35 Years CISG and Beyond 9789462744554, 9789462366244

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edited by ingeborg schwenzer

35 years cisg and beyond

series editor ingeborg schwenzer

international commerce and arbitration volume 19

35 Years CISG and Beyond

35 Years CISG and Beyond

Ingeborg Schwenzer (Ed.)

Published, sold and distributed by Eleven International Publishing P.O. Box 85576 2508 CG The Hague The Netherlands Tel.: +31 70 33 070 33 Fax: +31 70 33 070 30 e-mail: [email protected] www.elevenpub.com Sold and distributed in USA and Canada International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786, USA Tel.: 1-800-944-6190 (toll-free) Fax: +1 503 280-8832 [email protected] www.isbs.com Eleven International Publishing is an imprint of Boom uitgevers Den Haag.

ISBN 978-94-6236-624-4 ISBN 978-94-6274-455-4 (E-book) © 2016 The authors | Eleven International Publishing This publication is protected by international copyright law. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Printed in The Netherlands

Table of Contents Editorial

ix

List of Contributors

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Part I Economic Analysis of the CISG 1 Saving Transaction Costs Burghard Piltz

3

2 Choice of Law in Practice – A Global Empirical Survey Luiz Gustavo Meira Moser

9

Part II The Decline of Reservations 3

Reservations and the CISG: The Borderland of Uniform International Sales Law and Treaty Law after 35 Years Ulrich G. Schroeter 4 Reservations, the Case of the Scandinavian Countries Jan Ramberg The Reservation from the Freedom of Form Principle of the CISG: The Case of Russia Djakhongir Saidov

29

67

5

The Application of the CISG in International Commercial Arbitration in China Shiyuan Han

71

6

91

Part III Extending the CISG 7

Extending the Scope of the 1980 Vienna Convention on the International Sale of Goods to Framework Distribution Contracts María del Pilar Perales Viscasillas 8 Natural Gas and the CISG Florian Mohs

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139

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9 The CISG and Statute of Limitations Pascal Hachem Control of Unfair Standard Terms in International Commercial Contracts Sieg Eiselen

151

10

11 CISG and the Default Interest Rate in Arbitration Jan Ramberg

165

179

Part IV CISG, State Action and Regionalisation 12

Do We Really Need Special Provisions for Business-to-Consumer Sales? Yeşim M. Atamer Application of the CISG to International Government Procurement of Goods Cesar Pereira

185

13

OHADA and CISG: Alternatives or Complementary Instruments? Jean Alain Penda Matipe

205

14

15 Harmonization in the European Union Claude Witz Contract Law in Latin America: Building of a ‘Latin American’ Ius Commune on Contract Law Alejandro M. Garro

223

235

16

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Part V CISG and Fair Contract Law 17 The Politics of Fairness in CISG Hans-W. Micklitz and Leticia Diez Sanchez

269

18 The CISG – A Secret Weapon in the Fight for a Fairer World? Petra Butler

295

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Table of Contents

19

International Fair Trade (Fair Trade in International Contracts and Ethical Standard) Paulo Nalin 20 Beyond CISG: Agricultural Production under Contract Anna Veneziano The Future of Contract Law Harmonization: A View from Unidroit José Angelo Estrella Faria

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341

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Editorial On 29-30 January 2015, the Conference on 35 Years CISG and Beyond took place in Basel at the oldest Swiss university. It was the first of many conferences around the world in 2015 celebrating the CISG’s 35th birthday. 35 years ago in March and April 1980, delegates from 62 states gathered at the now-famous Vienna Conference and finally voted in favor of this Convention. By a joint effort of the US and the PRC to accede to the CISG in December 1986, the CISG finally entered into force on 1 January 1988. Since then, the CISG has been a true story of worldwide success. Today, we count 83 member states, about one third from the so-called developed countries, one third from so-called transitioning countries and one third from so-called developing countries. It is most remarkable that it is in this latter group where the CISG is finally gaining momentum. According to WTO trade statistics, nine of the ten largest export and import nations are contracting states with the UK being the only exception. It can be assumed that approximately 80% of all international sales contracts are potentially governed by the CISG. Moreover, a truly great success is the strong influence that the CISG has exerted at both the international and the domestic level. From the UNIDROIT – Principles to OHADA and the Common European Sales Law, from the modernization of contract law in the PRC, Eastern Europe, Germany, Japan or South Korea, during the last 15-20 years, all legislators and institutions involved in law reform heavily relied on and borrowed from the CISG. However, it would be presumptuous if we closed our eyes to the fact that there is still a lot of skepticism voiced against the CISG. In the Basel Conference, we did not whitewash these doubts but instead addressed them not only from an academic angle but also from that of an international practitioner. To this end, we discussed the economic implications of the CISG being applied to an international sales contract; we addressed some concerns about the CISG’s incompleteness; we had a look at reservations and regionalization jeopardizing the uniformity achieved by the CISG and scrutinized the CISG’s possible contribution to a fair international contract law. Finally, in our Round Table at the close of the Conference, we looked ahead and took up the discussion about the desirability and feasibility of a further unification of contract law. We as organizers were very proud that we were able to engage the leading persons from all over the world on the CISG and on comparative contract law to speak at our Conference including the members and rapporteurs of the CISG Advisory Council. Likewise, we were

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Editorial

proud that our program attracted participants from all continents and from 30 different countries.1 The Conference would not have been possible without the support of many different institutions. Many thanks to our partners, UNICITRAL and the Swiss Association of International Law, and to our sponsors, the Swiss Federal Office of Justice, the Swiss Federal Department of Foreign Affairs, the Swiss Academy of Humanities and Social Sciences, Oxford University Press, the Swiss International Law School, the Swiss National Science Foundation, the Freiwillige Akademische Gemeinschaft Basel, Novartis and Schellenberg Wittmer attorneys. This book features most of the papers presented at the Basel Conference. The editor is deeply indebted to her assistants, Jonas Krull, BLaw, and Thomas Meyer, BLaw, for taking care of the manuscripts and for carrying out the proofreading. Prof. Dr. Ingeborg Schwenzer, LL.M. Basel, August 2015

1

For detailed information about the CISG Basel Conference 2015 as well as photo and video materials, visit the official conference website available at .

