CISG Advisory Council Opinion No 12

1. When loss is caused to the buyer by delivery of non-conforming goods, the seller is liable to the buyer for damages under Article 45(1)(b). The buyer is entitled to full compensation subject to the limitations as set forth in Article 74.

Comment

1.1.    If the seller delivers non-conforming goods to the buyer, the buyer is given the remedies listed under Article 45. These include damages (Article 45(1)(b)), the amount of which is determined in accordance with Article 74 which sets forth the principle of full compensation subject to the limitation of foreseeability. On further interpretation of Article 74, the Advisory Council has already issued CISG-AC Opinion No. 6, Calculation of Damages under CISG Article 74. Rapporteur: Professor John Y. Gotanda, Villanova University School of Law, Villanova, Pennsylvania, USA.

1.2.    However, Article 5 provides a carve-out for seller’s liability for “death or personal injury” (hereinafter collectively referred to as “personal injury”) caused by non-conforming goods or services. For such loss, the governing law is the applicable domestic law. Paragraphs 2.1-2.3 of this Opinion deal with interpretative issues relating to that provision.

1.3.    For loss other than that carved out under Article 5, contractual liability is governed by the CISG when the CISG is applicable to the particular contract. However, there remains the question whether the CISG excludes the application of domestic law, especially tort law, when property damage is caused by the goods or services supplied by the seller. Paragraphs 3.1-3.3 deal with these interpretative questions.

2. Liability of the Seller for Personal Injuries (Article 5)

2.1. According to Article 5, the CISG does not govern[1] the liability of the seller for death or personal injury caused by the goods to the buyer or any other person.
Comment
A. Introduction

2.1.1. Article 5 provides that the CISG “does not apply to the liability of the seller for death or personal injury caused by the goods to any person.” This does not mean that the buyer is left with no remedy for such losses. The recovery of damages will be governed by the law applicable by virtue of the rules of private international law. If, in addition to personal injury, other damage such as loss of profit or damage to property has also been caused by the same goods, domestic law is applicable to seller’s liability for personal injuries, while the CISG is applicable to seller’s liability for other types of damage.[2]

2.1.2.    The question of whether Article 5 covers situations where personal injury is caused by the seller’s labour or services, rather than by the goods, is dealt with in Paragraph 2.2. Paragraph 2.3 discusses whether Article 5 applies to a recourse claim brought by the buyer against the seller.

B. Policy to leave product liability to domestic law

2.1.3.    The policy of Article 5 is demonstrated in its legislative history.[3]  Article 5 was added to the CISG at the 1980 United Nations Diplomatic Conference, and therefore may not have experienced rigorous deliberation in the Working Group meetings that culminated in the 1978 UNCITRAL Draft. The current Article 5 stems from proposals made by Finland, France and the USA, which were later consolidated into a joint proposal to add the following provision to the Draft CISG: "This Convention does not apply to the liability of the seller for death or injury caused by the goods to any person."[4]

2.1.4.    The purpose of the joint proposal was to accommodate domestic legal rules designed to protect victims of defective products, i.e., product liability rules in particular. The understanding at the Diplomatic Conference was that, without Article 5, different results with respect to applicable law would arise depending upon the characterization of “product liability” claims under domestic laws. It was considered that, under domestic law characterizing product liability claims in tort, the buyer would, in addition to the protection by the CISG, be able to resort to domestic product liability law in tort; while on the other hand, under domestic law characterizing “product liability” claims as contractual, the CISG would take priority over domestic law (Article 7(2)).[5]  Article 5 was intended to ensure that, in every jurisdiction, the seller’s liability for “personal injury” arising out of non-conforming goods would be governed by domestic law and not by the CISG. The underlying assumption that domestic “contract law” claims are excluded by the CISG but domestic “tort law” claims are not, however, is subject to scrutiny. On this issue, see para 2.1.6 below.

2.1.5.    During the deliberation of the current Article 5, an additional proposal was made to extend Article 5 so as to carve out all product liability claims, including claims for recovery in respect of property damage, from matters governed by the CISG. This proposal was unsuccessful. See para 3.1.2 below.

