Pursuant to Article 2(b) of the United Nations Convention on Contracts for the International Sale of Goods (CISG), the CISG does not apply to sales by auction.
What was the rationale for the exclusion of sales by auction from the scope of the CISG? How should an “auction” be interpreted under Article 2(b) of the CISG? Should any and all auctions fall within the scope of Article 2(b) of the CISG? These questions will be explored in this article.
I. The Rationale for the Exclusion of Sales by Auction from the Scope of the CISG.
In one of its opinions, the Court of Appeal of the Canton of Basel-Stadt summarized the reasons for the exclusion of sales by auction from the scope of the CISG:
• First, auctions have traditionally been viewed as subject to special national rules as well as special rules and customs at the auction location, and the common underlying idea was to exclude such transactions from the scope of the CISG to keep them non-standardized.
• Second, at auctions, it becomes clear whether the sale is subject to the CISG only when the highest bidder is knocked down, which is unreasonably late for the seller.
• Third, because the seller very often does not know the buyer at auctions, the applicability of the CISG would be uncertain due to Article 1(2) of the CISG.
The exclusion of sales by auction from the scope of the CISG seems logical in situations where bidders are concentrated in one location, remain anonymous, and the seller is left without an opportunity to conduct due diligence on the buyer’s identity. An illustrative example is an auction without reserve, also commonly known as an “absolute auction.” In an auction without reserve, the item is sold to the highest bidder, regardless of the bid amount. In jurisdictions like the U.S. and the UK, courts have clarified that in an auction without reserve, the seller is deemed to make an offer by virtue of putting the goods up for auction, and each bid made on the goods is an acceptance and thereby forms a contract, subject only to the contingencies of (a) a higher bid/acceptance or (b) the withdrawal of the bid made before the fall of the hammer, i.e., the conclusion of the auction. See, e.g., Board of Commissioners of City of Danville v. Advocate Communications, Inc., 527 S.W.3d 803, 807 (Ky. 2017); Barry v Davies (t/a Heathcote Ball & Co) [2000] 1 WLR 1962, Court of Appeal (Civil Division); see also Restatement (Second) of Contracts, § 28(1)(b) (stating that “when goods are put up without reserve, the auctioneer makes an offer to sell at any price bid by the highest bidder, and after the auctioneer calls for bids the goods cannot be withdrawn unless no bid is made within a reasonable time”). This auction process may create a scenario where the seller is bound to accept the highest bid without knowing the buyer, which raises concerns about whether the CISG is appropriate or applicable in such situations.
II. Court Practice: Scenarios Where Courts Have Invoked Article 2(b) of the CISG to Establish Its Non-Applicability.
Here are several case examples where courts have cited Article 2(b) of the CISG to determine that it does not apply.
Sale of horse via internet auction case
Rechtbank Oost-Brabant (East Brabant District Court)
The Netherlands, 31 August 2020 – C/01/360225 / KG ZA 20-386, CISG-online 5398Summary: “The [CISG] does not apply in this case,” as “the horse was purchased via a public (internet) auction.”
The contract for the sale of the horse was entered into between the seller, a company that organizes annual internet auctions for selling sport horses, providing details of the horses’ lineage, performance records, and veterinary reports on its website, and the buyer, who placed the highest bid. The seller was established in the Netherlands, and the buyer resided in a country that has not ratified the CISG.
The contract did not include a choice-of-law provision, and Article 4(1)(a) of the Rome I Regulation led to the application of Dutch law, as it is the law of the country where the seller had its habitual residence.
“In cases with international elements where the claim relates to a sales contract, the [CISG] applies under Dutch law, even if one of the contracting parties resides in a country that is not a signatory to that Convention, such as [the buyer’s country of residence],” the Court stated. However, in this particular case, the Court determined that the CISG did not apply pursuant to Article 2(b), as the contract of sale was formed through a public (internet) auction.
Accordingly, “the claim must be assessed on the basis of (domestic) Dutch law,” the Court concluded.
Online auction of photography case
Bundesgericht/Tribunal fédéral (Federal Supreme Court of Switzerland)
Switzerland, 08 November 2016 – 4A_451/2016, CISG-online 2803Summary: The Federal Supreme Court of Switzerland found that the CISG, according to its Article 2(b), did not apply to the contract of sale formed through an online auction.
This case involved a contract of sale entered into between the seller based in Austria and the buyer based in Switzerland. The buyer took part in the seller’s online auction via the platform www.________.com and purchased seven photographs.
