Sale

From Max-EuP 2012

by Gebhard Rehm

1. Concept

A sale is a reciprocal contract by which the seller undertakes to transfer to the buyer full entitlement to the asset sold and—at least in the case of tangibles—to put him into actual possession of the object in question. In return, the buyer undertakes to pay a purchase price consisting of money (as well as to accept delivery of the object where applicable). Depending on the legal system concerned, performance is either rendered automatically at the time of contracting (eg the transfer of property under the French causal consensual system) or it requires further actions. The contract of sale is characterized by the synallagmatic (do-ut-des) relationship between, on the one hand, the object of the sale (originally almost invariably goods), and, on the other hand, money. But contracts of sale are not confined to (movable or immovable) objects in the sense of corporeal things. Rights (personal claims, intellectual property rights, partnership interests or shares in a company) as well as other ‘objects’ constituting neither tangible things nor rights (eg goodwill) can also be bought and sold. Sale differs from contracts of hire or lease in that it entails a duty to transfer the asset in question; it does not exhaust itself in the duty to guarantee the other party’s quiet possession. Since Roman times, it has been an indispensable feature of sale that the buyer be under a duty to pay money as opposed to rendering counter-performance by transferring other assets. In the case of barter (contracts of exchange), there is no payment in monetary terms: instead, both parties are in a sense ‘sellers.’ It is widely held that the law relating to sale does not (directly) apply to barter, but only by way of express reference (eg § 480 of the German Bürgerliches Gesetzbuch (BGB).

Legally speaking, transactions commonly described as ‘sale’, such as the purchase of a ticket or the signing of athletes by sports clubs, have to be characterized strictly in accordance with the obligations to which they give rise—they will often be mixed contracts. The ‘sale’ of tickets, for example, will usually contain elements of employment/service contracts and hire; the ‘acquisition’ of an athlete will regularly involve taking over the athlete’s damages liability (for breach of contract) towards his former club.

2. Trends in legal development

A sale is considered to be among the most important legal transactions (juridical act), both in theory and practice; it is a paradigm contract for lawyers and lay people alike. The Roman jurists had already used the contract of sale (emptio venditio) to exemplify and discuss basic questions of contract law which are still relevant today. Their conceptual importance extends far beyond sale. Thus, the Romans laid down the cornerstones of modern contract law: the time at which the contract is concluded and risk is transferred; real and consensual contracts; essential elements (essentialia negotii), especially the necessity of a price which is certain or at least ascertainable; relevance of exorbitant pricing (iustum pretium requirement) which may entail unwinding the contract under the doctrine of laesio enormis (see Art 934 f of the Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB) and Arts 1674–1685 of the French Code civil; and for a different conception, see § 138(2) of the German Bürgerliches Gesetzbuch (BGB) and Art 21 of the Swiss Code of Obligations (OR)), the sale of a ‘chance’; liability for defects; the unilateral right to set aside (avoid) the contract, eg for mistake.

Even in recent times numerous doctrines of contract law, such as avoidance or the rules relating to standard contract terms, have been shaped primarily by reference to the law of sale. Despite the emergence of new types of contract, in economic terms, sale remains the most important commercial transaction. All legal systems, whether based on free market or socialist ideals, regulate the law of sale in considerable detail. The historical development of sale also reflects changing priorities in social and economic life. Some examples may suffice to illustrate the diverse challenges which the law of sale has faced over time. They may also throw some light on the economic and social focal points of various eras.

Under Roman law, the law of sale was applied to slaves. Certain types of marriage in the Germanic legal tradition are widely—albeit controversially—regarded as ‘marriage by sale’ (emptio puellae: it is etymologically telling that the Icelandic word for ‘marriage’ is still brúðkaup). During the Middle Ages, growing markets and the ready availability of credit led to sale being broken down into a large number of different sub-forms. The sale of cattle features very prominently in the original Bürgerliches Gesetzbuch (BGB).

The modern law of sale attempts to cater for the complexities of modern social life by means of a differentiated set of rules which take account of the circumstances under which the contract was concluded, and the business experience of the parties. The basic model of sale is usually enshrined in a codification of private law (where applicable). Even England has had a relevant statute since 1893, the Sale of Goods Act (the current version dates from 1979). Such provisions are often supplemented or modified by the rules of commercial law, taking account of the peculiarities of trade practices (speed, informality, less need for protecting the parties, greater protection of reliance) either where the protagonists tend to be particularly experienced in the trade (eg merchants under German or Austrian law) or where specific types of sales transactions are involved. Historically speaking, however, the ‘exceptional’ category of commercial sales actually often led the way in the evolution of the general law of sale.

