Third-party claims in general. A seller must deliver the agreed goods free from any third-party right or claim, unless the buyer agreed to accept the goods subject to that right or claim (CISG Article 41). This obligation is ‘implied’: it does not need to be required by the buyer or warranted by the seller to be enforceable. Examples of third-party claims: if materials or components of the delivered goods are still owned by a third party (e.g. if they were delivered under retention of title); if such materials, components, or the goods themselves were stolen from a third party; or if the ownership of such materials or components has not been transferred for any other reason (e.g. they were acquired in violation of mandatory laws).
Rights and claims. The seller has breached his obligation, not only if a third party’s claim is valid, but also and already if a third party merely makes a claim about the goods. This is because, once a third party has made a claim and until the claim is resolved, the buyer faces the possibility of litigation with and liability to the third party. Even if the seller asserts that the third-party claim is invalid – or if a good faith buyer can rightfully defend that, under the law applicable to the sales transaction, it will legally be deemed to acquire the goods free of third-party claims, (i.e. possession vaut titre) – the third party could still engage in time-consuming and expensive litigation against the buyer. Obviously, litigation will delay and disrupt the buyer’s use or resale of the goods.
It is the seller who carries the burden of demonstrating, to the satisfaction of the buyer, that a claim is frivolous. If the buyer is not satisfied that the third-party claim is indeed frivolous, the seller must take appropriate action to free the goods from the claim. From a buyer’s point of view, this could rarely be achieved within a reasonably short period of time. If that is not likely, the seller must either replace the goods, induce the third party to release the claim, or provide the buyer with an adequate indemnity (i.e. providing for defence in legal proceedings and against all losses arising out of the claim).
Third-party intellectual property rights. A different approach applies, however, to the delivery of goods that are not free from third-party rights or claims because they (allegedly) infringe intellectual property rights (CISG Article 42). The seller is not always aware of the existence of such IP rights, let alone that there has been an infringement. Therefore, the implied obligation at the time of contracting is qualified by two additional requirements. First, the seller is not liable if the buyer furnished the technical drawings, designs, formulae or other specifications from which the infringement results. Second, the seller must not have known or must not have been unaware of an alleged infringement under the law of the jurisdiction where the goods will be resold or otherwise used. This requirement is further limited: at the time of contracting, the seller must know or may not be unaware of the countries where the goods are intended to be resold or otherwise used. In other words, if a seller is aware of an infringement right or claim by a third party, and the buyer is not aware (and must not be aware) of the infringement right or claim, the seller may not sell the affected goods in the jurisdiction where the IP rights are alleged to be infringed.
International context and resale. In an international transaction, it is not obvious that the seller of goods should be liable to the same degree for all infringements of intellectual property rights. First, the infringement will often occur outside the seller’s country. The seller cannot be expected to have as complete knowledge of the status of IP rights that its goods might possibly infringe as it would know in respect of its own country. Second, it is the buyer who selects the countries to which the goods will be sent for use or resale. Therefore, as regards resale, the seller’s liability to the buyer for infringements is limited to the countries where the goods were envisaged to be resold (or used) by the parties at the time of contracting. If the parties had not anticipated use or resale in other countries, the seller’s liability is limited to infringements only in the jurisdiction where the buyer has its place of business.
Note: this chapter is also included in the e-book Cross-border contracting – How to draft and negotiate international commercial contracts, written by Weagree-founder Willem Wiggers and published by the ITC (the joint agency of the U.N. and WTO) and downloadable free of charge.