AUTHOR:

Ms. BHAWNA LAKHINA,
Student,
National Law Institute University, Bhopal   

CO-AUTHOR:

ABSTRACT

The Convention on International Sale of Goods (CISG) is one of the most successful among the conventions relating to international trade. The text of the CISG is constantly interpreted to broaden its scope of application. Today it is a common practice to include arbitration clauses in the contract agreement by the parties. Arbitration clauses are separate from the main contract according to the ‘Doctrine of Separability’. However, there can be situations wherein the parties to the contract do not specify the law applicable to the arbitration agreement. Various scholars and arbitral tribunals have used the standards of interpretation to apply the CISG to arbitration clauses.  Many courts have also taken decisions to this effect.

In this sense, various mechanisms are used to apply the CISG to arbitration agreements. This article studies and analyzes how CISG can be used as an applicable law by the parties in arbitration. For this purpose, the article has been divided into four sections which relate to the Doctrine of Separability, scope of application of the CISG, the standards of interpretation that can be adopted, and the formal validity of arbitration agreements.

INTRODUCTION

The Convention on International Sale of Goods (CISG), also known as the Vienna Convention is a multilateral treaty ratified by 93 countries (known as ‘Contracting States’).  It was developed by the United  Nations Commission on International Trade Law (UNCITRAL) and was subsequently enforced on 1st January 1988. CISG, in essence, provides substantive rules about  the formation of contract, rights and duties of the seller and buyer as well as remedies in case of breach of contract. It is usually invoked as the applicable law by parties which belong to two different Contracting States.

The basic objective of CISG is to provide a uniform framework to facilitate international trade and commerce.  It also leads to the harmonization of the various domestic laws in relation to particular areas by providing uniform laws. This has made CISG one of the most successful international conventions in relation to international trade law. It also has an influence over the contractual obligations entered into by the non-Contracting States.

Though the CISG covers all matters in relation to the international sale of goods, there are some aspects which are inherent in a sales contract. The scope of application of CISG is not comprehensive in the sense that it does not govern all such matters concerning international trade law including agency, ownership, arbitration, etc. which are additional clauses in a contract of sale. This is because there are some areas which differ largely among the various domestic laws. Thus, in order to attract maximum support for the Convention, these areas were left outside the scope of the CISG.  As a consequence, these issues are governed by the non-harmonized domestic law provisions which are made applicable on the basis of the conflict of laws rules.

One such area which is outside the scope of CISG is the resolution of contractual disputes by virtue of arbitration agreements. These can be in the form of either standalone arbitration agreements or arbitration clauses in the operative contract. Such agreements are usually to minimize the time and costs involved in litigation and thus, provide for the settlement of contractual disputes outside the court.  An arbitration process is followed to give effect to the same.  This is governed by the terms agreed upon by the parties at the time of entering into the contract.  The law applicable to the settlement of disputes through arbitration is usually specified in the contractual clause itself.

Since CISG does not explicitly include arbitration agreements in its scope of application, whether the relevant articles of the Convention can be employed in the interpretation of the same has been a subject matter of debate. International practices, which have also been recognized and accepted by scholars and foreign judicial pronouncements, have demonstrated the applicability of the CISG over national laws for the interpretation of arbitration agreements.[1]  Further, eminent jurist Mistelis has also accepted that the interpretation of arbitration agreements can be done through the use of CISG.[2] In this respect, though there is no express mention of arbitration clauses to be governed by the CISG, it is an accepted fact today that CISG can be used by parties to arbitrate.

This article is divided into four sections. The first section is focused on the ‘Doctrine of Separability’ which provides an essential understanding of the nature of arbitration clauses. The second section analyses the mechanisms for the application of CISG in the interpretation of international arbitration agreements.  It also looks at various case laws wherein CISG was found to be applicable even without any express agreement to this effect among the parties to the contract.  The various provisions of the UNCITRAL Model Law are discussed in the third section to provide a formal validity to the application of the CISG in international commercial arbitration. In this sense, the major focus of this article is on the ways through which CISG can be made applicable to arbitration agreements.

 DOCTRINE OF SEPARABILITY

Before an analysis of the mechanisms used to apply CISG to the arbitration clauses is made, it is important to understand the ‘Doctrine of Separability’. This is because it defines the relationship between arbitration clauses and the main contract. It helps the courts and arbitration tribunals to adjudicate effectively on the matter.

The questions with regard to jurisdiction of courts and arbitral tribunals with respect to dispute resolution are determined in accordance with the rules of private international law of the forum state.[3]  This has been laid down as a ratio in the Gutta-Werke AG v. Dörken-Gutta Pol. and Ewald Dörken AG[4] case. CISG applies only when the contract is silent on these issues.