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List of Contributors Atamer, Yeşim M., Dr. iur. (Istanbul), LL.M. (Istanbul), Professor, Istanbul Bilgi University, Turkey. Butler, Petra, Dr. iur. (Göttingen), LL.M. (VU Wellington), Associate Professor, Victoria University of Wellington, New Zealand; Co-Director, Centre for Small States, Queen Mary University of London, United Kingdom. Diez Sanchez, Leticia, Ph.D. Researcher of the Department of Law at the European University Institute, Florence, Italy. Eiselen, Sieg, Ph.D. (Potchefstroom), Professor, University of South Africa, Pretoria, South Africa. Estrella Faria, José Angelo, Secretary-General, UNIDROIT, Rome, Italy. Garro, Alejandro M., J.S.D. (Columbia), LL.M. (Louisiana State University), Adjunct Professor of Law, Columbia University, New York, United States; Honorary Professor of Law, National University of Buenos Aires, Argentina. Hachem, Pascal, Dr. iur. (Basel), Attorney at Law, Zurich, Switzerland. Han, Shiyuan, Ph.D. (CASS), LL.M. (Jilin), LL.B. (Jilin), Professor of Law, School of Law, Tsinghua University Beijing, People’s Republic of China. Meira Moser, Luiz Gustavo, LL.M. (UF Rio Grande do Sul), University of Basel, Switzerland. Micklitz, Hans-W., Dr. iur. (Bremen), Professor for Economic Law, European University Institute, Florence, Italy. Mohs, Florian, Dr. iur. (Basel), LL.M. (VU Wellington), Attorney at Law, Zurich, Switzerland. Nalin, Paulo, Ph.D. (UF Paraná), LL.M. (UF Paraná), Professor at UF Paraná, Curitiba, Brazil.

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List of Contributors

Penda Matipe, Jean Alain, Dr. iur. (Basel), LL.M. (Wolverhampton), Consultant, London, United Kingdom. Perales Viscasillas, María del Pilar, Ph.D. (Madrid), Professor, University Carlos III of Madrid, Spain. Pereira, Cesar, J.S.D. (PUC – São Paulo), LL.M. (PUC – São Paulo), FCIArb, Attorney at Law, São Paulo, Brazil. Piltz, Burghard, Dr. iur. (Munich), Professor honoris causae, University of Bielefeld, Germany. Ramberg, Jan, Dr. iur. (Stockholm), Professor Emeritus, University of Stockholm, Sweden. Saidov, Djakhongir, Ph.D. (East Anglia), LL.M. (East Anglia), Professor, King’s College London, United Kingdom. Schroeter, Ulrich G., Dr. iur. (FU Berlin), Professor, University of Mannheim, Germany. Schwenzer, Ingeborg, Dr. iur. (Freiburg), LL.M. (UC Berkely), Professor, University of Basel, Switzerland; Dean Swiss International Law School (SiLS), Basel, Switzerland. Veneziano, Anna, Ph.D. (Florence), LL.M. (Yale), Professor, University of Teramo, Italy (on leave); Deputy Secretary-General of the International Institute for the Unification of Private Law UNIDROIT. Witz, Claude, Ph.D. (Strasbourg), Professor, Saarland University, Germany.

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Part I Economic Analysis of the CISG

1

Saving Transaction Costs*

Burghard Piltz

1.1

Preliminary Remarks

‘Uniform Law can reduce costs’ is an appealing statement for businesspeople; however, it does not provide additional allure for legal scholars or practitioners. Therefore, it is no surprise that businesspeople react open-minded when confronted with the CISG, while hesitation against the application of the CISG – or to be more precise, the tendency to exclude its application – has its source mainly in lawyers’ heads. When recommending his clients in his function as advocate not to exclude the CISG, the author has never encountered any doubts, let alone any opposition from businesspeople. This result not only is corroborated by latest experiences but portrays the empirical knowledge of almost a quarter of a century. In addition, none of the author’s clients ever asked to reverse the (previous) decision of basing their international sales transactions on the CISG. Commercial clients are not interested in the intricacies and peculiarities of the legal structure of the CISG or any other set of rules. What they care about is their commercial interest. In this context, the CISG offers more flexibility than quite a number of national civil codes. Businesspeople are especially convinced by the benefits in costs that the CISG offers. In this regard, a closer look shall be taken on the CISG in the following.

1.2

Horizontal Effects

In international matters, lawyers like to rely on party autonomy and quite often believe that by stipulating something like ‘This contract is governed by German law’, they have cost-efficiently resolved all problems triggered by the co-existence of different national sets of rules, which may have a link to the given case or contract. In this world, there are more or less 200 co-existing jurisdictions. In the eyes of a lawyer dedicated to private international law, these 200 jurisdictions are of equal weight1 and it is the applicable private international law deciding the law of which country, or rather countries, will be the one(s) to govern a given case. To be more precise, it is not just one applicable private international law that decides, but as many private international laws * 1

All web pages were last accessed in July 2015. See also G. Kegel & K. Schurig, Internationales Privatrecht, 9th edn, C.H. Beck, Munich, 2004, pp. 131 et seq.; J. Kropholler, Internationales Privatrecht, 6th edn, Mohr Siebeck, Tübingen, 2006, p. 16.

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as countries involved. Private international law is not of international or transnational origin, but a national set of rules2 to handle international cases. Therefore, the boilerplate ‘This contract is governed by German law’ renders the intended result only if all private international laws involved permit the parties to choose the law governing their contract.3 In some Arabian countries, national legislators do not allow the parties to choose the law governing their contract at all.4 The same occurs in some Latin American countries like Paraguay5 and Uruguay.6 Other Latin American countries like Brazil7 and Columbia8 respect party autonomy only if dispute resolution is agreed to be reached by arbitration. On the other hand, all these Latin American countries are member states of the CISG.9 As long as the CISG applies, identical rules govern the transaction regardless of any restriction or condition, which a national private international law may set up.10 However, if the CISG is excluded and nonetheless a reliable contract effective in law is aimed at, each single jurisdiction with contacts regarding the respective contract has to be scrutinized in the way of a one-on-one attention. Obviously, it is much more cost-efficient not to exclude the CISG. Nevertheless, private international law campaigners will object that the vast majority of private international laws existing in today’s world respect party autonomy and that the exceptions mentioned above are the few exceptions corroborating the rule. However, there are further aspects, which require the consideration of all the private international laws involved in order to set up a contract effective in law when excluding the CISG. Any private international choice of law clause is an agreement regarding the applicable law. In order to establish a valid choice of law, this agreement must be effective in law also. According to Article 3 Para. 5 Rome I Regulation, the existence and validity of the consent of the parties as to the choice of the applicable law are to be determined in accordance with the law chosen. This approach may not convince in terms of a logical structure, but it works 2