The Federal Supreme Court of Switzerland agreed with the lower court’s finding that the CISG, according to its Article 2(b), does not apply to auctions, which also include online auctions.
The Supreme Court held that for auctions via the internet, in the absence of a choice of law, the general rule of Article 3 paragraph 1 of the Convention of 15 June 1955 on the Law Applicable to International Sale of Goods applies, according to which a sale shall be governed by the domestic law of the country in which the seller has his habitual residence at the time when he receives the order. As the seller’s habitual residence was undisputedly in Vienna at the relevant time, the Supreme Court determined that (domestic) Austrian law applied.
Online auction of car case
Oberlandesgericht Brandenburg (Higher Regional Court of Brandenburg)
Germany, 08 April 2016 – 11 U 44/14, CISG-online 2727Summary: The Higher Regional Court of Brandenburg found that the CISG was not applicable to the sales contract formed through an online auction “because the [seller] was not aware of the foreign element of the contract when it was concluded (Article 1(2) CISG) and because auctions do not fall within the scope of the Convention (Article 2(b) CISG).”
The buyer, a resident of Crimea, sought damages from the seller, a resident of Germany, who prematurely terminated an online auction. The seller posted an offer on the auction website under its general terms and conditions, listing a Ford Pickup vehicle for sale at a starting price of €1.00. The auction was intended to last ten days but was terminated early by the seller, who cited an error in the minimum price.
At the time of cancellation, the highest bid of €11,000.00 was placed by the buyer. Under the auction rules, the buyer was automatically awarded the winning bid of €9,261.00.1In many online auction platforms, the final sale price is not necessarily the highest bid but rather the minimum amount needed to beat the second-highest bid by a set increment. In other words, at the close of the auction, the winning bidder does not pay their maximum bid but rather an amount slightly higher than the second-highest bid, based on the system’s increments. In this case, the second-highest bid was €9,211.00, and the system’s increment was €50.00. Accordingly, the buyer was awarded the winning bid of €9,261.00 (€9,211.00 + €50.00) at the auction’s end. The seller later denied that a sales contract had been formed, questioned whether the highest bid actually came from the buyer, and claimed the vehicle had been sold to a third party.
The Regional Court of Potsdam determined that the sales contract was effectively concluded between the parties and that there was no successful challenge to this transaction. The Court also determined that (substantive) German law was applicable. Since the seller wrongfully refused to perform his obligations, the buyer was awarded damages equal to the difference between the contract price and the market price.
The Higher Regional Court of Brandenburg affirmed. It agreed with the lower court’s finding that (substantive) German law was applicable. This conclusion was based on Article 4(1)(a) of the Rome I Regulation, establishing that, in the absence of choice of law by the parties, a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence. The Higher Regional Court stated that Article 4(1)(g) of the Rome I Regulation, establishing the law applicable to a contract for the sale of goods by auction, was not applicable to this transaction. This was because “in the case of online auctions—assuming that transactions are even qualified as such in the legal sense—it is not possible to determine a place of auction in a meaningful way.”
As for the application of the CISG to the contract at issue, the Higher Regional Court found that the CISG was not applicable “because the [seller] was not aware of the foreign element of the contract when it was concluded (Article 1(2) CISG) and because auctions do not fall within the scope of the Convention (Article 2(b) CISG).”
Accordingly, the Higher Regional Court applied (substantive) German law.
Vegetables auction case
Bundesgerichtshof (Federal Court of Justice)
Germany, 02 October 2002 – VIII ZR 163/01, CISG-online 700Summary: The Federal Court of Justice, the highest court of civil and criminal jurisdiction in Germany, found that the CISG did not apply to sales contracts formed through auctions, where the buyer took immediate possession of the goods, followed by the seller issuing an invoice, and the buyer subsequently settling the invoice via bank transfer.
The buyer, a company based in the Netherlands, regularly purchased vegetables through the auctions organized by the seller at its location in S[.], Lower Rhine, Germany. In line with the established practice between the parties, the buyer took immediate possession of the goods, and the seller issued the invoice afterward. The buyer then settled this invoice via bank transfer from its place of business.
The Federal Court of Justice agreed with the lower court’s finding that the CISG did not apply in this context. This was “because the CISG is not applicable to purchases at auctions according to Article 2(b).”