Contracts of sale often contain clauses pertaining to forum selection and arbitration. Therefore, in such cases, procedural issues are considered to be agreed upon at the time of conclusion of the contract.[5] The issue with respect to the existence of an arbitration agreement is an issue with respect to consent. The question of consent is governed by ordinary contract law principles.[6]

The general understanding in relation to choice of law governing the arbitration clauses is that the law which governs the contract is automatically applicable to arbitration agreements as well.  However, this is a wrong understanding because these two aspects are completely different.  This was discussed extensively by the US District Court for the Southern District of New York in the landmark case Filanto, S.p.A. v. Chilewich International Corp.[7] 

In this case, there was a contract between an American Company (Chilewich) and an Italian manufacturer of boots (Filanto) for the sale of boots. The contract was entered into by Chilewich to fulfill its contractual obligations of sending boots to a Russian company. The terms of this contract were to govern the contract between Filanto and Chilewich.  One of the terms contained an arbitration clause which provided for the arbitration to be conducted in Moscow.

The Memorandum of the contract was signed by Chilewich and was then sent to Filanto. The contract was signed by Filanto only after the completion of five months after receipt of the offer for the contract and two months after the opening of a letter of credit in Filanto’s favour by Chilewich.  Further, it was declared by Filanto that it would make itself bound to only specific terms of the standard contract and rejected the arbitration clause requiring arbitration to be held in Russia.

A dispute arose between the parties to the contract, i.e., Filanto and Chilewich and one of the issues raised before the court was whether the arbitration clause formed a part of the standard contract entered into by the parties. Filanto argued that it had expressly declared rejection of the arbitration clause of the contract.  On the other hand, Chilewich contended that Filanto had objected to the arbitration clause after an unjustifiable period of delay when Chilewich had already executed its part of the obligations by opening the letter of credit.

The Court held that Filanto was bound by the terms of the standard contract including the arbitration clause. Further, the Court dealt with the issue of separability of arbitration clauses.  It interpreted Article 81(1) of CISG to affirm the ‘severability’ of arbitration clauses in the case of avoidance of the contract.  It was thus, held that clauses with respect to arbitration are ‘severable’ in the sense that they are not separate and subjected to the same laws or rules as the other terms of the contract.  However, after the contract has been repudiated, the arbitration clauses become ‘severable’ and can be subject to a different set of laws.

Various commentaries on Filanto v. Chilawich also support the view that arbitration agreements are not ‘separate’.  Professor Davor Babic has noted that arbitration clauses are not ‘separate’ but ‘separable’.[8]  It has also been stated by some commentators that Filanto v. Chilawich served as one of the first cases applying CISG to arbitration agreements.  The important principle laid down in this case related to the rejection of the application of ordinary laws to determine intent of the parties to arbitrate.[9]

This is the ‘Doctrine of Separability’ which considers the arbitration clause separate from the main contract.  Since the arbitration contract is independent of the rest of the contract, the repudiation of the contract does not affect the clauses with respect to arbitration in the contract.[10] The same approach was adopted in the case Sojuznefteexport (SNE) v. Joc Oil Ltd[11] wherein it was held that the independence of an arbitration clause is not subject to doubt. The subject of an arbitration agreement (clause) is distinguished from the subject of a material-legal contract.[12] Thus, in the ruling of the FTAC on the 29th January 1974, taken on hearing a dispute between a Soviet and an Indian organization, the arbitration agreement is treated as a procedural contract and not as an element of a material-legal contract.[13]

The ‘Doctrine of Separability’ is also incorporated in the CISG. Article 81(1) of CISG considers dispute settlement mechanisms to be unaffected by avoidance of the contract. The Secretariat Commentary on Article 81 has pointed out that “Article 81 would not make valid an arbitration clause, a penalty clause, or other provision in respect of the settlement of disputes if such a clause was not otherwise valid under the applicable national law; [Article 81]….states only that such a provision is not terminated by the avoidance of the contract”.[14] In this sense, it does not make the formation of arbitration clauses which is a part of the main contract, subject to a separate law.  It merely states that an avoidance of the contract has no affect over the dispute settlement mechanisms, i.e., arbitration clauses. 

An analysis of the ‘Doctrine of Separability’ shows that the law which is applicable to the standard contract does not extend to the arbitration clause automatically.  This means that the arbitration clauses can be subject to laws which are different from laws governing the other terms of the contract.  However, there can be problems in implementing this doctrine. There can be situations where the parties to the contract do not specify the law to be made applicable to the arbitration clause.  Even in such a situation, the courts do not always extend the choice of law of the main contract to the arbitration agreement.[15]  This was also upheld in the case of XL Insurance v. Owens Coming.[16]

Further, in the case of absence of an agreement with respect to the choice of law applicable to arbitration clauses, the general principle supports the application of the law governing the place of arbitration.[17] This has been supported in a number of cases.  In the case of Black Clawson v. Paureverke[18], it was observed that it is a rare incident in which the law governing the arbitration agreement is not the law of the seat of arbitration.