B. von Hoffmann & K. Thorn, Internationales Privatrecht, 9th edn, C.H. Beck, Munich, 2007, p. 9; Kegel & Schurig, 2004, supra, pp. 5 et seq., note 1. 3 See also F. Vischer, L. Huber & D. Oser, Internationales Vertragsrecht, 2nd edn, Stämpfli, Bern, 2000, Paras. 41 et seq.; J. Schröder & C. Wenner, Internationales Vertragsrecht, 2nd edn, RWS Kommunikationsforum, Cologne, 1998, pp. 10 et seq. 4 Cf., e.g., Saudi Arabia: H. Krüger, ‘Internationalrechtliche Probleme in Saudi-Arabien’, IPRax, No. 4, 2005, pp. 386 et seq. 5 A. Soto (Rosario/Argentina) on the congress of the German-Argentinian Lawyers Association 2009 in Heidelberg. In 2015 Ley No. 5393 was enacted which permits party reference. 6 A. Dabah, El Contrato Internacional en el Mercosur, Quorum, Buenos Aires, 2005, p. 172. 7 P. Sester & R. Benevenuto, ‘Schiedsgerichtsbarkeit im brasilianischen Handels- und Gesellschaftsrecht’, RIW, No. 10, 2010, pp. 680 et seq. at p. 682; C. Bergdolt, ‘Internationale Schuldverträge und ihre Durchsetzung im brasilianischen Recht’, Schriften der Deutsch-Brasilianischen Juristenvereinigung, Vol. 8, Peter Lang, Frankfurt a.M., 1988. 8 J. Samtleben, ‘Das kolumbianische Gesetz über die internationale Schiedsgerichtsbarkeit’, RIW, No. 8, 1997, pp. 657 et seq. at p. 659. 9 . 10 OGH, CISG-online 602.

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Saving Transaction Costs

fine in practise.11 However, other jurisdictions prefer other approaches. Chinese private international law seems to always resort to Chinese law when deciding whether the parties agreed validly on a choice of law clause or not.12 Therefore, if the choice of law clause forms part of general terms and conditions, the choice of law is only valid if the Chinese requirements for the inclusion of general terms and conditions have been observed. According to Japanese private international law, the issue of a valid consent of the parties as to the applicable law is an autonomous, stand-alone matter of interpreting private international law.13 These random examples give evidence that excluding the CISG and yet striving for a contract effective in law by agreeing on a national law require immerging into all the private international laws involved even if these (private international laws) allow the parties to choose the applicable law. Again, it is much easier and much more cost-effective to not exclude the CISG. To the extent that the CISG applies, the private international laws involved are irrelevant altogether and therefore do not require any attention at all.14 However, the situation is not that complicated if only European countries are involved. In such a setting, the Rome I Regulation applies and provides a uniform set of private international laws identical in almost all member states of the European Union. Anyhow, this does not mean that international sales transactions receive the same handling regardless of the European countries involved if the CISG is excluded and a national law is agreed upon. If a party alleges that its conduct should not be interpreted as consent according to Article 10 Para. 2 Rome I Regulation, the law of its habitual residence has to be consulted.15 By way of example, if a German party refers to its general terms and conditions and the French or Italian counterpart remains silent, the German party cannot be sure that its terms and conditions apply, even if the contract as such is subjected to German law, and silence of a businessman in such a situation means approval according to German law. Article 10 Para. 2 Rome I Regulation foresees to evaluate consulting French or Italian law

11 See also I. Schwander, ‘Rechtswahl im Spannungsfeld zwischen Kollisionsrecht und Sachrecht’, in A. Büchler & M. Müller-Chen (Eds.), Private Law: National – Global – Comparative: Festschrift für Ingeborg Schwenzer zum 60.Geburtstag, Stämpfli, Bern, 2011, pp. 1581 et seq.; Regarding conflicting choice-of-law clauses in terms and conditions of business, see A. Dutta, ‘Kollidierende Rechtswahlklauseln in allgemeinen Geschäftsbedingungen: Ein Beitrag zur Bestimmung des Rechtswahlstatuts’, ZVglRWiss, No. 104, 2005, pp. 461 et seq. 12 Y. Xiao & W. Long, ‘Contractual Party Autonomy in Chinese Private International Law’, in A. Bonomi & P. Volken (Eds.), Yearbook of Private International Law, Vol. 11, Sellier, Munich, 2009, pp. 193 et seq. at p. 200. 13 Y. Sakurada & E. Schwittek, ‘Die Reform des Japanischen Internationalen Privatrechts‘, RabelsZ, No. 76, 2012, pp. 86 et seq. at pp. 94-95. 14 Cf. OGH, CISG-online 602. 15 Cf. Oberlandesgericht (OLG) Karlsruhe, NJW-RR 1993, p. 567.

