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INTERSECTION OF CISG & ARBITRATION: ARBITRATOR’S DUTY TO APPLY CISG TO ICA FLOWS FROM PARTY AUTONOMY

[Ayush Kumar is a third-year student at Dr. Ram Manohar Lohiya National Law University, Lucknow]


THE NEED FOR UNIFICATION OF SALES LAWS AND CISG:


The globalisation of trade has led to the need to unify laws on an international level. The effects of globalisation have been reflected in almost all areas of human engagement; international trade is no exception. It is paramount to look at some data to picture the magnitude of exponentiation in global trade better. World Trade Organisation figures for 2001 show that the total merchandise exports worldwide summed up to USD 6,196,440 million. These exports escalated to USD 22,283,819 million in 2021. Moreover, the average annual growth in the period from 2000 to 2010 was more than 5% for exports and imports around the world.

The rise in international trade has led to a significant rise in commercial disputes. Subsequently, more than 60% of international commercial contracts now include an arbitration clause, according to a survey conducted by Ingeborg Schwenzer and Christopher Kee. These significant economic developments have catalysed the large-scale acceptance of Arbitration as a dispute resolution mechanism in resolving international trade disputes amicably. In the last two decades, the leading arbitral institutions of the world have seen more than threefold increase in arbitration case. For instance, alone Singapore International Arbitration Centre itself recorded a respective increase of 211% in arbitration cases.

It is only logical that international trade includes two or more countries. Countries have their own laws pertaining to contracts and trading. When disputes arise, it becomes tedious to find out the requirements of relevant contract laws of different countries, receive legal counsel, negotiate the applicable law, and adjust standard terms to domestic laws. In addition, there is a significant disparity in the accessibility of domestic legal systems throughout the world.

To level this disparity, the United Nations Commission on International Trade Law ("UNCITRAL") started working on a unified system of sales law for the international parties to use as an applicable law rather than dealing with the question of which party's domestic law will apply to the contract. It all came down to the formation of the Convention on Contracts for the International Sale of Goods (“CISG”), which was entered into force in 1988. If we look at the acceptance of CISG amongst the countries since then, we would see that 9 of the 10 most prominent export and import nations (except the United Kingdom) are now contracting parties to CISG. Today, there are 95 contracting states with the trajectory to continue going up.

If we look at the economic utility of CISG, we will get a fair picture as to why nations might opt for it in the future. CISG helps negating the possibility of a dispute on the choice of applicable law, therefore, it saves considerable amount of time and money which goes into determining the applicable law. It also reduces the number of cases in which contract negotiation fail due to a disagreement about applicable law. Additionally, a system of unified sales law ensures that no party is at disadvantage or at an unequal position when a foreign partner tends to act oppressive. CISG creates a framework for the parties to stipulate and implement stricter contract terms and conditions to protect their rights and interests, rather than signing rudimentary, unsecured model contracts in the past.[AK4]

CONVERGENCE OF CISG AND INTERNATIONAL COMMERCIAL ARBITRATION

International Commercial Arbitration (“ICA”) and CISG does not seem to be connected at first because whatever link that exists between them is unclear. Scholars cannot form a consensus as to when an arbitrator must apply CISG to ICA. At a conference titled “CISG in International Arbitration”, some scholars cited Article 1(1)(b) of the CISG and advised the arbitrators to apply CISG where conflict rules end up with the application of a Contracting State's law. On the other hand, this article advocates that the arbitrator's responsibility to apply the CISG stems from the parties' autonomy.

The majority of academics believe that the CISG does not bind arbitrators. Arbitral tribunals, unlike state courts, are not part of the nation's judicial system in which the Arbitration takes place. As a result, in the sense of a state court, they lack a proper lex fori (the law of Court in which the proceeding is brought). States do not create arbitral tribunals; instead, they provide the legal framework in which they function. The Vienna Convention ("VCLT") should be used to interpret the Convention’s applicability. According to Article 26 of the VCLT, only the Contracting States and their governmental organs are bound by the treaties' terms because treaties only bind parties who have signed them. As a result, because arbitrators are not state entities, they are not obliged by the CISG, including Article 1, unless the parties express a desire to apply it.

The rule of party autonomy is treated as a rule of conflict by these scholars, who maintain that when parties have selected the law of a Contracting State as the controlling substantive law, the CISG should apply as an essential element of that domestic law. The CISG's application may only be avoided if the parties expressly agree to it. What is bothering is that these writers do not elaborate on the logic for the ex officio application of Article 1(1)(b).