Eminent scholar Stephan Kroll has pointed out that CISG cannot be made applicable to an arbitration agreement for the mere reason that the contract is governed by it.[19] He further states that Articles 1 to 3 of CISG which deal with the sphere of application makes it clear that the CISG is not intended to regulate arbitration clauses.[20]

With an understanding of these concepts, it is clear that CISG cannot be made applicable to an arbitration agreement for the mere reason that it governs the main contract.  An interpretation of Article 1 and Article 3 of CISG explicitly provide that CISG is applicable only to contracts of sale.  Hence, even though an arbitration clause is incorporated into a contract which is governed by CISG, the arbitration clause and the main contract are separate due to the ‘Doctrine of Separability’.   This means there is no automatic application of the law governing the substantive part of the contract to the arbitration agreement since it is separable from the rest of the contract.  Thus, an arbitration clause cannot be governed by the CISG unless there is an express agreement between the parties to the contract to this effect. Thus, arbitration clause clearly constitutes a separate contract altogether.  

On the other hand, various scholars including renowned jurist Harm Peter Westermann is of the opinion that arbitration clauses can be subject to procedural laws only, and not substantive laws.[21] However, this view was rejected by the Federal Court of Germany in its decision of 21 September, 2005.[22] It held that even substantive laws can govern the arbitration agreements entered into by the parties to the contract.[23]

In this sense, the ‘Doctrine of Separability’ in no way limits the application of CISG to contract formation.  In other words, the formation of contract, including the arbitration clause falls within the scope of application of the CISG.  However, there is one area which is opined to be entirely outside the scope of CISG. This is the area of formal validity of the arbitration agreements.  This has even been accepted by Robert Koch when he states that CISG does not apply to the formal validity requirements even though it may be applicable to the process of formation of the contract.[24]

In this sense, in cases where the parties have not expressly agreed to any law governing the arbitration clause, it is very important to make proper interpretation of the intention of the parties.  CISG provides a comprehensive guideline in this direction and thus, is often used by courts and arbitral tribunals to determine the choice of law.  Many times, the CISG is found to be applicable in arbitration agreements. The subsequent sections of this article focus on the ways of making CISG applicable in the arbitration process.

SCOPE OF APPLICABLITY OF CISG

CISG is applicable to the contract of sale of goods between parties having their businesses based in Contracting States, i.e., members of the CISG.[25]  It is also provided in Article 7(2) of CISG that in case of issues not covered under the CISG, the general principles on which the CISG is based, or any other law as per the rules of private international law, will be applicable.  This has also been recognized in the Netherland’s Arbitration Institute’s Interim Award.[26]

The scope of application of the CISG is largely defined in Articles 4 and 5.  These Articles give a broad description as to the matters explicitly governed by the CISG along with a non-exhaustive list of issues not governed by it.  The issue of uniform application of the CISG is also dealt with through the interpretation of these Articles.

The areas which are explicitly covered by the CISG are listed in Article 4 of the Convention. These areas are – (i) formation of contract, and, (ii) rights and obligations of the seller and buyer. On the other hand, the issues including transfer of property and validity are not governed by CISG.[27] The issue of validity, as mentioned in the Article 4(a), has been interpreted by the US District Court in the Geneva Pharmaceuticals Tech v. Barr Lab[28], to mean “any issue by which the domestic law would render the contract void, voidable, or enforceable”.  Thus, it can be inferred that the issue of scope of application of the CISG rests with the national laws of the Contracting States.[29] With a rise in international commercial arbitration, it is a settled matter that the applicability of CISG to arbitration clauses of the contract is recognized by scholars and arbitral tribunals alike.

Various scholars are of the opinion that the CISG must be made uniformly applicable, as can be inferred from Article 7(1) of CISG which requires exhaustion of all possibilities of application of the CISG.[30]  However, it is often argued that CISG governs only substantive matters while arbitration clauses constitute a procedural matter.  However, Article 11 of CISG is interpreted to extend the scope of CISG to even procedural matters.[31] This helps in justifying the proposition that arbitration clauses are capable of being governed by the CISG.