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Burghard Piltz whether it is reasonable to interpret the silence as consent.16 Most probably, the result will be ‘no, silence does not mean consent’.17 However, if the CISG applies, such examination is not necessary. The CISG establishes the pre-requisites that have to be met in order to include general terms and conditions18 irrespective of which countries are involved and irrespective of what their national provisions regarding consent by conduct are. According to Article 12 Para. 2 Rome I Regulation in relation to the manner of performance and the steps to be taken in the event of improper performance, regard shall be paid to the law of the country in which performance occurs irrespective of the law governing the contract as such.19 Here again, in order to play it safe, the relevant laws should be checked even if the parties agree upon the application of a national law.20 However, if the CISG (is not excluded and therefore) applies, no such necessity arises. The legal benchmark for resolving any dispute is the CISG. Finally, Article 9 Rome I Regulation determines that under certain conditions, overriding mandatory provisions have to be respected regardless of the law governing the contract.21 Typical examples for such a situation are mandatory provisions granting rights to third parties, which are no contractual partner of the respective sales contract, yet have an interest in the evolution of the contract of sale since they are a sub-supplier to the seller or customer of the buyer.22 If the CISG applies, no party to the contract of sale will be confronted with contractual obligations not deriving from the CISG.23 However, if the CISG is excluded, mandatory provisions protecting third parties may have an impact. If the parties nevertheless strive for legal dependability of their contract, further examinations 16 Oberlandesgericht (OLG) Hamburg, CISG-online 2410; R. Hausmann, in J. von Staudinger (Ed.), Staudinger BGB: EGBGB/IPR Einführungsgesetz zum Bürgerlichen Gesetzbuche/IPR Einleitung zur Rom I-VO; Art 1-10 Rom I-VO (Internationales Vertragsrecht 1), new edn, Sellier, Munich, 2011, Para. 83 concerning Art. 10 Rom I-VO; F. Ferrari, in F. Ferrari, et al. (Eds.), Internationales Vertragsrecht, 2nd edn, C.H. Beck, Munich, 2012, Para. 34 concerning Art. 10 Rom I-VO. 17 Cf. D. Martiny, in C. Reithmann & D. Martiny (Eds.), Internationales Vertragsrecht, 7th edn, Dr. Otto Schmidt, Cologne, 2010, Para. 282. 18 Hoge Raad, CISG-online 1002; OGH, IHR 2004, pp. 148 et seq., 153 = CISG-online 828; BGH, IHR 2002, pp. 14 et seq. = CISG-online 617. 19 BGH, RIW 2006, pp. 948-949; R. Freitag, in T. Rauscher (Ed.), Europäisches Zivilprozess- und Kollisionsrecht, revised edn, Dr. Otto Schmidt, Cologne, 2011, Paras. 10 et seq. concerning Art. 12 Rom I-VO; Ferrari, 2012, supra, Para. 29 concerning Art. 12 Rom I-VO, note 16. 20 For a critical assessment of the indispensability of the rule, see Vischer, Huber & Oser, 2000, supra, Para. 878, note 3. 21 Cf. F. Maultzsch, ‘Rechtswahl und ius cogens im Internationalen Schuldvertragsrecht’, RabelsZ, No. 75, 2011, pp. 60 et seq. 22 For France, see J. Bauereis, ‘Anmerkung zu den Entscheidungen des Cour de Cassation Paris vom 30.11.2007 (IBR 2008, 428) und vom 25.02.2009: Zur Frage der Zulässigkeit eines direkten Zahlungsanspruchs des Subunternehmers gegen den Auftraggeber nach französischem Recht’, ZEuP, 2011, pp. 406 et seq.; J. Kondring, ‘Das französische Subunternehmergesetz als Eingriffsnorm: Triologie einer Identitätsfindung’, RIW, 2009, pp. 118 et seq.; for Italy, see K.-H. Lauser, A. Birk & P. Zanovello, ‘Gesetz über vertikale Kooperations- und Zuliefervertragsverhältnisse’, RIW, 2001, pp. 180 et seq.; for Belgium, see Art. 1798 Code Civil. 23 B. Piltz, Internationales Kaufrecht, 2nd edn, C.H. Beck, Munich, 2008, Paras. 2-137 et seq.

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have to be carried out and additional safeguards have to be incorporated, both meaning additional costs. In order to cut short the long story of excluding the CISG and agreeing on the application of a national, non-uniform law, it has to be highlighted: even in a common market and under the umbrella of a uniform private international law like the Rome I-regulation, the legal consequences of an international contract are not easy to foresee, unless they are subject to further examinations and additional safeguards. This scenario becomes even more complicated if the international contract has links to other, non-European states and further private international laws. Additional examinations and additional safeguards mean additional costs. However, if the CISG is not excluded and to the extent it applies, the result always remains the same, regardless of the states involved in the individual case. It is plain to see that a set of rules that offers such a result is much more cost-efficient than the alternative approach involving the multiplicity of private international laws and their tendency to refer to different bodies of law even if the parties have agreed on one applicable law.

1.3

Vertical Effects

Practising lawyers seem to assume that by agreeing on a national law, the international transaction will be handled like a domestic one. For the reasons explained above, this expectation will often be disappointed. On an international level, the CISG creates much more legal certainty than a national law. Moreover, this statement is valid not only comparing existing sets of rules but also looking at it in a time dimension. The CISG is an international treaty. Each person domiciled in a contracting state and engaged in international sales can count on a firm set of rules, which continues to be applicable in currently 83 contracting states and pre-empts domestic law.24 Since the signing of the CISG 35 years ago, no state ever decided to denounce the CISG and an amending treaty is not in sight at all. In other words, the probability that both, the set of rules provided by the CISG as well as the applicability in 83 states, will remain in force for the next future and continue to procure legal certainty is very high. If the CISG is excluded and the applicable law is a national one according to the contract, the situation is quite different. The private international laws involved may be amended or their application may change. If a party wants to be on the safe side, a constant moni24 U.G. Schroeter, UN-Kaufrecht und Europäisches Gemeinschaftsrecht: Verhältnis und Wechselwirkungen, Sellier, Munich, 2005, pp. 83 et seq.; R. Herber, ‘Der Erfüllungsort im Verhältnis zwischen CISG und EuGVVO’, IHR, 2004, pp. 89 et seq. at p. 91; Cf. BVerfG, NJW 1987, p. 2427 as well as Art. 75 Argentinian Constitution, Art. 55 French Constitution, Art. 28 I Greek Constitution, Art. 133 Mexican Constitution, Art. 94 Dutch Constitution, Art. 91 Polish Constitution, Art. 15 IV Russian Constitution and Art. 10 Czech Constitution.

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toring of the private international laws involved and their application is necessary entailing further costs. In addition, any state may enact national statutes, which are considered mandatory or for other reasons influence the intended result, which was supposed to be achieved by applying the private international laws involved. Therefore, monitoring just the persuasive private international laws involved is not sufficient in order to guarantee legal certainty. If the CISG applies, this outcome is unthinkable because the CISG as an international treaty is of higher hierarchy and pre-empts national law and changes or amendments introduced by national authorities.