On the other end of the spectrum, European legal systems have—at least since the enactment of the Consumer Sales Directive (1999/44/EC)—also accorded special protection to parties entering into the contract other than pursuant to their profession (sale of consumer goods). Yet the idea of consumer protection (consumers and consumer protection law) is much older than this, as is demonstrated by the German Abzahlungsgesetz of 1896 (an early type of consumer credit act). Certain marketing mechanisms such as doorstep and distance selling (distance contracts) or credit-financed consumer sales are governed by specific provisions applicable to these means of contracting (and usually operating alongside the general law on sale). The special rules on standard contract terms, though not concerned with consumer protection as such, are often tailored to contracts of sale.

3. Regulatory issues of the law of sale

a) Conclusion of the contract

In accordance with the general principles of contract law, the conclusion of a contract of sale (contract (formation)) in most legal systems requires the parties to agree (whether expressly or impliedly by conduct) on its essential elements, namely the identity of the parties, the object and the price. The validity of the contract of sale is normally—and irrespective of any proprietary consequences ascribed to contracting—not dependent on the seller having the relevant right in rem (ownership or title), nor does it depend on the object being already in existence. A ‘double sale’ (where the seller agrees to sell the same object to two different buyers independently of one another) is therefore in principle fully valid. Only the proprietary effects of such contractual agreements and the seller’s liabilities for their breach differ as between the various legal systems. Identified future objects can also be sold; however, any proprietary effects will then not occur until the goods come into existence (at the earliest). The parties are in principle free to determine the price as they see fit. And while the repercussions of the doctrine of laesio enormis are still noticeable in some legal systems (France, Austria), others (such as Germany, Switzerland and the market-orientated common law jurisdictions) are content to prevent only the most glaring and intolerable abuses of bargaining power. It has become rare for states to prescribe prices. This had been attempted by the Roman Emperor Diocletian (Edict on Maximum Prices of AD 301) and often, since then, in times of crises (though the provisions were frequently circumvented).

By and large, it is not necessary for the price to be determined as a fixed sum. Ascertainability by calculation or by reference to price lists, market prices, etc is sufficient. Additionally, the parties will often want to reach an agreement on issues such as the place and time of delivery, payment modalities, etc, and they may wish to make the final conclusion of the contract conditional on such agreement. Otherwise, however, their agreement on these matters is not indispensable. Any remaining gaps can be filled by dispositive statutory provisions or the relevant case law. Most legal systems require an understanding on such non-essential points (accidentalia negotii) only if one party makes clear to the other that it does not wish to contract without it.

b) Validity of the contract

Contracts of sale are subject to the ordinary prerequisites for the validity of a contract, such as the capacity of the parties as well as compliance with any applicable legal or moral standards (illegality of contracts). In principle, they can be concluded informally, yet for specific types of contracts various considerations dictate that formal requirements be imposed. Contracts for the sale of real estate, for example, either have to be attested by a notary (eg § 311b(1) BGB) or have at least to be in writing and signed by parties (see the English Law of Property (Miscellaneous Provisions) Act 1989, s 2). In France, formalities apply whenever the contract price exceeds a certain amount (Art 1341 Code civil). Non-compliance with a formal requirement will often render the contract invalid, but this is not invariably so. Sometimes the consequences are purely evidential (eg under Art 1325 of the French Code civil). A contract of sale may have to be approved by a public authority, eg when it concerns objects of special cultural value.

c) Types of sales

Several types of sales are usually distinguished according to their subject matter or according to particular features of the contract. Besides the basic distinction between the sale of goods or real estate, and the sale of rights, there are often special provisions relating to the sales of cattle (of ever-decreasing importance in the light of modern economic developments), sale on approval and pre-emption (the latter being of great practical importance in France, where it can be used to postpone the transfer of ownership associated with the contract).

Furthermore, entire businesses can be sold (mergers and acquisitions). From a legal perspective, the sale can either relate to all of the assets of a company (the asset deal) or to the proprietor’s shares in the business (the share deal). Asset deals and share deals often differ with regard to their tax consequences (disclosure of hidden reserves, taxation of gains), but also as a matter of simple contract law: in a share deal, the company’s proprietor becomes a party to the contract; in an asset deal it is the company itself. Moreover, there may be formal requirements depending on the object being sold. The chosen nature of the sale may also have repercussions for the law relating to breach of contract: in a share deal, the seller guarantees only the existence of his share in the company; he will in principle not be liable for defects in the company’s assets. The acquisition of shares is commonly treated as a purchase of an actual business only if the parties regard the business as such, as the primary object of the sale, which is usually the case if the purchaser acquires practically all of the shares.

