The way the United Nations Convention on Contracts for the International Sale of Goods (CISG) interacts with public procurement practices is not talked about enough. The 2024-2025 Vis Moot Problem highlights an issue with reverse auctions in public procurement and Article 2(b) CISG. This provision says sales by auction are not in the CISG sphere of application, as auctions usually follow local rules and do not have an international nature. But now that public procurement is using reverse auctions and similar methods to secure contracts more efficiently in a global scale, Cesar Pereira C.Arb FCIArb, Leonardo F. Souza-McMurtrie ACIArb, and Lorenzo Galan ACIArb explore how these methods fit with Article 2(b) and whether they fall under the CISG.

Reverse auctions in public procurement are different from traditional auctions. They aim to obtain competitive prices, be transparent, and give everyone a fair opportunity, instead of just selling to the highest bidder right away. So, the big question is, do these features mean reverse auctions do not fall under Article 2(b) CISG exclusion?

The CISG Advisory Council has picked up the issue and appointed Cesar Pereira  FCIArb as the rapporteur for its upcoming Opinion. He has worked on the application of the CISG to government contracts since 2014,[1] and his most recent paper on the topic came out in 2023 during the CISG Advisory Council’s first meeting about this topic in Serbia. The draft will be discussed further in 2025.

The Purpose of Article 2(b) CISG

The CISG governs the international sale of goods. Even though the term "goods" is defined on its own, it is hard to pin down because of different domestic views and changing times. Technology has come a long way since 1980, so any definition the drafters came up with back then might not fit today’s global trade. The drafters were smart, though, and instead of saying what “goods” are included, the CISG lists what is not covered. Article 2 spells out the transactions the CISG does not handle, like personal, family, or household purchases, and sales of electricity. Importantly for us, Article 2(b) says sales by auction are excluded.

The drafters had good reasons for this, as auctions were traditionally a domestic thing. They happened in person, and no one really cared where buyers or sellers lived or did business. The seller usually did not even know who bought the item until the winning bidder was revealed. Because of this, foreign elements and whether the CISG applied (under Article 1) stayed unclear throughout the auction. That is one of the reasons why Article 2(b) exists. It protects the seller from the unexpected application of the CISG.

Government Contracts and Reverse Auctions

Things are different when it comes to government contracts. Even though the CISG was not meant to cover auction sales at first, it can still apply to government contracts that are set up like auctions.

Reverse auctions and similar processes are often used to pick the best supplier based on price or specific criteria set by the buyer. Instead of selling to the highest bidder, the government looks for the lowest price for goods or services. This process is more like a selection or negotiation phase rather than a straightforward sales transaction. These methods may involve parties from different countries and with defined roles at each step of the procurement process. The procuring entity may know the nationality of their prospective sellers, making it clear that the CISG could apply.

Picking a supplier is different from the actual sales contract. Even if domestic procurement laws have rules about fairness or non-discrimination, these mainly focus on choosing suppliers and do not automatically rule out the CISG applying to the final contract once a bid is accepted. So, just because there was an auction-like process involved, such as a “reverse auction”, it does not mean the Article 2(b) CISG exclusion kicks in for the government contract. Unless the parties specifically say they do not want the CISG or there is a domestic statute that overrides it, the CISG still applies.

International Government Contracts Practice

The 2019 decision of the Swiss Federal Supreme Court in the Electronic electricity meters case briefly addressed the issue. A Swiss state-owned entity had a contract with a Slovenian subsidiary for the delivery of electricity meters. The court decided that none of the Article 2 exclusions were applicable, ruling in favour of the CISG as the governing law to the contract.

