By Eduardo Amaral Gurgel Kiss1
Study Group2

As promised, we shall continue to review the new rules on the international sale of goods and how it has changed Brazilian law. Through Decree 8 327, of October 16, 2014, the Brazilian government has put in force the United Nations Convention on Contracts for the International Sale of Goods (the "Convention").

Brazilian law in force until the enactment of the Convention did not distinguish between purely local and international purchase of goods. However, the Convention has brought new rules on the latter transactions.

There are some sales of goods that, although international and between parties whose places of business are in different States that are parties to the Convention and that, therefore, should be government by it, are not subject to the Convention's rules. These transactions are sales:

  1. of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use;
  2. by auction;
  3. on execution or otherwise by authority of law;
  4. of stocks, shares, investment securities, negotiable instruments or money;
  5. of ships, vessels, hovercraft or aircraft; and
  6. of electricity.

The reason for their exclusion is that in many States some or all of such sales are governed by special rules reflecting the special nature of the underlying goods. Particularly, letter (a) above deals with goods acquired by a consumer and Brazilian law has a detailed law protecting the purchases of consumer goods.

Real estate is not within the definition of "goods", and, consequently, such assets are also outside the scope of the Convention.

The sale of goods and the rendering of services

Sometimes the sale of goods takes place together with the obligation of the seller to render certain services related to the acquired goods. In other cases, the buyer supplies the seller with raw material and equipment for the latter to assemble the goods that interests the buyer. In these cases a doubt could surface as to the nature of the agreement and whether or not it is subject to the provisions of the Convention.

The Convention provides that (1) Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production. (2) It does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labor or other services. (Article 3).

Consequently the manufacture and sale of products will not be considered a sale if the buyer provides a substantial part of the materials necessary for such manufacture. If the quantity of the materials supplied is not "substantial", the agreement will be considered as a sale, and not a rendering of service, and, consequently, it will be subject to the rules of the Convention.

What "substantial" would be? How to measure it? The Convention does not define nor present parameters to that purpose.

Substantial can be viewed as a major physical portion or a major monetary value of the material supplied.

Based on Brazilian law and practice, it is reasonable to understand that substantial, in this case, is a measure considering more the value of the material supplied rather than the physical quantity. For instance, we can have a transaction in which the buyer supplies 90% of the physical material required, but that 90% is worth a small percentage of the value of all materials necessary to produce the merchandize; 10% per cent, for example. In that case, the remaining material - supplied by the seller - is worth 90% of all materials. It can be argued that the 90% of physical material supplied by the buyer is not "substantial" as it represents only 10% of the cost of the materials.

So, we understand that when determining if a certain agreement is to be considered as the rendering of service or sale of goods, for purpose of ascertaining if it is subject to the Convention or not, it is necessary to consider the worth of the material supplied to the manufacturer by the buyer. If the material supplied by the buyer is worth more than half of that supplied by the manufacturer, it may be reasonable to consider that the agreement primarily provides for the rendering of service, and, therefore, it is not subject to the Convention. And, on the contrary, if the material supplied by the manufacturer is worth more than half of the total of the materials required, the transaction could be considered as a purchase and sale of goods, thus subject to the rules of the Convention.

In the next forthcoming articles we shall proceed on the review of the Convention and it is applicability in Brazil.

1 Partner of Demarest Advogados

2 Formed at Demarest. This article was written with the participation of Aline Mendonça, Fernanda Melara, Priscila Park, Fernando Bueno, Crisleine Yamaji, Elizabeth Larsen, Vitoria Mattos, Gabriela Jung, Bernardo de Senna, Manoela Medeiros.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.