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The authors are Aryan Soni and Tahir Syed, fourth-year students at Gujarat National Law University, Gandhinagar.
Introduction
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is a treaty governing the international sale of goods. Its purpose is to create a uniform legal framework, eliminate legal obstacles, and ensure fair trading practices. Since its adoption in 1980, the CISG has been ratified by 97 countries.
Article 1 of the Convention specifies that CISG applies to contracts for the sale of goods between businesses in different countries that are signatories to the CISG or when private international law directs its application. Although the CISG does not explicitly define ‘goods’, the core aspect of a contract governed by the Convention is the exchange of goods for money. However, not all sales are covered. Article 2 excludes purchases for personal use, auction sales, and transactions involving stocks, shares, and other financial instruments.
Despite Article 2 providing some clarity regarding the application of the Convention, ambiguity exists regarding contracts that include additional elements beyond the sale of goods. A recurring issue in international disputes is whether the Convention applies to contracts such as Engineering, Procurement, and Construction (“EPC”) and Framework Agreements.
This blog delves into the threshold established for the applicability of the CISG on EPC contracts. Further, we will disambiguate the applicability of the Convention to Framework Agreements, examine current interpretations, and propose potential solutions.
EPC Contracts: A Contract of Sale or Contract for Services?
EPC Contracts have both sales and service elements to them. They involve transferring the complete design, procurement, and construction risk to the contractor responsible for delivering the project in a turnkey condition. To ascertain the applicability of the CISG to EPC contracts, Article 3 is relevant, as it addresses mixed contracts where the seller undertakes to produce, deliver, and/or install the sold goods or to provide other services in addition to selling and delivering the possession and ownership of the goods.
Article 3(2) states that the CISG does not apply to mixed contracts involving labour or other services if these services constitute the ‘preponderant part’ of the obligations of the party providing the goods. Therefore, to determine whether an EPC contract qualifies as a sale of goods contract under the CISG, one must assess whether the contract’s preponderant part is related to the sale of goods or the provision of services.
How to Determine the Preponderant Obligations of The Contract?
Two tests are employed to determine whether the primary obligations under EPC contracts are related to sales or services: (a) the economic value criterion, and (b) the essential obligation criterion.
The economic value criterion assesses the value of the sales obligations in definite or ascertainable monetary terms. If the non-sales obligations exceed 50% of the total contract value, the contract is considered a service contract. The Cisterns Case and the Hydraulic Pressure Unit Case have followed this approach, emphasising that to exclude the application of the CISG, the preponderant part of the obligation must be the rendering of services rather than the sale of goods. However, even if the sales component is less than 50% and remains the most significant single element, as in Software Case II, the contract may still fall under the CISG.
The essential obligation criterion focuses on the primary purpose and nature of the contract. As per the criterion it is crucial to determine the primary object of the commercial transaction and determine whether it is the sale of goods or the rendering of services. The HG Zürich case illustrates this approach. The Court excluded a turnkey contract from the CISG, arguing that the significant labour involved in assembly and supervision indicated that the service aspect was essential, thus not a mere sale of goods.
Framework Agreements: A Different Dilemma
Along with EPC contracts, Framework Agreements form a big part of international commerce. Framework Agreements regulate future sales and purchases between parties over a specified period. These agreements outline the primary elements of future contracts, including price, product volumes, delivery times, technical or quality specifications, and the agreement’s duration. The primary question regarding the applicability of CISG is whether the Convention will govern an agreement for future sales transactions. Additionally, unlike EPC contracts, no CISG provision provides the standard or threshold to determine the applicability of the Convention on Framework Agreements. In light of this, it is pertinent to have clarity regarding the application of the Convention to such agreements to establish buyer and seller obligations.
Differing Opinions
Various courts in different jurisdictions have addressed questions on this applicability, but there is a lack of consensus among these courts. The Swiss Appellate Court in Blood Infusion Devices Case has held that Framework Agreements are limited to the “organisation of the distribution” of future sales contracts rather than the immediate transfer of goods and, therefore, will not be governed by the CISG. The Supreme Court of China has taken a similar stance in the case of Panda S.r.l. v. Shunde Westband Furniture Co., Ltd..
However, this position is not unanimous. In the Metallurgic Sand Case, the Supreme Court of Poland held that Framework Agreements do fall under the CISG, reasoning that there is no explicit exclusion of Framework Agreements under the CISG. Most importantly, the Court also established a threshold for the applicability of the Convention to Framework Agreements, and it was held that Framework agreements which involve the buyer periodically providing detailed specifications for deliveries, fall within the general definition of sales contracts covered by the CISG. The International Chamber of Commerce in the Roller Bearings Case has also affirmed the applicability of the Convention to Framework Agreements, reasoning that such agreements, which outline “future sales and deliveries,” fall under the scope of the Convention.
The Way Forward
The CISG Advisory Council aims to promote a uniform interpretation of the CISG. To disambiguate the threshold for applicability of CISG on EPC contracts, the council released its advisory opinion titled Service Contracts and The CISG. The opinion acknowledges the economic value criterion and the essential obligation criterion and advises that, primarily, the former should be preferred to determine the preponderant part of a contract. However, the latter can be referred to as a fallback when it is impossible or impractical to determine the economic value of the obligations. This protocol provided by the Advisory Council is prudent and sufficient to decide on the preponderant part of an EPC contract and should be followed.
Regarding the applicability of the Convention on Framework Agreement, no settled opinion exists, and the position, as previously mentioned, remains ambiguous. When similar ambiguity existed regarding EPC contracts, it was the Advisory Council that provided a uniform interpretation and clarification on the applicability of the Convention. A similar approach is also suggested to disambiguate the applicability of the convention on Framework Agreement. It is therefore suggested that the Advisory Council publish an opinion evaluating the conflicting judgements of courts in various jurisdictions and harmonising international positions on Framework Agreements.
It is also suggested that an interpretation and threshold similar to that of the Polish Supreme Court should be established. If a Framework Agreement specifies the annual quantity of goods to be sold along with their prices, the Convention should apply. This is supported by the principle of “In Dubio pro Conventione,” which mandates that any doubts regarding the application of the CISG should be resolved in favour of the Convention when there are sufficient reasons for its application.
Conclusion
The fundamental principle of the CISG is to create a uniform framework; therefore, ambiguity, especially concerning its applicability, beats the very purpose of the Convention. While the economic value and essential obligation tests clarify its applicability to EPC contracts, the same clarity is lacking for Framework Agreements. The CISG Advisory Council, which has effectively guided EPC contracts, is urged to address Framework Agreements similarly. Similar to the Polish Supreme Court’s approach, a uniform interpretation is recommended.