C. Fallacy in the underlying assumption

2.1.6.    The underlying assumption in the discussion of Article 5 in the drafting process, that domestic “contract law” claims are excluded by the CISG but domestic “tort law” claims are not, relied on the domestic characterization of claims. That was a questionable assumption both from the viewpoint of the purpose of the CISG and the design of the CISG. First of all, it runs counter to the goal of uniformity since it would be up to each jurisdiction to decide which domestic law claims would remain intact even when the CISG was applicable. Uniformity is better served by an interpretation that does not rely on domestic characterization; the interpretation should focus on the “interests” sought to be protected by the CISG. Secondly, such an assumption also runs counter to the design of the CISG which, in principle, excludes the application of domestic law with respect to matters already governed by the CISG (Article 7(2)). Thus, the better view is that the characterization of claims under domestic law is irrelevant in deciding whether the claim is excluded by the CISG or not.[6]

2.1.7. In addition, it is not clear whether and how the difference between legal systems that adopt the cumul rule and those that adopt the non-cumul rule was taken into account in the deliberative process.[7]  Most jurisdictions adopt the cumul rule, which is a rule that allows concurrence of claims arising from the same facts, typically contract and tort claims, and allows parties to elect one or more of the claims. The argument that product liability claims sounding in tort are not excluded by the CISG seems to presuppose a cumul rule regime. On the other hand, the non-cumul rule (non-cumul des responsabilités contractuelles et délictuelles) does not allow concurrence of claims. Under that regime, if both contract and tort claims potentially arise from the same facts, contract claims take priority over tort claims, and the parties are not allowed to make an election of the tort claim. For example, this used to be the rule adhered to in France, one of the proposers of Article 5, at the time of the 1980 Diplomatic Conference.[8]  In the absence of Article 5, the result under the non-cumul rule would be that domestic product liability claims, irrespective of their characterization, would not be allowed: domestic contract law claims would be excluded by the CISG (Article 7(2)), while domestic tort law claims would also be excluded by the non-cumul rule. Thus, the reasoning given by the French delegate that different results will ensue depending on the characterization of domestic law claims does not fit non-cumul rule regimes. The French delegate’s explanation that problem will arise “in countries which based liability for defective goods on the seller’s latent defects guarantee” may have meant to refer to countries which adopted the non-cumul rule, but that is not how the explanation was understood by the other delegates or later commentators.[9]

D. Policy not to exclude domestic law claims for recovery of “extra-contractual interests”

2.1.8.    If the underlying assumption was questionable, there remains the question of what policy Article 5 actually entertains. The practical consequence of applying the CISG to buyers’ remedies is that the buyer will be subject to the requirements imposed by the CISG. Most notably, except for cases where Article 40 applies, Articles 38 and 39 will bar the buyer from bringing damages claims when notice of the defect in the goods is not given within a reasonable time frame (although Article 44 may ameliorate this result to some extent), or when the accident caused by defects occurs more than two years after the goods were handed over to the buyer. These limitations may be appropriate for the protection of “contractual interests” created by the contract and for which the parties bargained, but they may be inappropriate for the protection of interests such as “death and personal injuries,” which are not created by the contract and for the protection of which the parties did not bargain or waive.

2.1.9.    The policy behind Article 5 is thus to ensure that the liability of the seller is not limited by the CISG with respect to extra-contractual interests: i.e., claims under domestic law that protect such interests are allowed irrespective of their characterization. This policy also has implications for property damage which will be dealt with in para 3.2 below.

2.1.10. Some commentators argue that a seller may agree to assume an additional contractual obligation to protect the life and limb of the buyer, and that Article 5 would not exclude the application of CISG in case of breach of such obligation. These are situations where, for example, the seller promises to warn the buyer of certain dangers in using the goods. In such cases, the seller may have impliedly undertaken an obligation to pay for injuries caused by a failure to perform this obligation.[10]  This would amount to a contractual derogation (under Article 6) from the provision of Article 5. However, there remains the question, not addressed in this Opinion, whether the parties may validly agree to limit the liability of the seller for personal injuries. Whether such contract terms exclude the otherwise applicable domestic remedies is a matter to be decided according to the rules on validity of the applicable domestic law (Article 4(a)).[11]

2.2. When a contract entailing labour or other services is a contract of sale in accordance with Article 3(2), the CISG does not govern the liability of the seller for death or personal injury caused by such services to the buyer or any other person according to Article 5.