1.4

Conclusion

Using domestic model contracts or terms and conditions in an international setting poses quite a lot of legal perils. By applying the CISG, a party engaged in international sales transactions enjoys much more legal certainty. Of course, this means that in addition to the forms used in domestic business, further model contracts as well as terms and conditions based on the CISG25 have to be elaborated, which will cause some spending. However, these model contracts and terms and conditions can currently be used with contractual partners in 83 jurisdictions and continue to be used in the next future without any amendment triggered by national acts of legislation becoming necessary. On the other hand, if the CISG is excluded and the parties strive for contracts effective in law, a continuous monitoring and a persisting readiness to adapt the forms to new situations are indispensable. Therefore, it is the author’s conviction corroborated by experience: not excluding the CISG is the most cost-efficient way to secure legal certainty in international sales transactions.

25 For model contracts based on the CISG, see ICC, The ICC Model International Sale Contract, Paris, 2013; B. Piltz, ‘Export Contract’, in R. Schütze, L. Weipert & M. Rieder (Eds.), Münchner Vertraghshandbuch, Vol. 4, 7th edn, C.H. Beck, Munich, 2012, pp. 397 et seq.; International Trade Center, Model Contracts for Small Firms, Geneva, 2010.

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2

Choice of Law in Practice – A Global Empirical Survey*

Luiz Gustavo Meira Moser Decision-making processes are typically not a ‘one-size-fits-all’ matter. The drive behind these decisions may be plural, involving (frivolous or not) motives that cannot always be rationally explained. For example, assuming you are agreeable to ice cream in general, have you ever thought about how you choose an ice cream flavor? Is it the consistency, the color, the calories, or the nutrients or is it part of a certain diet? Alternatively, do you choose a flavor because you have (or have not) chosen the particular flavor before, you were taught to choose one over the others, a third party once recommended a particular flavor, or you simply enjoyed that particular flavor the last time you had it? Perhaps you have absolutely no idea what the thought processes behind ice cream flavor choices are at all. Readers may be questioning themselves at this point in time: what, and to what extent, does this analogy have to do with choice of law in international sales contracts? The answer may surprise the reader because it is far more than we believe. In the discourse to follow, we will discuss choices, preferences, and parties’ behavior in international sales contracts1.

2.1

Global Empirical Survey on Choice of Law

2.1.1

Survey Goals

In contract negotiations, parties may frequently choose the governing contract law based on previous practices and the positive and negative experiences related to the trading partner and/or the transaction. Nonetheless, there are factors of a practical standpoint that parties should evaluate and take into consideration while assessing the pros and cons of any governing contract law at the choice-of-law decision stage. * 1

All web pages were last accessed in June 2015 For reference of previous empirical research efforts, see I. Schwenzer & C. Kee, ‘International Sales Law: The Actual Practice’, Pennsylvania State International Law Review, Vol. 29, Issue 3, pp. 425-448, 2011; S. Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’, European Review of Private Law, Issue 1, 2013, pp. 13-78; and Queen Mary School of International Arbitration Empirical Studies, available at .

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The governing law sets out the standards, defines the effects of acts and omissions of the contracting parties, and dictates and guides the parties’ behavior in the course of a contract’s life2. For example, such decisions may include whether or not to perform or breach the contract, to remain silent in respect of an offer, to claim damages or mitigate losses, to gather evidence, to exchange and communicate information, to manage, transfer, or allocate risks, to behave opportunistically, to adopt recalcitrant tactics, and to spend resources in resolving (or not) disputes. Under a pure rational perspective, individuals make decisions utilizing a compensatory strategy. In other words, they identify and evaluate all available options, assess and weigh all of the relevant attributes of each option, and then select the option they evaluate most favorably3. This requires actors to infer facts by applying principles of deductive logic to all known and relevant information. Therefore, while choosing the governing contract law, parties would process all available information, make choices, and execute behaviors in a way calculated to maximize their expected utility, i.e., maximize the differential between expected benefits and expected costs4. On the other hand, under a heuristic-based approach5, or an intuitive process, the choice of law decision may be based on empirical evidence, meaning that individuals use mental shortcuts to make decisions on the basis of limited information. In such a scenario, the decision would be assessed premised on their success or failure in real-world environments and not according to the logical and mathematical rules6. It is rather a simplified cognitive process of making decisions with uncertainties. While the choice of law process may seldom be regarded as a rational choice, there are many factors, both legal and economic, that may influence and guide this choice.

2 3

4 5

6

See A.W. Katz, ‘Contract Formation and Interpretation’, in P. Newman, (Ed.), The New Palgrave Dictionary of Economics and the Law, 1998, pp. 1-14, at p. 2, available at . C. Guthrie, ‘Law, Information, and Choice: Capitalizing on Heuristic Habits of Thought’, in C. Engele & G. Gigerenzer (Eds.), Heuristics and the Law, MIT Press, 2006, Vanderbilt Law and Economics Research Paper No. 06-11, p. 427, available at . R.B. Korobkin, ‘The Problems with Heuristics for Law’, in UCLA School of Law, Law & Econ Research Paper No. 4-1, p. 2, available at . Id. In this connection, see also M.I. Fraidin. ‘Decision-Making in Dependency Court: Heuristics, Cognitive Biases, and Accountability’, Cleveland State Law Review, Vol. 60, 2013, pp. 913-974, noting that “[…] heuristics devices include ‘availability’ and ‘representativeness’, among other ‘mental shortcourts’ […]The availability heuristic allows a decision-maker to reach a decision by immediate, reflexive reference to a different situation that comes readily to mind […] The ‘representativeness’ heuristic similarly reflects a decisionmaker’s substitution of one item for another. A decision-maker who relies on the representativeness heuristic assesses a probability ‘by the degree to which A is representative of B, that is, by the degree to which A resembles B’ […]‘Affect’ or the good or bad feelings generated by a person or event, is another heuristic that sometimes drives decision-making” (at pp. 919-920). For further information about heuristics and choice of law processes, see L. Spagnolo, ‘Green Eggs and Ham: the CISG, Path Dependence, and the Behavioural Economics of Lawyers’ Choices of Law in International Sales Contracts’, Journal of Private International Law, Vol. 6, Issue 2, 2010, pp. 417-464, at p. 438.

