International sale contracts: beware of implied warranties!

A case recently decided by the Italian Supreme Court clarifies what the risks are for those who sell their products abroad without having paid adequate attention to the legal part of the contract (Order, Sec. 2, No. 36144 of 2022, published 12/12/2022).

Why it’s important: in contracts, care must be taken not only with what is written, but also with what is not written, otherwise there is a risk that implied warranties of merchantability will apply, which may make the product unsuitable for use, even if it conforms to the technical specifications agreed upon in the contract.

The international sales contract and the first instance decision

A German company had sued an Italian company in Italy (Court of Chieti) to have it ordered to pay the sales price of two invoices for supplies of goods (steel).

The Italian purchasing company had defended itself by claiming that the two invoices had been deliberately not paid, due to the non-conformity of three previous deliveries by the same German seller. It then counterclaimed for a finding of defects and a reduction in the price, to be set off against the other party’s claim, as well as damages.

In the first instance, the Court of Chieti had partially granted both the German seller’s demand for payment (for about half of the claim) and the buyer’s counterclaim.

The court-appointed technical expertise had found that the steel supplied by the seller, while conforming to the agreed data sheet, had a very low silicon value compared to the values at other manufacturers’ steel; however, the trial judge ruled out this as a genuine defect.

The judgment of appeal

The Court of Appeals of L’Aquila, appealed to the second instance by the buyer, had reached a different conclusion than the Court of First Instance, significantly reducing the amount owed by the Italian buyer, for the following reasons:

• the regime of “implied warranties” under Article 35 of the Vienna Convention on the International Sale of Goods of 11.4.80 (“CISG,” ratified in both Italy and Germany) applied, as the companies had business headquarters in two different countries, both of which were parties to the Convention;
• in particular, the chemical composition of the steel supplied by the seller, while not constituting a “defect” in the product (i.e., an anomaly or imperfection) was nonetheless to be considered a “lack of conformity” within the meaning of Articles 35(2)(a) and 36(1) of the CISG, as it rendered the steel unsuitable for the use for which goods of the same kind would ordinarily serve (also known as “warranty of merchantability”).

The ruling of the Supreme Court

The German seller then appealed to the Supreme Court against the Court of Appeals’ ruling, stating in summary that, according to the CISG, the conformity or non-conformity of the goods must be assessed against what was agreed upon in the contract between the parties; and that the “warranty of merchantability” should apply only in the absence of a precise agreement of the parties on the characteristics that the product must have.

However, the seller’s defense continued, in this case the Italian buyer had sent a data sheet including a summary table of the various chemical elements, where it was stated that silicon should be present in a percentage not exceeding 0.45, but no minimum percentage was indicated.

So, the fact that the percentage of silicon was significantly lower than that found on average in steel from other suppliers could not be considered a conformity defect, since, at the contract negotiation stage, the parties exchanging the data sheet had expressly agreed only on the maximum values, thus not considering the minimum values relevant to conformity.

The Supreme Court, however, disagreed with this reasoning and essentially upheld the Court of Appeals’ ruling, rejecting the German seller’s appeal.

The Court recalled that, according to Article 35 first paragraph of the CISG, the seller must deliver goods whose quantity, quality and kind correspond to those stipulated in the contract and whose packaging and wrapping correspond to those stipulated in the contract; and that, for the second paragraph, “unless the parties agree otherwise, goods are in conformity with the contract only if: a) they are suitable for the uses for which goods of the same kind would ordinarily serve.”

Other guarantees are enumerated in paragraphs (b) to (d) of the same standard[1] . They are commonly referred to collectively as “implied warranties.”

The Court noted that the warranties in question, including the one of “merchantability” just referred to, do not stand subordinate or subsidiary to contractual covenants; on the contrary, they apply unless expressly excluded by the parties.

It follows that, according to the Supreme Court, any intention of the parties to a sales contract to disapply the warranty of merchantability must “result from a specific provision agreed upon by the parties.“

In the present case, although the data sheet that was part of the contractual agreements was analytical and had included among the chemical characteristics of the material the percentage of silicon, the fact that only a maximum percentage was indicated and not also the minimum percentage was not sufficient to exclude the fact that, by virtue of the “implied guarantee” of marketability, the minimum percentage should in any case conform to the average percentage of similar products existing on the market.

Since the “warranty of merchantability” had not been expressly excluded between the parties by a specific contractual clause, the conformity of the goods to the contract still had to be evaluated in consideration of this implied warranty as well.

Conclusions

What should businesses that sell abroad keep in mind?

• In contracts for the sale of goods between companies based in two different countries, the CISG automatically applies in many cases, in preference to the domestic law of either the seller’s country or the buyer’s country.
• The CISG contains very important rules for the relationship between sellers and buyers, on warranties of conformity of goods with the contract and buyer’s remedies for breach of warranties.
• One can modify or even exclude these rules by drafting appropriate contracts or general conditions in writing.
• Parties may agree not to apply all or some of the “implied warranties” (possibly replacing them with contractual warranties) just as they may exclude certain remedies (e.g., exclude or limit liability for damages, within certain limits). However, they must do so in clear and explicit clauses.
• For the “warranty of merchantability” not to apply, according to the reasoning of the Italian Supreme Court, it is not enough not to mention it in the contract.
• It is not sufficient to attach an analytical description of the characteristics of the goods to the contract to exclude certain characteristics not mentioned but nevertheless present in similar products of other manufacturers, which can be used as a parameter for the conformity of the goods.
• Instead, it is necessary to include a clause in the contract expressly excluding this type of guarantee.

In other words, in contracts, one must pay attention not only to what is written but also to what is not written.

This case once again demonstrates the importance of drafting a proper and complete contract not only from a commercial, technical, and financial point of view but also from a legal point of view, using the expertise of a lawyer experienced in international commercial contracts.

Finally, it is important not to overlook applicable law and jurisdiction clauses. These aspects are unfortunately often overlooked, even in high-value negotiations, considering these clauses unimportant or even blocking for negotiation, only to regret them when litigation arises or even threatened. See an in-depth discussion here.