Unfortunately, none of these cases provides detailed information about the auction mechanisms, particularly regarding how the contract was formed as a result of the auction. In some auctions, the highest bidder automatically enters into a contract of sale with the seller, meaning that the highest bid constitutes acceptance. In contrast, other auctions function as invitations to bid, where a bid is viewed as an offer, which the seller is not obligated to accept.
In Anglo-American jurisdictions, the latter type of auction is known as an auction with reserve. When the goods are sold in an auction with reserve, the auctioneer (as agent of the seller) invites offers from successive bidders, which the auctioneer may accept or reject until the auctioneer announces the completion of the sale. A bid is the equivalent of an offer to buy the goods, and no contract is formed until the auctioneer manifests final acceptance of the bid. See Puckett v. Dunn, 529 S.W.2d 358, 359 (Ky. 1975) (“An advertisement of an auction is not an offer to sell which becomes binding, even conditionally, on the owner when a bid is made. Rather, an announcement that a person will sell his property at public auction to the highest bidder is a mere declaration of intention to hold an auction at which bids will be received. … It is a mere invitation to those attending the sale to make offers by bids. The contract becomes complete only when the bid is accepted, this being ordinarily denoted by the fall of the hammer.”); Pitchfork Ranch Co. v. Bar TL, 615 P.2d 541, 548 (Wyo. 1980) (“[I]n auctions with reserves the bidder is deemed to be the party making the offer, while the auctioneer (as agent for the seller), is the offeree with authority to either accept the bid or reject it. The ramifications of this are that the latter need not sell if he or his principal chooses not to and may, at any time before the hammer falls, withdraw the property from the auction block. If the bidding is too low, the auctioneer need do nothing and there is no resulting contract between the seller and any bidder.”); see also Restatement (Second) of Contracts, § 28(1)(a) (stating that “[a]t an auction, unless a contrary intention is manifested, the auctioneer invites offers from successive bidders which he may accept or reject”).
Auction with Reserve: In an auction with reserve, the seller reserves the right not to sell. Here, bids are considered offers, which the auctioneer (as agent of the seller) is not obligated to accept. No contract is formed until the auctioneer manifests final acceptance of the bid.
Auction without Reserve: This type of auction obligates the seller to accept the highest bid, regardless of its amount. When a bid is placed, it is considered an acceptance of an offer to sell, creating a binding contract upon the close of bidding.
Corbin on Contracts describes an auction with reserve as follows:
“When an auctioneer presents an article for sale at auction and asks for bids, the auctioneer is ordinarily not making an operative offer and creates no power of acceptance. Such an auction is often called an auction ‘with reserve;’ that is, the seller reserves the right not to sell. The auctioneer is asking for offers. The bids made in response thereto are themselves offers that can be revoked by the bidders prior to an acceptance by the auctioneer. This is true even though the seller or the seller’s agent has issued advertisements or made other statements that the article will be sold to the highest bidder, or is offered for sale to the highest bidder. Such statement are usually merely preliminary negotiation, not intended and not reasonably understood to be intended to affect legal relations. When such is the case, the seller or the seller’s agent is as free to reject the bids, highest to lowest, as are the bidders to withdraw them. The seller may at any time withdraw the article from sale, if a bid has not already been accepted. The seller need give no reasons; indeed, all bids are rejected by merely failing to accept them—by doing nothing at all. It is not necessary for the seller to say that ‘the privilege is reserved to reject any and all bids.’ Such a statement is merely evidence that the goods are not being offered ‘without reserve.’”21 Arthur L. Corbin, Corbin on Contracts § 4.14 (1993). (Footnote references omitted.) (Emphasis added.)
In an auction with reserve, the seller may have an opportunity to conduct due diligence on the buyer’s identity, as the contract is not formed until the seller manifests acceptance. Thus, the seller may be aware of the international character of the transaction before accepting a bid. Given this, why should the application of the CISG be automatically excluded in this context?
The same question arises in the context of internet auctions that do not limit participants to one country. Some legal scholars suggest that Article 2(b) of the CISG should not apply to internet auctions.3See, e.g., Frank Spohnheimer, Article 2, in UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS: A COMMENTARY 47, 39–53 (Stefan Kröll, Loukas A Mistelis & Maria del Pilar Perales Viscacillas eds., 2nd ed. 2018); Pascal Hachem, Article 2 CISG: Sales excluded from Convention’s scope, in COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS (CISG) 69, 60–73 (Ingeborg Schwenzer & Ulrich G. Schroeter eds., 5th ed. 2022). This is because sellers using the internet cannot reasonably ignore the fact that the platform is accessible worldwide, allowing bids from around the globe. Therefore, it is reasonable for sellers to consider that the highest bidder may come from another country. Furthermore, if the seller chooses to leverage the advantages of an internet auction—where virtually anyone can bid on an item—they must also accept the potential disadvantage that the resulting sales contract may be governed by the CISG. Ultimately, sellers can protect themselves from the CISG’s application if they prefer not to be bound by it by explicitly excluding it in the auction’s terms and conditions.