Another misconception in relation to the scope of application of the CISG is that the Convention governs only the substantive rights and obligations, along with the validity of contracts of sale of goods. However, CISG pertains to procedural matters as well which is evident from Article 19(3) and Article 81(1) which clearly make provisions for the application of CISG to the dispute settlement mechanisms adopted by the parties to the contract.[32] 

Specifically, Article 19(3) regards dispute settlement procedure as a material term of the contract.  This was also upheld in the Printed Goods case[33] wherein the court found that the arbitration clause is considered to alter the offer materially and thus, is subject to Article 19(3).  On the other hand, Article 81(1) of CISG provides that avoidance of the contract does not affect any means of settlement of disputes adopted by the parties involved.  This clearly implies that the CISG recognizes the arbitration clauses in the contract and thus, it applies to these arbitral clauses as well.[34] In this sense, Article 19(3) and Article 81(1) of CISG can be invoked as one of the means to apply the CISG to arbitration agreements.

Another mechanism to justify application of the CISG is with respect to substantive validity. Renowned scholars Schmidt and Ahrendts support the view that in cases where the substantive rules of the lex arbitri are employed, the application of CISG should be used for the interpretation of the arbitration clause.[35]  Various judicial pronouncements also support the application of CISG in case of dispute settlement clauses with respect to substantive validity.  In the Shoes Case[36], the Court found the CISG to be the applicable law due to the fact that the parties belonged to two different Contracting States and had not excluded the application of CISG.  Hence, in accordance with Article 1(a) of CISG, the contract would be governed by the CISG and the dispute will be settled through the provisions of the same.

Further, in the Woods case[37], it was recognized that the question regarding validity as mentioned under Article 4(a) of CISG, is to be assessed under the national law. The major question involved in this case was with respect to whether Austrian wood trade usages, which are considered to be part of commercial customs, involve a question of law or that of fact.  The Court held it to be a question of fact and thus, found CISG to be applicable based on the substantive elements involved.

STANDARDS OF INTERPRETATION

As stated previously, CISG does not explicitly cover matters relating to arbitration agreements. Thus, an in depth analysis of its various provisions is very essential for the same.  This is also essential to understand the scope of applicability of CISG to arbitration clauses. As stated above in part II of this article, arbitration agreements can be governed by CISG. An interpretation of some of the articles of CISG makes it clear that arbitration agreements can be governed by it. According to Article 4(1) of CISG, contracts subject to the CISG are to be interpreted solely according to the interpretative rules set forth in Article 8.[38] This has even been recognized by courts in a number of cases which will be discussed in this section.

There can be situations wherein the parties to the contract have not included some terms with regard to the arbitration processes in the arbitration clause.  It may also happen that the arbitration clause does not manifest the real intention of the parties to the contract.  In these situations, it becomes very important to interpret the terms of the contract in such a manner that the true intention of the parties involved is ascertained. For this purpose, it is important to make an analysis of Article 8 of CISG.

Article 8 of the CISG lays down certain guidelines to ascertain the real intent of the parties in case of ambiguous terms or conduct or where according to the other party, “the first party was operating under a mistaken assumption of fact”.[39] A three-step process is adopted under Article 8 to analyze the intention of the parties bound by the contractual obligations.  These are the standards of interpretation provided under the CISG in order to determine the intent of the parties which is in turn used to apply CISG in the arbitration agreement.

The first standard of interpretation relates to the analysis of the conduct of a party according to its actual intent where the other party knew or could not have been unaware of that intent.[40]  In case these essentials are not present in the conduct or statements of the party, interpretation is carried out using the yardstick of a reasonable man.[41]  This means that the understanding of the conduct or statements of the party is done according to the skill or knowledge standards of a reasonable person in similar circumstances.  Further, the arbitral tribunals or courts can even consider the facts and circumstances of the particular case to determine a party’s true subjective intent.[42]

A detailed analysis of Article 8(2) leads to the inference that the phrase ‘reasonable person of the same kind’ has been included to imply that the reasonable person must be of the same kind as the other party having the same characteristics as the party to whom the statement or conduct was addressed.[43]  In other words, the reasonable person, as mentioned in Article 8(3), must not be ‘any reasonable person’.  Rather proper regard must be had to the specific situation at hand.

The three standards of interpretation under Article 8 of the Convention have also been previously used to determine the real intention of contractual parties in relation to an arbitration agreement, in the Tissue Machine Case[44]. In this case, the arbitration clause was thoroughly interpreted by the court to ascertain the true intent of the two parties. Here, Article 8 of CISG was used to determine the real intention of the parties to the contract in relation to the arbitration agreement. 

In such situations where the arbitral tribunal recognizes the application of the CISG to the arbitration agreement, the standards of interpretation discussed above hold a lot of significance.  This is because the conduct or statements of the parties are thereby interpreted according to their true intent.  The standards of a reasonable man also play an important role in certain situations. 

