Meaning of the term 'Sale of goods' in                                            international law

                                        

Where parties to sale of goods are located in different countries, their mutual relationship will be determined by the contract of sale. Such contracts become subject to interpretation by different legal systems in order to find the legal obligations between the parties. There are several international conventions and regulations in this regard and these instruments determine the rights and duties of contracting parties. The United Nations Convention on Contracts for the International Sale of Goods (CISG) is a good example of such an instrument. Despite the fact that central issue in such dealings is transfer of goods yet transfer of property is not covered by these conventions. It is therefore, necessary that contracting parties must envisage in the sale contract clauses related to the transfer of ownership of the sold goods sold.

This type of situation gives rise to questions such as how does transfer – from the seller to the buyer – of property in goods occur? More important, is the problem of the law applicable to the transfer of property? In each contract of sale, the effects of the transfer of ownership of the goods sold from the seller to the buyer emerge as an important legal issue. The issue emerging is dealt with in various ways by different legal systems and in an international contract of sale parties from at least two countries are involved.

For example, in civil law system passing of property takes place either at the time explicitly agreed between the parties or, in absence of specific terms at the time the parties exchange their consents to the sale, and this happens irrespective of the fact whether the goods have been delivered or the price thereof has been paid. The fact is that a transfer of goods takes place when the goods are identified; where the goods are sold on the basis of weight, number or measure, property passes when the goods have been weighed, counted or measured. Further, the property in future goods stands passed when the goods are manufactured, grown or the same come into existence and it is possible for the buyer to take the delivery. Where the sale is conditional sale, property passes upon fulfillment of the condition.

Property passes to the buyer at the intended time where a sale contract deals with specific or ascertained goods. When there is unconditional sale contract in respect of specific or ascertained goods, property passes to the buyer at the time the contract is made, irrespective of the fact whether the time of payment or delivery or both is postponed.

Where the goods are un-ascertained, property is transferred to the buyer when they are ascertained. In many cases specific rules apply, for example where the title retention clause serves to separate the passing of property or where risk of loss is related with the receipt of payment, the title remains with the seller along with other conditions that may be imposed by the contract.

Physical delivery is a pre-condition in the default rule for transfer of ownership to take place.1 An international contract of sale obviously takes place in different countries, and is governed either by a particular national law or by merchant law (lex mercatoria).2

CISG is now increasingly becoming applicable to world trade as more and more states accept it and make its rules part of their law.3 CISG provides uniform rules for the international sale of goods where parties to the contract have places of business in different countries and where the rules of private international law direct the application of the municipal law of a contracting state.4

The seller must, among other obligations, transfer the property as required by the contract and Directed by CISG.5 However, it is not concerned with the effect which the contract may have on the property in the goods sold.6 It appears that the transfer of ownership is a matter to be regulated by the terms of the contract even where the parties decide that the contract is governed by the CISG.7

As per international practice states have failed to agree as to the mode and time of transfer of ownership and these elements differ in different legal systems. The contracting parties do not agree on various consequences attached to the transfer of ownership, such as the questions of validity and effects of the reservation-of-ownership clause particularly in the case of a bankruptcy.8

Where the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or in such cases UNIDROIT principles may apply. These principles apply since the parties have not chosen any law to govern their contract. These principles may also apply where there exists an aspect not regulated by the law governing the contract.9 Where parties to the contract have failed to contemplate transfer of ownership in their contract, the said principles will be helpless, since they neither regulate the transfer of ownership of the goods nor contain provisions concerning delivery of the goods.

The transfer of ownership of goods is also not covered by Inco terms; rather, Inco terms deal with responsibilities of parties for delivery of goods under contracts of sale.10

The goods sold normally pass to the buyer on delivery, ie, when the goods are placed alongside the ship. In a FOB (free on board) contract, property as well as risk and possession pass when goods cross the ship’s rail, save in a case where the seller has reserved the right of disposal (by retaining the bill of lading), when goods are un-ascertained or when the contract provides otherwise. In a CIF (cost, insurance and freight) contract, property and possession pass to the buyer when documents are handed over, but the risk passes retroactively as of shipment. In ex-ship or arrival contracts, property and risk pass with delivery of possession to know the moment of transfer of ownership, therefore, one must first determine the applicable law. In many cases the moment at which property passes is a matter of intention to be gathered from the terms of the contract, the conduct of the parties and the circumstances of the case.