Contracts for work and materials, where the seller undertakes to manufacture the object to be sold using his own raw materials, are nowadays usually treated as a kind of sale.

d) Duties of the parties and liability for breach of contract

The seller is under a duty to bestow on the buyer the full right relating to the object of the sale and—where appropriate—to put the buyer into possession of the thing bought. The buyer is under a duty to pay the purchase price. To the extent that the contract does not already have the relevant effect of conveyance, the concrete pre-requisites for the transfer are determined by the particular rules applicable in each legal system (eg in Germany §§ 929 ff BGB for movables, §§ 413, 398 ff BGB for rights; §§ 873, 925 BGB for land). The seller is further under an obligation to provide the object sold free from defects, which obligation is non-excludable at least as far as the European Consumer Sales Directive applies.

Defects may consist in deviations in the quality or fitness of an object from what was expressly agreed upon, implied or what is customarily to be expected (physical defects), or they may consist of legal encumbrances constituted by the rights of third parties (legal defects). Warranties for defects exist even where the Consumer Sales Directive does not apply. Where rights (choses-in-action) are sold, the seller will typically be accountable for the existence of the right, but—except where this is expressly agreed—not for its value (eg the creditworthiness of the debtor). The buyer is under a duty to pay the purchase price in the manner agreed upon by the parties, and he is obliged to accept the object. Depending on the legal system involved, the parties will also have accessory obligations of various degrees and intensity. While §§ 241(2) and 311(3) BGB make explicit the concept of good faith (§ 242 BGB) with respect to pre-contractual duties of care and information under German law, English lawyers are very cautious about imposing such accessory obligations, although similar duties here might result from tort law, ie the concept of negligent misrepresentation.

Until a few years ago, the regime of the law relating to breach of contract was the area in which the divergences between the common law and continental civilian jurisdictions were most marked. While the latter followed the Roman tradition of allowing a damages claim for physical defects only in exceptional situations (where the seller had fraudulently concealed or kept quiet about the defect, or where he had given an express warranty), referring the buyer instead to his right to terminate the contract or reduce the price, English law has always adhered to the principle that physical defects give rise to the same liabilities as other breaches of contract (non-performance, delay). German law and Dutch law have recently dissociated themselves from the Roman model; they now also follow the ‘unitarian’ system of aligning the liability for physical defects with the general liability for breach. French, Italian and Spanish law, on the other hand, still follow the dual approach.

If the seller does not comply with his obligations, the buyer usually has recourse to a number of remedies, some of which are based on Roman law. He may thus demand specific performance (in English law only under certain limited conditions), repair or replacement of the goods; he may terminate the contract and demand repayment of the purchase price; he may claim damages for breach or reduce the contract price (price reduction). The seller is, in turn, entitled to terminate the contract or claim damages if the buyer does not fulfil his obligations. While some jurisdictions make liability in damages for non-performance dependent on a culpable breach of the duty to perform (liability for fault as, for example, under § 280(1) BGB), English law imposes strict liability except in cases of force majeure, although here some cases may fall under the common categories of mistake or frustration. Outside the consumer sales context (sale of consumer goods), liability for breach of contract can, to a large extent, be excluded or restricted. And at least in commercial sales, the seller’s liability may be excluded if the buyer accepts the goods and fails to give timely notice of their defects.

Breaches of duties connected with the sale may at the same time constitute a delict and therefore give rise to an appropriate damages claim. In Germany, for example, such claims compete freely with claims based on the contract (subject to the rule against double recovery), whereas French law requires the claimant to choose and confine himself to either contractual or delictual claims (principle of non-cumul).

From a comparative point of view, there are differences in the extent to which mistakes allow one party to rescind the contract. English law places relatively great weight on the need for transactional stability and hence does not permit the avoidance of contracts for unilateral mistakes. The caveat emptor principle (let the buyer beware) is here still firmly enshrined. Continental civilian jurisdictions, on the other hand, are willing to allow avoidance more broadly. They invoke the parties’ private autonomy and appeal to the ideal of a decision-making process free from all error. Yet it is important to notice that the special provisions governing liability for defects take precedence over these general rules, so that a buyer’s mistake about a quality of the object bought will not usually allow him to escape from the contract except by means of a remedy for breach (termination).

e) Acquisition of ownership

The effects of a contract of sale on the allocation of property rights (or the entitlement to choses-in-action) may be roughly divided into three categories. In German law, the contract is only obligatory and has no proprietary effects whatsoever. This is a consequence of the so-called principle of separation. In French law, by way of contrast, the seller’s property is transferred to the buyer as soon as the contract is concluded (Arts 1138, 1583 Code civil). The position is—theoretically at least—similar in England: Sale of Goods Act 1979, ss 17 and 18 no 1. In many other jurisdictions (Netherlands: Art 3:84 Burgerlijk Wetboek (BW); Austria: Art 424 f ABGB; Spain: Art 609(2), 1095 2nd sentence Código civil), the contract of sale does not in and of itself lead to a transfer of property, but it is nevertheless an essential aspect of the conveyance since it provides the basis (‘title’) for the acquisition of ownership. Swiss law hovers between the different models in that it only distinguishes between obligatory contract and conveyance where a chose-in-action is sold (Art 165 Swiss Code of Obligations (OR)).

