Is the Convention on Contracts for the International Sale of Goods (CISG) Applicable to Contracts for Work?
The scope of application of the Convention on Contracts for the International Sale of Goods (“CISG” or “Convention”), which has been approved by law numbered 5870, and acceded to on 7 July 2010, with regard to contract types, is set forth under Article 3 of the CISG. This Article elaborates upon the application of the provisions of the CISG to contracts having the characteristics of contracts for work.
Under Article 207 of the Turkish Code of Obligations (“TCO”), a contract of sale is defined as a contract where the seller is obliged to sell and transfer the ownership and the possession of goods to the buyer; whereas, the buyer undertakes to pay the sales price. On the other hand, under a contract for work, the contractor undertakes to perform certain, specified work; whereas, the principal undertakes to pay the contract price, in exchange, as regulated under Article 470 of the TCO. Further, contracts where one of the parties undertakes to fulfill characteristic obligations of different contracts, and the other party undertakes to pay the contract price, are referred to as mixed contracts by legal scholars and the Court of Cassation’s decisions.
In this regard, Article 3 of the CISG shows the features to be considered to determine whether a contract is to be qualified as a contract of sale under the CISG if the seller undertakes to produce, deliver, and/or install the sold goods, or to provide other kinds of services, in addition to its obligation to sell and deliver the possession and the ownership of the sold goods. Accordingly, interpretation of a contract of sale under the CISG is broader than the definition set forth under Turkish law.
CISG Article 3 (1)
Pursuant to paragraph 1 of Article 3, contracts in which the seller is under an obligation to manufacture or produce the goods would be deemed as a contract, of sale as it regards the application of the CISG. However, if the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture, then that contract would not be subjected to the CISG. In the event that a substantial part of the materials is provided by the buyer, then the main obligation of the buyer is to shape the provided material, and to provide manpower or services to the other party of the contract; therefore, these types of contracts would be deemed as service or employment contracts, or contracts for work. Pursuant to the CISG Advisory Committee, the main feature that is used to determine which party is to provide the substantial part of the materials is the economic value of the materials provided by each party. However, if the materials provided by the buyer are used for packaging or delivery of the goods, and not for the manufacture or production of the goods, this does not affect the applicability of the CISG to the relevant contract.
With respect to paragraph 1 of Article 3, in order to decide whether or not the seller’s obligation to sale of the goods to produce or manufacture the goods to be sold, the local courts consider whether the materials provided by the buyer are essential for the production or manufacture of the goods or whether the obligation to deliver the materials is regulated as a main obligation of the buyer.
CISG Article 3 (2)
On the other hand, paragraph 2 of Article 3 of the CISG governs the applicability of the Convention to mixed contracts. According to the said paragraph, the CISG does not apply to the contracts where the preponderant part of the obligations of the party who provides the goods is to supply labor or other services.
Often times, the parties of a contract of sale agree that the seller is to perform certain services related to the sold goods, such as packaging and delivery of the goods, under the same contract governing the sales of the goods. In such cases, in order to determine whether the CISG applies to a mixed contract, it must be considered which obligation constitutes the preponderant part of the entire obligations of the party providing the goods.
The determination of the preponderant part of the seller’s obligations has been the subject of cases before local courts and arbitral tribunals. According to these examinations, it has been concluded that if the preponderant part of the seller’s obligation under a contract is the sale of the goods, and the other obligations can be qualified as ancillary obligations under the contract of sale, then the said contract would be subjected to the CISG.
As stated by the CISG Advisory Committee, the “preponderant part” of the obligation must be interpreted considering the entire content of the contract, the purpose and essence of the contract, the weight given by the parties to different obligations under the contract, and the economic value given to different obligations.
Economic Value Criteria
Pursuant to the CISG Advisory Committee, the main feature to be considered while interpreting the preponderant part of mixed contracts, is the economic value of each obligation under the contract.
Thus, the ratio of the price of each obligation to the total contract price must be compared. Local courts often calculate the percentage of the prices of each obligation in order to determine the effect of each obligation to the contract price. If the price determined for the sales of goods is below 50 % of the total contract price, then it would be deemed that the preponderant part of that contract is not sales.
However, even if the consideration agreed upon for the sales price is lower than 50% of the contract price; the contract may still be deemed as a contract of sale under the CISG, if the price determined for the sales is higher than the prices determined for the other obligations under the same contract. The Zurich Commercial Court qualified a contract as a contract of sale where the seller is obliged to sell computer applications to the buyer, upload these applications to the buyer’s computer, and train the buyer in how to use these applications, since the consideration of the sales establishes 45 % of the contractual price, where the price determined to train the buyer constitutes 20 % of the contract price, and uploading the applications costs 35 % of the contract price.
Further, during its evaluation as to whether or not the CISG is applicable to the relevant case, a local court qualified a contract as a contract of sale for the reason that the delivery and installment prices were not separately invoiced to the buyer, but the consideration for these services were included under the sales price, and that fact shows the parties intended to determine the sales to be the main obligation.
Provisions to be applied to Mixed Contracts
As stated in the Commentary on the Draft Convention of 1980, with regard to mixed contracts that are subjected to the CISG, the application of the Convention is limited to the obligations, claims, and disputes regarding the sales of goods; whereas, the claims and disputes regarding the obligation to perform certain work that is undertaken by the party obliged to provide the goods, would be governed by the governing domestic law.
In accordance with our explanations regarding Articles 3(1) and 3(2) of the CISG, contracts for work are not subjected to the CISG, in principle. However, in mixed contracts, where the party obliged to provide the goods also undertakes to perform other obligations regarding contracts for work, would be subjected to the CISG, if the preponderant part of the seller’s obligation is not the performance of work.
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