In a situation where the addressee of the statement is unable to interpret the intent of the addressor, the addressee is bound by the subjective intent of the addresser if it is easily recognizable.[45] This is because a reasonable man in a similar situation is capable of determining the real intent behind the statement.  In another situation where an addressee knows or should have known the true subjective intent of the addresser even though the statement is ambiguous, the addressee is bound by the intent, irrespective of the fact that a reasonable man in a similar situation would not have been able to understand the real intent of the addresser.[46] In this sense, the application of CISG to ascertain the content of arbitration agreements depends on the standards of interpretation. 

The inquiry into the applicable provisions of CISG to arbitration depends on the basic premise that the different parts of the agreement may be inconsistent or disputable.  In other words, an arbitration agreement may consist of terms which are deemed to be material and those which are not considered to be so, i.e. the terms which are immaterial.[47] Some of the terms which are considered to be material include the choice of law, arbitral seat, institutional rules and means of selecting the arbitrators.[48] In some jurisdictions, this has led to the application of formal rules only to the terms considered to be material to the arbitration agreements.[49]

The application of Article 8 to the interpretation of arbitration agreements was illustrated in a landmark case.  MCC Cermacis v. Ceramica Neueva & Agostiono[50] provides an in depth analysis of the standards of interpretation adopted under Article 8(1). Further, the case also addresses Articles 8(2) and 8(3) to analyze the standards which must be invoked while interpreting the substantive intent of the parties to the contract.

In this case, a contract was entered into by an American retailer and an Italian manufacturer for sale of ceramic tiles.  The parties orally agreed for the sale of tiles and the terms were later incorporated in the seller’s pre-printed order form which was duly signed by the buyer’s company.  The form was written in Italian and the terms were printed on both sides, i.e. front and back.  There was a signature line provided at the bottom of the front side of the form.  It contained a declaration that the buyer had complete knowledge with respect to all the terms printed on both sides of the form and thus, consented to them. The terms included sanctions in case of failure on the part of the buyer with respect to payment.  In addition, a clause was inserted requiring that the buyer must give notice of non conformity of the tiles delivered within ten days of the delivery. 

In one of the orders, the buyer alleged breach of contract on the part of the seller for failure to make delivery of the tiles ordered.  In their counterclaim, the seller invoked the sanctions clause pertaining to non-payment claiming that the deliveries can be withheld in case the buyer did not comply with its obligation of making timely payment.  The buyer, as a response, submitted that the earlier deliveries were non-conforming and thus, the non-payment was justified.  In their defense, the seller invoked the clause which mandated a notice with respect to non conforming goods to be provided within ten days of the delivery and thus, the seller claimed that the actions of the buyer were against the terms agreed upon. 

Though the seller accepted non-conformance with the clause relating to notice of the contract, they submitted that the subjective intent of the parties was to not be bound by the terms of the contract which were written on the reverse side of the form, in particular the terms concerning notice of non conformity and late payment.  The buyer even presented affidavits to support their submission to this effect.

The US Court of Appeal held that the affidavits served as evidence that the subjective intent of the parties to the contract was not to be bound by the provisions mentioned on the reverse side of the form.  Thus, through the standards of interpretation laid down under Article 8(1) of CISG, it was concluded that the terms regarding non-payment and notice constituted non-binding terms of the contract in question.

Further, the court recognized that the facts of all cases are different and thus, an interpretation of the real intent of the parties cannot be made without considering the specific circumstances of each case.  This is in accordance with Article 8(3) of CISG.  Thus, the Court recognized the importance of a more substantive inquiry in accordance with Article 8(3) of the CISG and thus, held that the interpretation of the subjective intent of the parties differs as per the facts and circumstances of particular cases.

This shows that Article 8 plays a very significant role in the interpretation of arbitration agreements. The legal standards discussed above have been used by courts and arbitral tribunals in a number of cases to ascertain the true intention of the parties with respect to arbitration agreements in international commercial arbitration. The use of Article 8 of CISG to interpret arbitration agreements has also been recognised by international practices and scholars.[51] In this sense, Article 8 plays an essential role in the justification of the application of CISG to arbitration clauses. This is also the most used mechanism for applying the CISG to arbitration clauses.

FORMAL VALIDITY

There are certain requirements that need to be met in order for an arbitration clause to be considered valid. These requirements of formal validity are set out in the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards and the UNCITRAL Model Law on International Commercial Arbitration. Article V (1) of the New York Convention provides for the recognition only of “an agreement in writing under which the parties intend to submit to arbitration all or any differences which have arisen, or which may arise between them in respect of defined legal relationship.”