Government contracts in Brazil highlight how relevant the CISG is. The Brazilian military’s purchasing office in Washington, D.C., often buys goods through online reverse auctions. They sometimes mention, right in their requests for quotation, that the CISG does not apply to the contract (see RFQ 0154/2022 and 0033/2022 here). This exclusion is also provided in some contracts (see Contracts 1197/2022 and 1071/2023 here). In several contracts for the international purchase of equipment, a Brazilian nuclear power state-owned entity (SOE) expressly provided for the application of the CISG (see CS-164/2020, CB-012/2020, and CB-103/2021: “The Agreement shall be governed based on the United Nations Convention on Contracts for the International Sale of Goods (CISG, Vienna Convention). The arbitration shall be held in accordance with the rules of the International Chamber of Commerce of Paris, in France, in English”.). This shows that governments and SOEs know when and how to apply the CISG to their international deals.

Online Reverse Auctions under the CISG

The CISG originally left out auctions because they were mostly domestic and happened in person, with buyers and sellers interacting face-to-face. But with online auctions, things are different. People, companies and states from all over can bid online, giving it an international character that fits the CISG’s cross-border sales idea better. This global reach makes the original reason for excluding auctions from the CISG a bit weak if extended to their online version. Similarly, online reverse auctions in public procurement do not fit the exclusion in Article 2(b) either.

However, exclusion of electronic auctions from the scope of the CISG has been construed broadly by case law. The court in the Sale of horse via internet auction case ruled that an online auction was outside from the scope of the CISG under Article 2(b). The court reasoned that the auction’s nature still aligned with the traditional auction framework, despite the online setting, thereby reinforcing a broader interpretation of Article 2(b)’s exclusion.

Where electronic auctions are concerned, whether the CISG applies depends on if international bidders are involved. Sellers can clear things by stating in their auction terms whether the CISG applies or not. Online platforms for public procurement may also specify if the CISG is relevant, especially in reverse auctions where governments want to connect with international suppliers. Brazilian public procurement practices demonstrate this approach.

Figuring out what legal language means in real life is hard. Sometimes, rules cover more or less than they literally say. The ‘No dogs’ sign at the train station obviously means you cannot bring your pet bear either, even if it is not specifically mentioned—sorry, Lord Byron. The point is that when you figure out why a rule exists, you usually get a sense of what it covers and where the exceptions lie.

Thus, the way international public procurement evolved, it is difficult to stick to the old, narrower interpretation of Article 2(b) CISG’s exclusion of sales by auction. Reverse auctions are different from the traditional ones covered by Article 2(b). They are a procedural step before the contract exists. Unlike the usual auctions in Article 2(b), reverse auctions often involve clear cross-border elements, defined parties, and structured processes, making them more in line with the CISG. Even more so if they are done electronically.

There is case law and scholarship in favour of the CISG’s applicability to government contracts, as Cesar Pereira’s 2023 paper highlights. With more governments using reverse auctions or other selection methods to procure goods globally, the CISG’s role in government contracts is poised to grow.

[1] This article benefits from materials comprised in Cesar Pereira. ‘Application of the CISG to international government contracts for the procurement of goods’, Review of the Kopaonik School of Natural Law, No. 2/2023, p. 157-183, 2023. Available at: <https://kopaonikschool.org/wp-content/uploads/2023/11/06-Cesar-Pereira.pdf>. Accessed on 15 November 2024. The latter is an updated version of Cesar Pereira. ‘Aplicação da CISG a licitações e contratos administrativos de compra internacional de mercadorias’, in Ingeborg Schwenzer, Paula Costa e Silva & Cesar Pereira (coord.) CISG, Brasil e Portugal. São Paulo, Almedina, 2022, p. 137-159; C. Pereira. Application of the CISG to international government procurement of goods, Public Procurement Law Review, No. 1, pp. 20-32, 2016; and Cesar Pereira. ‘Aplicação da CISG a licitações e contratos administrativos de compra internacional de mercadorias’, in Ingeborg Schwenzer, Cesar Pereira & Leandro Tripodi (coord.) A CISG e o Brasil, São Paulo, Marial Pons, Curitiba, Federação das Indústrias do Estado do Paraná, 2015.