Comment

2.2.1. According to Article 3(2), the CISG applies to a contract of sale of goods that entails the supply of labour or other services, provided that the supply of labour or other services is not the preponderant part of the obligation of the party furnishing the goods. Those contracts are considered to be sale of goods. On further interpretation of Article 3(2), the Advisory Council has already issued CISG-AC Opinion no. 4, Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Article 3 CISG), 24 October 2004. Rapporteur: Professor Pilar Perales Viscasillas, Universidad Carlos III de Madrid.

2.2.2.    In such a contract, personal injury may be caused by the labour or other services, rather than by the furnished goods. This gives rise to the question whether claims for recovery of personal injury caused by labour or services is governed by the CISG, or whether that is a matter not governed by the CISG under Article 5. This is possibly a gap that the drafters of the CISG did not foresee.[12]  In such case, the liability of the seller for the death or personal injury should, in accordance with Article 5, not be governed by the CISG.[13]  Although a literal reading of Article 5 may lead to a different result, the policy of Article 5 to leave the recovery of personal injury to domestic law carries equal weight irrespective of whether personal injury is caused by defects in goods or by defective services. There is no reason to distinguish these two cases.[14]

2.3. Claims of the buyer against the seller to be indemnified against the buyer’s liability for death or personal injury of a third person caused by goods or services supplied by the seller are claims for pecuniary loss of the buyer, and are not claims for “liability of the seller for death or personal injury caused by the goods to any person” under Article 5. These claims are governed by the CISG to the exclusion of any claims based on the applicable domestic law, whether contractual or not.

Comment

2.3.1.    Personal injury caused by goods or services to any third person other than the buyer, such as a sub-purchaser, manager, employee, or family member of the buyer, is personal injury caused by the goods or services to “any person”. Thus, if the buyer has compensated those third parties for personal injury, against whom the buyer is liable under the applicable law, and then turns to the seller for recourse or indemnification, it may seem that such recourse or indemnification claims are claims for liability of the seller for “personal injury caused by the goods to any person” and therefore not governed by the CISG. This interpretation, supported by many commentators,[15] is consistent with the French delegate’s statement at the Diplomatic Conference that the words "to any person" were “introduced in deference to the wishes of certain delegations in order to clarify the meaning of the provisions of [Article 5] on the question of a claim by one of the parties to the contract against the other resulting from a claim against the former asserted by a third party.”[16]

2.3.2.    However, the better interpretation is that such recourse or indemnification claims of the buyer are not excluded by Article 5, and that these claims are governed by the CISG to the exclusion of any claims based on the applicable domestic law, whether contractual or not.[17] According to this view, which finds support in one German decision,[18] the buyer is claiming damages for its economic loss or “balance sheet loss”.[19] The policy of Article 5 is not disturbed by such interpretation because the sub-purchaser or any third person who was injured has already been compensated by the buyer, and therefore is not in need of further protection.

2.3.3.    This interpretation may seem, on its face, to ignore the language “to any person” in Article 5. However, the question of who suffered “death or personal injury”, and the question of whether the seller’s liability is “for death or personal injury” are two separate questions.

2.3.4. The latter question is discussed in para. 2.3.2 above. On the other hand, with respect to the first question, death or personal injury caused to, for example, sub-purchasers admittedly is “death or personal injury to any person”. Thus, Article 5 would seem to exclude a seller’s liability to those third persons from the purview of the CISG. However, there may have been some confusion in the drafting of Article 5, because the CISG does not govern such direct claims against the seller with whom the third person has no contractual relationship. The CISG governs “the rights and obligations of the seller and the buyer”, but not the legal relationship of those parties to the contract with third parties (Article 4).

2.3.5.    For the same reason, this Opinion does not deal with the question of the third person’s claim against the buyer, or the seller’s recourse claim against the manufacturer or its supplier. These are questions that must be resolved according to the law applicable to their relationship.