The formal validity rule is considered to be exclusive and uniform which must be adhered to by parties which have entered into international arbitration agreements.[52]  Article II (2) of the New York Convention provides further elaboration on the requirement of ‘written’ arbitration agreements.  It states that in order to be considered as written, an arbitration agreement must consist of ‘an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams’.[53]

In this sense, the rule regarding formal validity of arbitration agreements as established by the New York Convention is very rigid for the reason that it does not recognize an oral arbitration agreement.  However, Article VII of the New York Convention provides some flexibility to this effect by providing an opportunity to the parties to the contract for relying on more ‘favourable laws’ and treaties of the country where the award is sought to be enforced. In this respect, Professor Nina Tepes elaborates on the same when she states that “the application of the New York Convention cannot result in the situation where a party would be deprived of any rights it has according to more liberal provisions of the law of the country where the enforcement procedures are taking place”.[54]

There have been efforts to further reduce the rigidity in the formal validity rule under the New York Convention.  To this effect, UNCITRAL, in its New York Convention Recommendation regarding Interpretation of Article II, Paragraph 2, and Article VII, Paragraph 1, has recognized that the arbitration agreement can be entered into in any form as long as the contents of the agreement is recorded.[55]  Thus, an oral arbitration agreement can also be enforced on the condition that the parties to the contract can provide adequate evidence to this effect.  In the case of H. Small Limited v. Goldroyce Garment Ltd.[56], the Court has recognized witness testimony as a sufficient evidence of an oral agreement.

An interpretation of Article VII which supports application of ‘a more favourable law’ can be done in order to justify the application of CISG to arbitration agreements.  However, opponents of this proposition bring in the rigidity element of Article II of the New York Convention.  On the other hand, various Scholars are of the view that the ‘more favourable law’ provision of Article VII will prevail over the rigid provisions of Article II in a case where the New York convention is considered to be unfavourable by the parties to the contract.[57]  Taking this view, CISG can be used as the favourable law to govern arbitration agreements. There are certain factors that are considered by courts and arbitral tribunals to determine whether CISG can be the ‘favourable law’ applicable to arbitration agreements. 

It has been provided in the UNCITRAL Model Law that “failing any designation by the parties, the arbitral tribunal shall apply the law determinable by the conflict of laws rules which it considers applicable”.[58]  The factors which are, in general, used by arbitral tribunals to determine the applicable law include law of the place of arbitration, the law of the place where the arbitration agreement was concluded, the seat of a domestic trade organization which has published a standard form contract/arbitration agreement, and the law of the enforcing jurisdiction.[59]  Two major factors, the law of the seat and the law of the enforcing jurisdiction, have been discussed below in detail.

(A) Law of the Seat

The New York Convention places a lot of significance on this factor.  This is evident from the fact that Article V (1) (A) of the Convention provides that the arbitral award may be refused to be enforced “if the said agreement is not valid under the law of the country where the award was made”. Scholars have interpreted the ‘choice of the seat’ factor to mean that the choice of situs is deemed to be the law chosen by the parties to the contract to govern the arbitration agreement, even though a choice has been made with respect to law applicable to the contract or procedural rules to be made applicable by the arbitral tribunal.[60]

With respect to the CISG, it can be made binding only on parties belonging to the Contracting States.  However, in case of arbitration, CISG cannot be made binding on the parties for the reason that arbitrators are not similar to organs of any State.[61]  Thus, arbitral tribunals are not obliged to make CISG applicable to the parties to the contract even though the seat of arbitration may be in a Contracting State.[62] The CISG will be binding upon the tribunal if the parties decide so, whether expressly or impliedly. For this reason, it becomes important to utilize the interpretive mechanisms mentioned in the preceding sections of this article.

(b) Law of the Enforcing Country

The New York Convention defies the idea that the law of the place of arbitration is the sole source of an award’s legal force.[63]  In this sense, Professor Emmanuel Gaillard has elaborated by stating that, ‘the New York Convention considerably minimizes the importance of the law of the seat and although it leaves the State of the seat free to control arbitrations carried out on its territory as it sees fit, it shifts the focus to the conditions of recognition of awards in the national legal orders where enforcement is sought”.[64] 

This line of reasoning has emerged from Article V (2) (b) which refers to “public policy of the country” i.e., the jurisdiction responsible for enforcing the arbitration agreement.  The term ‘public policy’ has been regarded as ‘relative’ and ‘purely theoretical’.[65]  Thus, it can be inferred that the term ‘public policy’ has broader scope than ‘law’.  It can be concluded that CISG can be applied to arbitration agreements by parties belonging to Contracting States.  CISG can also be applied to escape from the rigid formal validity rule mentioned under Article II of the New York Convention.