THREE SCENARIOS WHERE THE ARBITRATION TRIBUNAL APPLIED CISG:

There has been plethora of instances where CISG was applied to ICA by the arbitrators. We can cull out three scenarios of application: first, ex office application of CISG while relying on Article 1; second, application of CISG as a result of an implied agreement between the parties while also relying on Article 1; and third, application of CISG where the awards sought to justify the application on grounds other than Article 1.

For first scenario, in the Ukrainian Chemical Fertilizer Case at the International Chamber of Commerce (“ICC”), the contract between the parties did not contain a clause on the applicable law. The various possibilities considered by the tribunal were Austrian law, which applied to the place of the defendant's seat as seller, Swiss law, which applied to the place of the plaintiff's seat as buyer. Swiss law was also considered because the ICC has fixed Basel as the seat of arbitration. Moreover, since the Court of Arbitration appointed a German arbitrator, German law could also be applied as neutral law. Mention was also made of the possibility of applying Ukrainian law because the plaintiff had to send to Ukraine the bags.

Switzerland, Austria, the Federal Republic of Germany and Ukraine are all signatories to CISG. In each of these countries, the Convention entered into force before the date of signature of the contract by the parties. As a result, the arbitrators invoked Article 1 of CISG to resolve the Conflict of Laws and used CISG as the applicable law.

Tribunals take a different approach when the parties choose the law that will govern the substantive element of the contract. For instance, in the Manganese Ore Caseand the Machine for Manufacture of Household Textile Products Case, the court held that a Contracting State's choice of law implies the CISG's application since such a decision represents an implicit choice of the CISG.

These awards demonstrate that party autonomy is a connecting factor in ICA, satisfying the requisites for the applicability of CISG set out in Article 1(1)(b) – namely, that the applicable rules of private international law led to the application of a Contracting State's law. For example, the parties chose French law to regulate their contract in an ICC Arbitration Case. The arbitral panel decided that the Convention should be implemented since it was an inherent component of French commercial law that dealt with overseas purchases and sales of products.

Similarly, in Coke Case at the ICC, the CISG took precedence over domestic law. The tribunal found CISG to be a vital part of the parties' domestic law system. This is because Switzerland tries to incorporate international Conventions to which it is a party into its domestic laws. As Switzerland is a contracting state to the CISG, it is also part of Swiss law. In other words, if parties want to exclude themselves from CISG, they must explicitly state that CISG does not apply to the contract that they have entered into.

ARBITRATOR'S DUTY TO APPLY CISG CAN ONLY FLOW FROM PARTY AUTONOMY AND NOT FROM ARTICLE 1

No interpretation is ever right, all scholars can do is put forward a new interpretation of the subject matter based on their findings. For the purposes of this article, it is not Article 1 that obligates the arbitrator in relation to the application of CISG but the parties’ autonomy. As a result, the arbitrator shall apply CISG considering it as an implied choice as and when the parties choose the law of a contracting state. In order to avoid invalidation of the arbitral award under Article V(1)(d) of the NYC because of lack of party autonomy and use of excess authority on the part of the arbitrator, the arbitrator shall follow the parties’ choice of law, mostly.

As a substantive governing law, the CISG should be applicable when both parties’ business places are located in contracting states unless they agreed otherwise; or when “the rules of private international law led to the application of the law of a contracting state”; or when the parties expressly agreed on the CISG as a governing law. Another case is when the arbitral tribunals choose it because they believe that it is neutral to apply the CISG because it is outside any particular state’s judicial system.

Some arbitral awards have applied the CISG by virtue of Article 1(1)(a) where parties had their places of business and place of Arbitration in different contracting states. The prevailing view in this context is still that Article 1(1)(a) is not applicable.[1] Thus, even if both parties have their places of business in contracting states, the CISG can only become applicable via Article 1(1)(b), only after the arbitral tribunal has entered into a Conflict of Laws analysis.


---------------------------------------------------------------------- [1] 3 I. SCHWENZER & P. HACHEM, SCHLECHTRIEM & SCHWENZER COMMENTARY ON THE UN CONVENTION ON THE INTERNATIONAL SALE OF GOODS (Oxford University Press, 2010).

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