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Choice of Law in Practice – A Global Empirical Survey

This is precisely what the Survey has envisioned to demonstrate: a complete diagnosis of parties’ preferences in the international contract negotiation context – their strategies and choices – while they assess and decide on the governing contract law of international sales, the advanced precautions taken, and the legal and economic considerations and concerns arising out of the table of negotiations. Finally, the Survey brings to the readers, including parties to an agreement, party advisors, legal practitioners, and laymen, empirical knowledge on parties’ preferences in international sales negotiations, coupled with commercial tactics, useful observations, and comments out of an international negotiation setting. It also includes an assessment of the main concerns associated with the substantive law, the intricate analysis of advantages and disadvantages of choosing domestic law vis-à-vis uniform laws to govern international sales contracts, and the exclusions and opt-out mechanisms available to the contracting parties.

2.1.2

Respondent Profile

The respondents were profiled based on professional experience, legal background, and geographical location. Party counsels and party advisors with significant experience in international sales contracts were invited to participate in the Survey. The respondents were leading practitioners in the subject matter in their respective countries. All of the professionals invited to participate in the Survey were carefully selected through a series of searches premised on the above criteria. Finally, legal practitioners who combined international sales law experience with expertise in other areas of law or practice areas were also approached, as the Survey aimed to offer a multi-disciplinary view on the choice-of-law process and a clearer perception of this practice worldwide.

2.1.3

Methodology

The Survey was composed of an online questionnaire accessible by invitation only. The content of the Survey was available via a click-through link that guided the respondent to eight multiple-choice questions. The respondents were invited to participate in the Survey from July to September 2014. In the online invitation, the respondent was made aware of the Survey goals, as well as of its structure, the estimated time to respond to the questionnaire, and the web link. Being directed to the Survey web page, the respondent was firstly informed about the Survey goals.

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As a preliminary request, the respondent was invited to indicate his or her country of residence. While completing the questionnaire, the respondent was allowed to specify other choices, preferences, and/or concerns not listed in the provided answers and/or to make comments that he or she might wish to include regarding the choice-of-law decisionmaking process. The questionnaire offered an indicative and non-exhaustive list of preferences that was, to a great extent, focused on legal and economic aspects, with some variations of terms for adequacy and methodological purposes. Nonetheless, in all of the proposed questions, the respondent was offered a blank box to identify or specify other choices, preferences, and/or concerns, which could also be used to link a non-listed choice to precedent questions and for additional thoughts and comments. A respondent should have taken around 5 to 10 minutes to respond to the questionnaire. The eight questions displayed choices in random orders each time a new respondent accessed the questionnaire. Questions 1 and 4 allowed the respondent to select only three choices or preferences – the reason for this was to better assess the main legal and economic considerations. The respondent could specify in a blank box his or her choice(s), preference(s), and/or concern(s) not listed. Questions 2, 3, 5, 6, and 7 allowed the respondent to select an unlimited number of choices, preferences, and/or concerns – the Survey was intended to give the respondent more alternatives that would help draw assumptions regarding parties’ preferences in these questions. Finally, Question 8 could be skipped or, if selected by the respondent, the reason for the exclusion or opting-out choice could be disclosed or omitted. Questions 1 to 8 are reproduced later in this article.

2.1.4

Survey Results

228 respondents from 93 jurisdictions completed the Survey. The respondents are located in Europe, Asia, the Americas and Caribbean, Africa, and Oceania. The respondents comprised 40 of the largest national economies in the world, and some of the jurisdictions are listed in the top 100, in accordance with the World Bank’s figures that measure the economy growth by the gross domestic product7. The figure below shows the percentage of jurisdictions per geographical region8. 7 8

Further information and data available at . The full list of jurisdictions in alphabetical order: Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Bermuda, Bolivia (Plurinational State of), Brazil, Bulgaria, Cambodia, Cameroon, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, El Salvador, Finland, France, Germany, Greece, Guatemala, Hong Kong (China), Hungary, Iceland, India, Indonesia, Iran (Islamic Republic of), Ireland, Israel, Italy, Jamaica, Japan, Kuwait,

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Choice of Law in Practice – A Global Empirical Survey

Figure 2.1

Africa Cameroon, Egypt, Mozambique, Namibia, Nigeria, South Africa, Tanzania (United Republic of), Zambia, Zimbabwe. Americas and Caribbean Argentina, Barbados, Bermuda, Bolivia (Plurinational State of), Brazil, Canada, Colombia, Costa Rica, Chile, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, United States of America, Uruguay, Venezuela (Bolivarian Republic of). Asia Armenia, Azerbaijan, Bahrain, Bangladesh, Cambodia, China, Cyprus, Hong Kong (China), Indonesia, India, Iran (Islamic Republic of), Israel, Japan, Kuwait, Macao (China), Malaysia, Myanmar, Nepal, Philippines, Republic of Korea, Saudi Arabia, Singapore, Sri Lanka, Taiwan (Province of China), Thailand, Turkey, United Arab Emirates, Viet Nam.

Latvia, Luxembourg, Macao (China), Malaysia, Malta, Mexico, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Republic of Korea, Romania, Russian Federation, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan (Province of China), Tanzania (United Republic of), Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom of Great Britain and Northern Ireland, United States of America, Uruguay, Venezuela (Bolivarian Republic of), Viet Nam, Zambia and Zimbabwe. Except for Taiwan, please note that the author classified the jurisdictions into geographical regions according to the United Nations Statistics Division. Further information available at .

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Europe Albania, Austria, Belarus, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Russian Federation, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, United Kingdom of Great Britain and Northern Ireland, Ukraine. Oceania Australia, New Zealand. 2.1.4.1 Legal Considerations Question 1: When choosing a substantive law to govern an international sales contract, what are your three (3) main legal considerations? Figure 2.2

With respect to the main legal considerations in a choice-of-law decision-making process, the respondents elected legal certainty (74.89 per cent), substantial relationship to the transaction (52.86 per cent) and substantial relationship to the parties (45.81 per cent). The respondents indicated the following additional main legal considerations: – level of development of the proposed governing law; – degree of familiarity with the law; – cost and time; – clients’ interests; – for a sale on credit basis, law of the buyer’s jurisdiction;

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2

– – – – – – – – – – – – –

Choice of Law in Practice – A Global Empirical Survey

flexibility; accessibility to the law; legal rules easy to ascertain; ‘home turf’ advantage where possible; enforceability; positive effects on the party who seeks advise; forum for dispute resolution; independent and corruption-free judiciary; habit – use of standard contracts; counsel and client’s favorable experiences with, and knowledge of, the law; arbitration know-how available; enforceability of resulting judgment or award; and familiarity to lawyers acting.