However, there can be Contracting States which adopt reservations with respect to CISG through Article 12 and 96.  These articles allow the Contracting States to refuse to be bound by certain provisions of the CISG. However, such reservations do not make an arbitral award based on CISG unenforceable.  The text of these articles with respect to reservations does not set any restrictions as to form.[66]  On the other hand, the issue regarding whether Article 96 reservations mandates the arbitration agreement to be written or not, depends on the law applicable according to the conflicts of laws rules.[67] Thus, CISG can be applied to arbitration agreements even when one or both the parties belong to Contracting States which have made any reservations as to the application of the Convention.

CONCLUSION

 

It is a general notion that CISG is only applicable to contracts of sale in international trade.  However, an interpretation of its various articles shows that the CISG relates to some aspects of procedural matters as well.  Furthermore, CISG has been made applicable to arbitration agreements by courts and arbitral tribunals in a number of cases by using the standards of application provided under the same. Thus, the application of CISG to arbitration clauses is undisputable.

Arbitration clauses in a contract are considered to be separate and independent of the rest of the contract due to the ‘Doctrine of Separability’.  Hence, different set of laws can be applied to the main contract and arbitration clauses respectively. As a consequence,   courts and arbitral tribunals consider a number of factors to determine the law applicable to arbitration clauses in events of absence of any express agreement among the parties to the contract to this effect.

The application of CISG to arbitration agreements in international commercial arbitration can be justified through a number of ways. The most important of these involve an interpretation of its various provisions.  Also, it can be applied as a more favourable law in accordance with the provisions of the New York Convention.  This is also supported by various scholars as well as national arbitration laws.  Hence, CISG can be made applicable to arbitration agreements through an adoption of various mechanisms.  In this era of increasing International Trade contracts, the application of CISG to arbitration agreements provides a uniform mechanism for settlement of disputes arising between the parties to the contract leading to an effective and convenient arbitration procedure.

[1] Honnold, p. 17; Flechtner, p. 260 (2011); CISG Digest, Bianca/Bonell, p. 74; Zeller (2002), p. 629; Bell,   p.40.  

[2] Mistelis, p. 395.

[3] Neumayer/Mingop. cit., p. 250, Art. 31 n. 14.

[4] Switzerland Federal Supreme Court (11 July 2000).

[5] Stefan M. Kroll, Selected Problems Concerning the CISG’s Scope of Application, 25 J.L. &

COM. 39, 43 (2005).

[6] Margaret M. Moses, The Principles And Practice Of International Commercial Arbitration 19 (2d Ed. 2012).

[7] 789 F. Supp. 1229 (S.D.N.Y. 1992).

[8] Statement made during Professor Babic’s lectures on European private law at the University of

Pittsburgh School of Law in February 2012.

[9] Ronald A. Brand & Harry M. Flecthner, Arbitration and Contract Formation in International

Trade: First Interpretations of the U.N. Sales Convention, 12 J.L. & COM. 239, 260 (1993).

[10] Julian D.M. Lew Et Al., Comparative International Commercial Arbitration 102(2003).

[11] Court of Appeal of Bermuda (7 July 1989).

[12] Id.

[13]Arbitration Practice of the FTAC, Moscow, part VII, page 68 (1979).

[14] See Secretariat Commentary on Article 66 of the 1976 Draft (draft counterpart of Article 81)(1976).

[15] ICCA Yearbook of Commercial Arbitration XXVI 869, 878 et seq. (Albert Jan van der Berg ed. 2001).

[16] 2 Lloyd’s Rep. 500 (Q.B.) (2000).

[17] ICCA Yearbook of Commercial Arbitration IX 131, 133 Et Seq(1984).

[18] 2 Lloyd’s Rep. 446, at 483(1981).

[19] Kroll, S, Selected Problems Concerning the CISG`s Scope of Application (25), in Journal of Law and Commerce, 39 at 42 et seq (2005/06).

[20] Id.

[21] Westermann, HP, Münchener Kommentar zum Bürgerlichen Gesetzbuch, Article 4 para 7 (4th Ed. 2005).

[22] III ZB 18/05.

[23] Id.

[24] Robert Koch, The CISG As The Law Applicable To Arbitration Agreements, in Sharing International Commercial Law Across National Boundaries: Festschrift For Albert H. Kritzer On The Occasion Of His Eightieth Birthday 267, 286 (Camilla B. Andersen & Urlich G. Schroeter eds., 2008).

[25] CISG, Article (1)(1)(a).

[26] Interim Award 10 February  Netherlands Arbitration Institute (2005).

[27] CISG, Article 4.