As an example, the General Terms and Conditions of TroostwijkAuctions.com for Buyers explicitly exclude the CISG (“These General Terms and Conditions, the User Agreement, the Purchase Agreement and other legal relationships arising in connection with an Auction are governed by Dutch law, with the exception of the Vienna Sales Convention.”).
Other operators of internet auctions may not explicitly exclude the CISG. For example, the Terms and Conditions of Auction of Machinery Network Auctions, Inc. (MNA) establish that “[t]hese Terms shall be governed by the laws of the State of California regardless of its place of execution or performance.” The auctions organized by MNA have the following distinctive features:
• In order to bid, all bidders must provide MNA with contact and financial information. Accordingly, there is no bidder anonymity.
• By establishing the requirement to submit a refundable deposit for bidders residing outside the continental United States, MNA admits that the highest bid may come from another country.
• MNA expressly reserves the right to reject any bid that is not commensurate with the value of the item being offered or that MNA, in their sole discretion, believes was made illegally or in bad faith.
• MNA reserves the right to withdraw items from the sale at any time, including retroactively (post sale) for any reason(s) beyond their control.
Could the CISG apply to the resulting sales contract?
In our opinion, the reasons for the exclusion of sales by auction from the scope of the CISG (see Section I) do not apply in these specific circumstances. To reiterate, sales by auction were excluded from the scope of the CISG because of their local character and because the seller did not know the buyer and whether the sale was subject to the CISG until the highest bidder was knocked down. This is not the case in MNA’s auction. There is no bidder anonymity, and MNA may be aware of the international character of the transaction before accepting a bid. Accordingly, it appears possible to argue that the resulting sales contract is governed by the CISG if the preconditions set forth in Article 1 are met and the transaction does not fall under any other exception specified in Article 2.
The court practice, however, excludes internet auctions from the scope of the CISG, without adequately considering their unique terms and conditions, particularly the geographical scope and the mechanism of contract formation. This generalization creates a situation when courts may apply Article 2(b) of the CISG to any method of sale or procurement tool labeled as an “auction,” containing this term, or bearing resemblance to one. With the evolution of modern auction practices since the drafting of the CISG, there is a pressing need to clarify exactly what falls within and outside the scope of Article 2(b).
III. Court Practice: Tendering Procedure Does Not Fall Under Any of the Exceptions Enumerated in Article 2 of the CISG.
Here is an example of a case where the court did not apply Article 2 of the CISG to a tendering procedure.
Electronic electricity meters case
Bundesgericht/Tribunal fédéral (Federal Supreme Court of Switzerland)
Switzerland, 28 May 2019 – 4A_543/2018, CISG-online 4463Summary: The Federal Supreme Court of Switzerland found that the CISG applied to the contract formed through a tendering procedure because such procedures do not fall under any of the exceptions enumerated in Article 2 of the CISG.
The buyer’s predecessor issued a call for offers for the supply of electricity meters, advertising the opportunity in the Swiss Commercial Gazette. The buyer, a public organization based in Switzerland, received an offer for the supply of electricity meters from the seller based in Slovenia (Seller No. 1). The buyer accepted this offer. The orders for electricity meters were initially sent to Seller No. 1 and, after its establishment, to Seller No. 1’s subsidiary in Switzerland (Seller No. 2).
The Court of Appeal of the Canton of Basel-Stadt found that the CISG applied to the contract at issue. It rejected the respondents’ argument that the CISG did not apply because, according to the respondents, award procedures, as bidding procedures, are excluded from its scope of application according to Article 2(c) of the CISG. This Article states that the CISG does not apply to sales on execution or otherwise by authority of law. “The conclusion of a sales contract as part of a tendering procedure is clearly not covered by the literal meaning of Article 2(c) of the CISG,” the Court stated. This is because “the authorization to conclude a contract under procurement law does not arise directly from the law, but only from the award decision.”