3. Liability of the Seller for Property Damage

3.1 Liability of the seller for damage to the property of the buyer caused by goods or services supplied by the seller is governed by the CISG.
Comment
A. Claims for property damages governed by the CISG

3.1.1.    Article 5 does not exclude claims based on the CISG for property damage caused by the goods or services supplied by the seller. Under Article 74, damages for such loss are recoverable under the CISG, and therefore, this matter is governed by the CISG.[20] Whether that results in the exclusion of domestic law claims is considered in paras 3.1.4 et seq.

3.1.2. When the current Article 5 was under deliberation at the Diplomatic Conference, there was a proposal to extend Article 5 to all product liability claims, including claims for property damage.[21] There was some support for an expansive Article 5, but this proposal was not adopted, mainly due to difficulties in defining “product liability”.[22] The Swedish delegate also pointed out the drawback of such a provision for uniformity of law, stating that “it would remove from the purview of the [CISG] such cases as the supply of defective spare parts for aircraft or defective raw materials which damaged the final product. It would then not be clear which rules prevailed in those cases. Problems of the choice of law would arise and parties to contracts of sale would have to inform themselves about unfamiliar systems. That would be a setback for efforts at legal unification”.[23]  Similarly, the French delegate explained, from the viewpoint of the core interests protected by the CISG, why the proposal which later became Article 5 did not exclude property damage from the coverage the CISG: “[I]t was the sponsors’ opinion that [damage to property] was included in commercial or economic loss and not a failure on their part to recognize its importance. If damage to property were to be excluded there would be a conflict with other provisions of the Convention including those which covered the conformity of goods.”[24]

3.1.3.    Thus, if property damage was caused by seller’s breach of contract and if that result was foreseeable, it would fall within the scope of damage claims under the CISG. However, whether or not the CISG completely excludes domestic law claims for property damage, especially tort law claims, has been subject to continuous debate.[[25] Paragraphs 3.2 and 3.3 address this issue with the conclusion that although domestic claims for property damage are normally not excluded by the CISG (para 3.3), i.e., concurrence takes place, there are situations where domestic law claims are excluded (para 3.2).

B. Exclusion of domestic law claims

3.1.4.    The question whether the CISG excludes domestic law claims is a matter to be decided under the CISG.[26] This question concerns the permissibility of concurrence of claims based on the CISG and claims based on domestic law. Comparable questions of concurrence may also arise in situations other than those relating to property damage. For example, there is question of concurrence between claims under the CISG and claims based on negligence, negligent misrepresentation, tortious interference with a contract,[27] etc. under domestic law. This Opinion does not address those issues.

3.1.5. However, it should be noted that, even if it is decided, under the CISG, that domestic claims are not excluded, the permissibility of resorting to concurrent claims will ultimately depend on whether the applicable law adopts the cumul rule or the non-cumul rule.[28] If the applicable law adopts the cumul rule, concurrent claims will be allowed. However, if the applicable law adopts the non-cumul rule, it is likely that only claims based on the CISG will be allowed. This outcome is beyond the reach of the CISG.

3.1.6.    In considering whether domestic law claims for property damage are excluded, the basic concern is not to upset the balancing of interests and uniformity of law achieved under the CISG by allowing the application of domestic remedies.[29] On the other hand, a countervailing consideration is to avoid overreaching by the CISG; since the CISG is designed to balance the contractual interests of the seller and buyer, which are created by the contract, the protection of extra-contractual interests should not be exclusively dealt with by the CISG.[30] Extra-contractual interests exist independently of the contract. If the protection of such interests were to be governed exclusively by the CISG, “the conclusion of an international sales contract would amount to a partial disclaimer of tort liability”,[31] which is a result that the buyer should not be assumed to have bargained for.[32]

3.2. If the damage is caused to the goods themselves, the liability of the seller is governed by the CISG to the exclusion of any claims based on domestic law, whether contractual or not. The same applies if the damage is caused to property which is attached to the goods, or with which the goods are combined or commingled, or which are processed by the goods, in the normal course of business or in the course of normal use.