In a case where the transfer of ownership is not regulated under international rules one may resort to the terms of contract between parties, and these terms can help to solve the issue.11

It is not necessary that an applicable law to the contract governs the issue of transfer of goods. For Example, where parties did chose the lex mercatoria as being the governing law of their contract. The fact is that lex mercatoria does not govern the transfer of ownership. Further the parties are at liberty to choose the domestic law of the country of their choice as governing the contract, and in one country’s domestic law, transfer of ownership may necessarily govern the latter. In that case the choice of law clause must explicitly state that the law chosen will also govern the transfer of ownership.12 At times, however, the choice of applicable law may be implied.13

The implied choice of applicable law can be deduced from the arbitration or jurisdiction clause in the contract. The principle qui eligit judicem eligit jus justifies it and it entails that appropriate tribunal be specified along with appropriate basis for the determination of the law to be applied. Use of a standard form known to be governed by the law of a particular country also helps to deduce the implied choice of law; in addition it can also be deduced from an express choice in previous or related transactions between the countries or from references in the contract to particular provisions of the law of a particular country. Where the parties have chosen the law governing the contract, no grounds will be available for isolating one element from the other in order to look for another governing law particularly when the parties did not manifest any intention of subjecting that element to a different law.14 Where parties have not opted for a specified law to the contract, it shall be governed by the law of the country with which it is most closely connected.15

The law governing transfer of ownership should be the law of the state of the seller. Indeed, it would be unfair if the law of the country of the seller cannot govern ownership transfer while his or her performance is said to be characteristic of the contract. After the determination of legal factor, one has to see what the law about the transfer of ownership. In many cases the lex situs may apply. Even these statements may lead to another problem that is to determine where the goods were located at the time of conclusion of the sale contract?

The manner in which and the time when passing of property takes place differs, from one country to another. Passing of property may take place, in principle, immediately and automatically at the moment the contract of sale is concluded, especially in civil law tradition countries. On the contrary, in common law tradition countries the principle is that the intention of parties prevails as to when and how passing of property is affected.

The various sets of rules, principles and conventions of international trade do not regulate the moment and the manner of passing of property, allegedly because different countries have failed to reach a consensus. Consequently, the issue of passing of property in goods sold is a matter left to contractual stipulations. The parties may expressly or by implication choose a national law that shall govern the passing of property which may differ from the law governing the rest of the contract. Where such stipulations are not made, the law applicable to the passing of property shall be determined by the court. The passing of property is a delicate issue; hence parties are advised to make a choice as to which law will govern the passing of property, as in the absence of such a choice the court may decide on a law which was not intended by parties.

(The writer is an Advocate and is currently working with Azimuddin Law Associates Karachi)

1. This is also the case under Swiss law, where delivery of possession is necessary for the transfer of ownership in movable goods in addition to a cause underlying this transfer. The above legal systems recognize the transfer of possession by way of Constitution possessorium (the seller transfers ownership but retains temporary control over the thing). In addition, if the sale is a cash sale there must be payment of the price in addition to delivery of the goods for transfer of ownership to take effect, except in the case where there is a credit agreement.

2. The merchant law is defined in various ways, though in most cases it is agreed to include, among others, rules laid down by merchants and general principles which are codified by different institutions.

3. The CISG was adopted on 11 April 1980 and entered into force on 1 January 1986.

4. Parties are entitled to choose the CISG as the law governing their contract even if they are located in states which are not member states to the convention.

5. See Article 30 of CISG.

6. See Article 4 (b) of CISG

7. The transfer of property is not dealt with by the CISG because legal systems disagree on this question.

8. The CISG may play a vital role in the transfer of ownership since it regulates the delivery of goods in international sale.

9. As per principles of international contract adopted by the International Institute for the Unification of private international law (UNIDROIT).

10. As for the CISG, the underlying cause is that the law on transfer of property rights differs from country to country. The time and manner of transfer of ownership is also determined by the applicable national law.

11. However some binding rules exist which cannot be derogated from by parties no matter how international their contract may be? One may rightly wonder whether the law chosen by the parties as the law governing the contract governs also the transfer of property in goods sold.

12. The ownership transfer will depend: on the law chosen by the parties to govern the contract. The manner of transfer and its timing will vary according to the domestic law chosen by the parties.

13. The implied choice is considered as the absence of choice of law; the proper law is determined by reference to the subjective element, that is, the implied intention of parties.

14. In the absence of any choice of law the court shall decide the proper law applicable to the contract based on conflict of law  rule 66  which vary from country to country.

15. Under article 4 (2) of Rome Convention, it is presumed that a contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or central administration in the case of a body corporate or unincorporated. Under article 8 (1) of the Convention on the Law Applicable to Contracts for the International Sale of Goods of 1986 (but which has not yet entered into force), the contract is governed by the law of the state where the seller has his place of business at the time of conclusion of the contract. Article 8 (2) of the same convention provides some cases when the law of the state of the buyer can govern the contract. Nonetheless, this provision cannot be of great help since article 5 (c) of the convention excludes the transfer of ownership from its scope of application.