Moreover, the Court found that the contracts formed through a tendering procedure do not fall under any of the exceptions enumerated in Article 2 of the CISG. “According to [doctrine], obtaining several offers, for example in international tenders, in order to accept the cheapest one, is not an auction and is therefore covered by the CISG,” the Court concluded.
The Federal Supreme Court of Switzerland affirmed. It agreed that the contracts formed through a tendering procedure are not covered by Article 2(c) of the CISG. “[I]n contrast to compulsory enforcement or other judicial measures within the meaning of Article 2(c) of the CISG, [a tendering procedure] is conducted privately and autonomously,” the Supreme Court stated. It also agreed that none of the exceptions listed in Article 2 of the CISG were relevant in this case.
We find this opinion to be sound. A tendering procedure involves evaluating multiple offers, with bidder identities being disclosed. Additionally, price is often not the sole criterion for awarding the contract; buyers typically consider other factors, such as quality and compliance with tender requirements. Buyers can perform due diligence on the seller’s identity and are free to reject any offer. Accordingly, this process does not constitute an auction in the sense contemplated by the drafters of Article 2(b) of the CISG. The rationale for excluding sales by auction from the scope of the CISG, such as the lack of clarity regarding the bidder’s identity because of their anonymity until the contract is concluded, does not apply in this context. The buyer is aware of both the seller’s identity and the international character of the transaction before accepting a bid.
IV. Which types of “auctions” fall within and outside the scope of Article 2(b) of the CISG?
In today’s world, organizers of internet auctions can reasonably anticipate that the highest bid may come from a different country unless they explicitly restrict participation to a single country. This may also be true for auctions held in physical locations; in an age of increased mobility, the highest bid may likewise come from abroad.
In our opinion, auctions in which the pool of participants is not explicitly limited to one country may potentially fall outside the scope of Article 2(b) of the CISG. Each case requires careful consideration of its specific circumstances. The auction organizer may explicitly exclude the application of the CISG in the terms and conditions, as permitted under Article 6 of the CISG, which renders the analysis of the applicability of Article 2(b) unnecessary. If the CISG is not explicitly excluded, the preconditions set forth in Article 1 are met, and the transaction does not fall under any other exception specified in Article 2, the following factors may be considered to determine the applicability of Article 2(b): (1) whether the auction is conducted online or in a physical location, (2) whether the seller or buyer knows the bidder’s identity before entering into a contract, and (3) how the contract is formed.
Auctions where an announcement of the auction is not an offer to sell but a mere invitation for bids/offers, which the buyer or seller is not obligated to accept, may fall outside the scope of Article 2(b) of the CISG. This is because the buyer or seller has the opportunity to conduct due diligence on the bidder’s identity and thus learn about the international character of the transaction before entering into a contract.
Auctions that are conducted in a physical location, where bidders remain anonymous until the contract is concluded, and where an announcement of the auction constitutes an offer that forms a binding contract upon acceptance may fall within the scope of Article 2(b), provided that all these conditions are met. In Anglo-American jurisdictions, these auctions are known as “auctions without reserve.” In an auction without reserve, the contract is consummated with each bid, subject only to a higher bid being received. This is so because the seller makes his offer to sell when he advertises the sale will be a no-reserves sale to the highest bidder. In this type of sale, the seller may not withdraw his property once any legitimate bid has been submitted. The seller is absolutely committed to the sale once a bid has been entered, no matter what the level of bidding or the seller’s notion of the property’s true value. In this context, the seller may lack the opportunity to conduct due diligence on the buyer’s identity, casting doubt on the applicability of the CISG.
The proposed narrow interpretation of auctions under Article 2(b) of the CISG—limited to auctions that are conducted in a physical location, where bidders remain anonymous until the contract is concluded, and where an announcement of the auction constitutes an offer that forms a binding contract upon acceptance—prompts reconsideration of Article 2(b)’s relevance, since Article 1(2) of the CISG may sufficiently cover this scenario. At this time, however, the possibility of amending Article 2 of the CISG does not appear to be on the horizon.
Given the significant evolution in modern auction practices since the CISG was drafted, it is necessary to develop a uniform interpretation of Article 2(b) that would align with today’s commercial realities and cross-border trade practices.
The information provided in this article is intended for informational purposes only and does not constitute legal advice. It should not be relied upon or applied without consulting an attorney to address your specific circumstances. Please note that this article was published on the date indicated and may not reflect subsequent changes in the law.