4. Uniform law

In the light of the overwhelming economic importance of sales law, it does not come as a surprise that this area of the law plays a prominent role both internationally and as an object of study of comparative law. Early unification attempts all concerned cross-border sales, long before the spotlight of harmonization turned to other potential areas.

Ernst Rabel’s preparatory comparative work initially led to the Hague Convention of 15 June 1955 (ratified by only a few states) and later to the Hague Uniform Sales Convention of 1 July 1964 (which failed as a result of it not being ratified by the United States, the USSR, many of their allies and the developing countries). Yet, the subsequent UN or Vienna Sales Convention of 11 April 1980 (CISG) turned out to be a remarkable success, particularly during the time of the Cold War. By now, it applies in over seventy countries worldwide. After the convention has entered into force in Japan on 1 August 2009 (sale of goods, international (uniform law)), there are only very few significant industrial nations left (particularly Brazil and Great Britain) that still have to ratify it.

In its field of application, the CISG takes precedence over national law, except where the parties have expressly excluded it or if the contracting states have put in an appropriate reservation. Based on wide-ranging preliminary studies and a productive interplay between common law and civilian concepts, the CISG contains primarily provisions about the conclusion of sale contracts, the parties’ obligations and their remedies in the case of breach. On the other hand, in the light of the great differences between the legal systems, it abstains from imposing validity requirements and does not seek to harmonize the proprietary effects of contracting. The CISG is based on the ideal of informal agreements, and it does not apply to consumer contracts. Its aim is, on the one hand, to afford maximum freedom to the contracting parties governed by it (parties with seats in different convention states or where international private law so dictates: see Art 1 CISG), while at the same time holding them to the requirements of good faith. Since it is particularly burdensome to unwind contracts in international trade, the remedy of termination (in the CISG referred to as ‘avoidance’) is subjected to strict preconditions, so that the parties will regularly have to fall back on the damages claim (based on no-fault liability). The CISG does not contain rules on prescription, but some states have acceded to the UN Limitation Convention. Interestingly, the CISG has had significant repercussions on the national law of many states. Not only did it influence the codifications of sales law in vastly different Convention states (eg China or Estonia), but also the European Consumer Sales Directive, thus necessitating the appropriate reforms in various Member States of the European Union (EU). The CISG is therefore a remarkable example of comparative law leaving a distinct imprint on national legal systems. The European and international model rules ([Principles of European Contracts law, Draft Common Frame of Reference, UNIDROIT Principles of International Commercial Contracts (PICC)) also take the CISG as their point of departure.

At the European level, unification of sales law is hitherto based mainly on the EU’s competence in the field of consumer protection (consumers and consumer protection law). Besides the directly relevant Consumer Sales Directive, contract law—albeit not sales law in particular—has been partially harmonized by the Doorstep Selling Directive (85/577/EEC), the Distance Selling Directive (97/7/EC), the Directive on Unfair Terms in Consumer Contracts (93/13/ EC), the Timeshare Directive (94/47/EC, now 2008/122/EC) and the E-Commerce Directive (2000/31/EC). Further steps towards harmonization are foreseeable, eg through the Common Frame of Reference which may constitute an optional instrument of European contract law.

The UNIDROIT Principles of International Commercial Contracts (PICC) of 1994/2004/2011 are also of an optional character. At the same time, however, they constitute a paradigm on which national law can be modelled. Finally, the influence on international trade of the Incoterms should not be underestimated.

Literature

Ernst Rabel, Das Recht des Warenkaufs, vol I (1936), vol II (1958); Karl Otto Scherner, ‘Kauf’ in Adalbert Erler and Ekkehard Kaufmann (eds), Handwörterbuch zur deutschen Rechtsgeschichte, vol II (1984) 675; John Honnold, Documentary History of the Uniform Law for International Sales (1989); Reinhard Zimmermann, The Law of Obligations (1996) 230 ff, 271 ff, 293 ff; Michael Bridge, The International Sale of Goods (1999); Dieter Martiny, ‘Warenkauf’ in Christoph Reithmann and Dieter Martiny (eds), Internationales Vertragsrecht (2004) 556; Viola Heutger, Ein gemeineuropäisches Kaufrecht? (2007); Ingeborg Schwenzer and Peter Schlechtriem (eds), Kommentar zum Einheitlichen UN-Kaufrecht (5th edn, 2008); Peter Huber, ‘Comparative Sales Law’ in Mathias Reimann and Reinhard Zimmermann (eds), The Oxford Handbook of Comparative Law (2008) 937.

Retrieved from Sale – Max-EuP 2012 on 15 August 2022.

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