Comment

3.2.1.    If a defect in the goods results in destruction or damage to the goods themselves, the CISG governs to the exclusion of any domestic remedies.[33] This is because the buyer’s remedial scheme under the CISG is designed precisely to deal with such a situation. If concurrent domestic remedies are allowed, the purpose of Articles 38 and 39 to expedite resolution of sales disputes would be overturned.

3.2.2.    Likewise, if a defect in the goods causes damage to other property which, in the normal course of business or in the course of normal use, is expected to be used together with the goods, the CISG governs to the exclusion of any domestic remedies. What is “normal” should be decided according to the criteria set forth in Article 35, because this is a question of whether the protection of such property is incorporated as a “contractual interest”. Thus, if the parties have agreed that the goods will be attached, combined, commingled with other property, or that the goods will be used to process other property, that is a use in the normal course of business or in the course of normal use (Article 35(1)). Similarly, if the goods are of a kind ordinarily used together with other property (Article 35(2)(a)), damage to such other property is exclusively protected under the CISG. This is because the well-being of such property is usually taken into consideration in the bargain between the parties, and thus becomes a “contractual interest” for which uniformity of law was intended. For example, if a defective battery in a laptop computer catches fire and destroys the laptop, the liability of the seller should be governed exclusively by the CISG. If defective glue damages the thing to which it is “attached” or “combined”, that property damage should be governed exclusively by the CISG. If live fish infected by virus are sold and “commingled” in the normal course of business with other live fish of the buyer, causing damage to all the fish, that property damage is exclusively governed by the CISG.[34] The same principle applies if the goods are used “to process” other property.[35] For example, if a defective saw damages wood, the seller of the saw will be liable for property damage under the CISG alone. These are all cases where the possibility of damage to the property should be taken into account by the seller.

3.2.3. The same principle applies to situations where the buyer made known to the seller, at the time of the conclusion of the contract, any particular purpose for which the goods are to be used, unless the circumstances indicate that the buyer did not rely, or that it was unreasonable for the buyer to rely, on the seller’s skills or judgment (Article 35(2)(b)).

3.2.4.    For the purpose of this Opinion, the terms “attached”, “combined” or “commingled” are not concerned with proprietary effects.[36] Goods are “attached” or “combined” if they are physically joined together, but it is irrelevant whether the goods belong to different owners or if they become inseparable or not. “Commingling” includes situations where goods (whether solid, liquid or gas) are put together resulting in a mixture. It is irrelevant whether it is impossible or economically unreasonable to separate the mixture into its original constituents. It is also irrelevant whether the ownership of the original constituents belonged to different persons or not.

3.3. However, if the damage is caused to other property of the buyer, any liability under the applicable domestic law is not excluded by the CISG.

Comment

3.3.1.    When damage to property other than that described in para 3.2 is caused by the goods or services provided by the seller, the CISG governs but does not exclude domestic law claims. As already explained in para 3.1.6 above, the protection of such property is a protection of an extra-contractual interest that exists independently of the contract. Rather, the existence of the contract is only incidental to such damage, and the CISG should not exclude the liability of the seller under domestic law when such disclaimer was not part of the bargain of the parties.[37]

3.3.2.    This policy is already implied in Article 5, and arguably a general principle upon which the CISG is based (Article 7(2)) may be derived from Article 5: i.e., the applicability of domestic law is not excluded with respect to extra-contractual interests. With respect to claims for personal injuries, which are question of extra-contractual interests, Article 5 completely leaves the matter to the applicable domestic law. Even under non-cumul rule regimes, the applicability of domestic law is preserved. On the other hand, with respect to claims for property damage, the CISG still applies, but that does not alter the principle that the protection of extra-contractual interests under domestic law should not be precluded by the CISG (see paras 2.1.9 and 3.2).[38] Whether the buyer may elect domestic remedies ultimately depends on whether the applicable law adopts the cumul rule or the non-cumul rule, but that is a choice for the domestic law to make. However, if the parties validly incorporate interests that are otherwise extra-contractual into their contract, that will be protected and exclusively governed by the CISG (see paras 2.1.10 and 3.2.2).