[28] 201 F. Supp. 2d. 236 (S.D.N.Y. 2002).

[29] Cf. John A. Spanogle, Jr. & Peter Winship, International Sales Law: A Problem Oriented Coursebook    83, 130 et seq. (2000).

[30] Zeller 2002, p.635.

[31] Rajski, p.122.

[32] Walker, J, Agreeing to Disagree: Can We Just Have Words? CISG Article 11 and Model Law Writing Requirement (25), in Journal of Law and Commerce 153 at 163(2005/06).

[33] Germany Appellate Court Frankfurt (26 June 2006).

[34] Schlechtriem/Schwenzer, p. 356, para.14; Farnsworth Art. 19, note 2.8; Walker, p. 160; Kröll et al. Art. 11, para.13; Magnus, Art. 90, para.11; Huber, Art. 90, para.5; Schroeter, section 6, para 37.

[35] Schmidt – Ahrendts, p.217.

[36] Germany Appellate Court Karlsruhe(20 July 2004).

[37] Austria Supreme Court(21 March 2000).

[38] Federal Supreme Court, 31 October 2001 — VIII ZR 60/01, BGHZ 149, 113, 116 f.; Schmidt-Kessel in Schlechtriem/Schwenzer, op. cit., Art. 8 section 59; Magnus in Staudinger, op. cit., Art. 8 section 18.

[39] Bruno Zeller, Determining the Contractual Intent of the Parties under the CISG and Common

Law—A Comparative Analysis, 4 EUR. J.L. REFORM 629, 636  n.33 (2002).

[40] CISG, Article 8(1).

[41] CISG, Article 8(2).

[42] CISG, Article 8(3).

[43] E. Allan Farnsworth, Commentary on Article 8 CISG, in Bianca-Bonell Commentary on the International Sales Law 94, 96 (Massimo Bianca & Michael Bonnel eds., 1987).

[44] Germany Appellate Court Stuttgart(15 May 2006).

[45] Franco Ferrari, Interpretation of Statements: Article 8, in The Draft Uncitral Digest and Beyond: Cases, Analysis and Unresolved Issues in the U.N. Sales Convention 172, 174 (Franco Ferrari et al. eds., 2005).

[46] Id.

[47] See Gary B. Born, International Commercial Arbitration 619 (2009).

[48] Id.

[49] Id.

[50] United States Federal Appellate Court (11th Circuit: 29 June 1998).

[51] Koch; Janssen/Spilker; Schlechtriem/Butler, p. 43, para.42.

[52] Gary B. Born, International Commercial Arbitration: Commentary and Materials 23 (2d Ed. 2001).

[53] New York convention on Recognition and Enforcement of Foreign Arbitral Awards, Article II(2).

[54] Nina Tepes, The More Favorable Right Provision of Article VII of the New York Convention and Its Application to the Form of the Arbitration Agreement, 12 CROAT. ARBIT. Y.B. 125, 125–26 (2005).

[55] UNCITRAL Model Law on International Commercial Arbitration, Article VII (2006).

[56] 2 HKLR 526 (H.C. 1994).

[57] Emmanuel Gaillard, Enforcement Of Arbitration Agreements And International Arbitral Awards:The New York Convention In Practice 69–70 (Emmanuel Gaillard & Domenico Di Pierto Eds., 2008).

[58] Model Law on International Commercial Arbitration, Article 28(2).

[59] Leonardo Graffi, The Applicable to the Validity of the Arbitration Agreement: A Practitioner’s View, in Conflict of Laws in International Arbitration 19, 33 (Franco Ferrari & Stefan Kroll eds., 2011).

[60] William W. Park, The Lex Loci Arbitri and International Commercial Arbitration, 32 INT’L & COMP. L.Q. 21, 23 (1983).

[61] Giorgios C. Petrochilos, Arbitration Conflict of Laws Rules and the 1980 International Sales

Convention, 52 REV. H.D.I. 191, 218 (1999).

[62] Nils Schmidt-Ahrendts, CISG and Arbitration, 107 BELGRD. L. REV. 211, 214 (2011).

[63] Emmanuel Gaillard, Legal Theory Of International Commercial Arbitration 29 (2011).

[64] Id.

[65] Karl-Heinz Bockstiegel, Public Policy as a Limit to Arbitration and its Enforcement, IBA J. DISP. RESOL. 123, 124–25 (2008).

[66] Aleksandr Dolzhich Otdelnyie Voprosy Zaklucheniia Dogovora Kupli Prodazhi Tovarov po Venskoi Konventsii 1980 (Some Problems Related to the Conclusion of Sales Contracts under the Vienna Convention of 1980) (2005).

[67] Id.

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