of up to 18% p.a. This means that after five years of litigation the claim to interest will be nearly as high as the amount being claimed.

5. Arbitration
If the contracting parties had declared that an arbitration tribunal has jurisdiction for disputes arising out of the contract, the question arises as to whether the arbitration tribunal must also automatically apply the Vienna Sales Convention. Whereas State courts must basically apply the Vienna Sales Convention ex officio based on an obligation of international law, this is not so in the case of arbitration tribunals. After all, arbitration tribunals, as instances for dispute resolution that are deployed based on an agreement by the parties, are not subject to any such obligations of international law. In the case of arbitration tribunals, the arbitration rules that govern the arbitration procedure determine how the arbitration tribunals ascertain the applicable law. If there is a choice of law in favor of national law of a member State of the CISG, the arbitration tribunal must determine by way of interpretation whether or not the Vienna Sales Convention is covered by this choice of law. If no choice of law exists, the applicable law is to be determined via the mechanisms of the rules of arbitration.

6. Recommendations

  1. The conduct of the parties following a default in performance can be decisive to the success of a later judicial enforcement of or defense against a liability claim. It is therefore recommendable to seek legal advice directly after the discovery of the default on what direct measures should be taken. What might be considered include, among other things, a timely notice of non-conformity, measures to secure evidence or measures to mitigate damages.
  2. If a cursory review of the legal situation in a specific case indicates that the Vienna Sales Convention is more favorable for a party than the national code of obligations, it is recommendable that the court be informed at as early a stage in the litigation as possible of the applicability of the Vienna Sales Convention and of the provision under the Vienna Sales Convention that is central to the case. In this manner, the risk can be minimized that the court will adjudge the case guided by the provisions and legal principles of the national code of obligations that the court is more familiar with, but that are disadvantageous in the case at hand.