Question 2: Under a legal perspective approach, while analyzing the provisions of a substantive law, please indicate the features that may call particular attention and contribute to a decision in favor of the substantive law under analysis: Figure 2.3

With respect to the positive legal features of a governing contract law, the respondents elected commitment to freedom of contract (66.36 per cent), remedies available (61.75 per cent) and provisions on damages (40.55 per cent).

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The respondents indicated the following additional positive legal features of a governing contract law: – predictability; – enforcement rules and procedure; – familiarity with the law of the jurisdiction by the parties; – cost/convenience of resolving disputes; – language considerations; – depends on whether one is representing seller or buyer. For example: buyer’s duties to verify; goods and related time limits; extent of seller’s warranty; – whether the jurisdiction has ratified the UN Convention on Contracts for the International Sale of Goods (CISG); – quality of available arbitrators; – provisions on discovery; – contract law rules; and – provisions on limitation of liability. Question 3: Under a legal perspective approach, while analyzing the provisions of a substantive law, please indicate the features that may call particular attention and contribute to a decision against the substantive law under analysis: Figure 2.4

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Choice of Law in Practice – A Global Empirical Survey

With respect to the negative legal features of a governing contract law, the respondents elected mandatory provisions (55.51 per cent), complexity of structure (50.66 per cent) and limited coverage (32.60 per cent). The respondents indicated the following additional negative legal features of a governing contract law: – restriction of parties’ rights under a commercial transaction; – unfamiliarity with the laws of the particular jurisdiction; – state of administration of justice in applicable jurisdiction; – cost/convenience of resolving disputes; – language considerations; – lack of qualified and impartial arbitrators in the relevant jurisdiction; – independence and impartiality (or lack thereof) of judiciary; – depends on whether one is representing seller or buyer; – mandatory provisions curtailing the freedom of contract; – lack of case law and doctrine; – law different from the one of the place of performance; – potential enforcement issues; and – unpredictability. 2.1.4.2 Economic Considerations Question 4: When choosing a substantive law to govern an international sales contract, what are your three (3) main economic considerations? Figure 2.5

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With respect to the main economic considerations, the respondents elected cost of enforcement of legal rules (75.77 per cent), political stability in the relevant jurisdiction (57.27 per cent) and unfamiliarity and cost of learning (47.58 per cent). The respondents indicated the following additional main economic considerations: – predictability of outcome coupled with law’s recognition of freedom of parties to a contract; – level of education of the judges; – own knowledge of the substantive law; – what courts will decide on potential disputes; – if arbitration is chosen, then this consideration is of minor importance; – depends on whether one is representing seller or buyer; – how to financially secure the transaction; – enforceability; – breadth of available discovery; – relationship to parties transaction; and – similarity of chosen law with law of the client. Question 5: Under an economic perspective approach, while analyzing the provisions of a substantive law, please indicate the features that may call particular attention and contribute to a decision in favor of the substantive law under analysis: Figure 2.6

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Choice of Law in Practice – A Global Empirical Survey

With respect to the positive economic features of a governing contract law, the respondents elected flexibility to design the contract (69.16 per cent), remedies available (59.91 per cent), and provisions on damages (44.49 per cent). The respondents indicated the following additional positive economic features of a governing contract law: – predictability of approach or interpretation to be taken (respectable system, settled case law); – warranty: the more protective of the buyer, the better (including statute of limitations); – familiarity/unfamiliarity of a party with the law – if a party always needs to retain foreign legal advice whenever a legal issue arises under a contract this increases cost and incentivizes early moving or settlement; – independent and corruption-free judiciary; and – breadth of discovery, strict construction of contractual terms. Question 6: Under an economic perspective approach, while analyzing the provisions of a substantive law, please indicate the features that may call particular attention and contribute to a decision against the substantive law under analysis: Figure 2.7

With respect to the negative economic features of a governing contract law, the respondents elected provisions on damages (40.09 per cent), broad interpretation of the legal rules (37.89 per cent), and remedies (36.12 per cent).

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The respondents indicated the following additional negative economic features of a governing contract law: – features that limit the parties’ ability to freely negotiate terms, or that automatically imply terms; – unpredictable approach/interpretation; – costly to access; – mandatory indemnities; – unclear gap-filling schemes; no freedom to adapt legal solutions; – mandatory law provision; – too favorable to the counterparty; – from seller’s perspective: the more protective of buyer, the more reason against; – average speed of legal enforcement processes; – difficult enforcement in the country; – corrupt judiciary; and – legal uncertainty. 2.1.4.3 Most Desirable Substantive Law: Features Question 7: Please indicate the features of a most desirable substantive law: Figure 2.8

The respondents were required to indicate the features of a most desirable substantive law. The following results were obtained: legal rules easy to ascertain (68.72 per cent), body of

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Choice of Law in Practice – A Global Empirical Survey

case law that facilitates interpretation of legal rules (53.74 per cent), limited restriction on party autonomy (46.70 per cent), and neutrality (42.29 per cent). The respondents also indicated the following additional features of a most desirable substantive law: – gap-filling mechanisms easy to ascertain; – applicable jurisdiction member of the CISG; – whether or not mandatory rules are in favor of one of the parties; – language; and – ability to enforce. Question 8: In your experience in negotiating a substantive law to govern an international sales contract, please indicate if you have undertaken one (or both) of the following approaches and, if so, please specify the reason(s) for that: Figure 2.9

The respondents were required to indicate whether a particular national law and/or the CISG had been avoided or opted out. In total, 33.34 per cent of the respondents have already opted out of the CISG, and 59.64 per cent avoided a particular national law. Respondents could specify the reason for the avoidance or exclusion of the CISG or not, although it was encouraged to specify the reasons for purposes of the Survey. Out of 59.64 per cent of the respondents who avoided a particular national law, 37.35 per cent did not inform or disclose the relevant reasons. Out of 33.34 per cent of the respondents who opted out of the CISG, 44.73 per cent did not inform or disclose the reason for the exclusion of the CISG’s application. 2.1.4.4 National laws Below are the reasons indicated by the respondents for the avoidance of certain national laws:

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– ‘neutrality of law’ concern; – client’s request; – since the national law requires multiple signatures or other arcane contract formation requirements; – for contracts involving intellectual property, national laws were chosen because of stronger copyright protection for software and less confusion about moral rights; – international sales of goods are international in essence, so a particular national law might bring obligations not conceived for international trade; – it contained a prohibited penalty clause; – a particular national law most of the time meant a benefit to only one party, usually the party familiar with such a law; – it is considered a ‘weak law’; – it is not adequate to the parties’ juridical culture; – it avoids the law of the counterparty’s domicile because choosing that law might encourage the counterparty to breach the contract relying on legal advice available in its own country instead of trying to cooperate in the full performance of the contract; – it demonstrates a lack of knowledge of that specific national law in order to examine if that was the best option; – difficulty of enforcement; – uncertainty and difficulty in interpretation of that country’s law; – opposing party’s law; – in matters of first demand guarantee, a national law was recommended to be avoided as it meant less difficulty in obtaining an order to prevent the payment to the beneficiary; – the limitations of the substantive law of many under-developed countries; – it did not apply to the place of execution of the agreement; – more flexible approach regarding the limitation of liability; – national law was not favorable for specific transactions; – in order to avoid punitive damages and not to be stuck in a very costly litigation; – international organization is involved; – limited freedom of contract; no reliable gap-filling mechanisms; – law not developed within the energy sector; – to avoid uncertainty or inconvenience/cost issues; – substantive law not sufficiently developed to govern the main aspects of the contractual matters; – certainty and predictability; – preference for freedom to contract and avoidance of jurisdictions with less developed judicial systems; – certain jurisdictions restrict party autonomy and have introduced mandatory statutory provisions, which are highly undesirable;

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Choice of Law in Practice – A Global Empirical Survey

– unfair terms or higher learning costs to understand the law; – the substantive law has unfavorable provisions on time limitation, limitations of liability or other provisions that can be unfavorable for our client; – extremely costly to use; – parties needed more flexibility to design their particular contracts; – for reasons of its contents and the remedies available; – to avoid the application of specific mandatory provisions; – ‘exotic’ laws that we always advise against applying; – generally preferred common law and therefore avoided civil law as being less flexible; – does not meet the positive satisfactory requirements; – lack of available legal framework; – complex and dogmatic interpretation of parties’ intention and broad interpretation of mandatory rules that significantly limits contractual freedom; – uncertainty; – cost of enforcement; – due to potential invalidity of standard terms; – risk of damages in case of breach of contract; – whenever provisions regarding filling in the gaps are absent from the text or impacted negatively by other provisions; – doubts on the correct application of the law by the courts; – best practice to avoid choosing substantive law from any nation where the legal system is not stable, neutral and fair, to the extent possible given the wishes of the parties and the particular circumstances of the transaction; – political and social instability; – uncertain rule of law, protection of national parties by court; – national law not flexible enough and restricts the party autonomy; – neutral law instead of the law of the counterparty’s country; – unpredictable jurisprudence; and – civil law jurisdiction. 2.1.4.5 CISG Below is a list of the reasons9 indicated by the respondents for the exclusion of the CISG’s application: – lack of familiarity and lower degree of legal certainty; – client’s request; – the CISG was considered weighted in favor of buyers;

9

The ‘absentees’, or the respondents who indicated the exclusion of the CISG without specifying the reason for that, amount to 44.73 per cent. Therefore, this list compiles the reasons of 55.27 per cent of the respondents.

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– use of precedent contract that excluded CISG; – the CISG was excluded because the contracts involve service and intellectual property as well as goods, and the CISG is not well suited to those aspects of the transaction and may produce unwanted results; – unconvinced that CISG struck the right balance; – it is a question of balance. If I want balance, I go for the CISG. If I want to enforce obligations strictly, I go for specific national state laws; – lack of knowledge of particular body of law and its consequences on contract performance and avoidance; – national law more favorable than CISG; – national law more advantageous for the seller; – the desire is to have the entire agreement between the parties reflected within the four corners of the contract, without importing – perhaps unintentionally – CISG provisions; – less legal certainty; CISG is not covering all issues usually relevant in a contract law dispute; – especially in software-related contracts, counterparties expect the CISG to be excluded; – the other side refused to have the CISG applicable; – to make sure specified States applied the law without exception; – uncertain outcome of application in particular by State courts; – the national rules available are more flexible than the CISG; – the CISG can sometimes add to perceived complexity, which may not be favorable for parties, notably also for negotiation of the contract; – the CISG is one sided; – if a national courts have jurisdiction, application of domestic civil code is more predictable; – lack of safety rules; – lack of a body of case law; – it all depends on who you are representing – buyer or seller. Very buyer-friendly law is reason for seller’s representatives to avoid this law; – undesirable solutions; – the CISG is excluded whenever we assist a seller. If we assist a buyer, seller’s national law is avoided if the differences between buyer’s and seller’s national laws are considered to be too extensive; – provisions were more favorable to the counterparty; – have only excluded the CISG where other party insisted or there was a specific reason; – depending on clients position and interests; – international conventions, especially UN conventions, embody political compromises between a large number of countries, representing different interests. Therefore, these

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2

–

– – – – – – – – –

2.2

Choice of Law in Practice – A Global Empirical Survey

compromise solutions do not always fit the interests of specific parties in international sale contracts; excluded the CISG only in cases where the client prefers to have arbitration in common law jurisdictions as lawyers and arbitrators in these jurisdictions are familiar with common law; because of the doubts on the application of the said rules since there is no established precedents; risk of different interpretation of same rules in different jurisdictions; excluded the application of the CISG because it may infer with the contract in an unpractical manner; principle of good faith; certain CISG provisions – for example, the one on consequential damages – are not necessarily more advantageous than the available national alternatives; to avoid uncertainty or inconvenience/cost issues; no experience; clients do not like the CISG because people exclude it; and the cost of advising under CISG is bigger than under a national law.

Conclusion

The factors that guide the parties’ choices in their choice-of-law decision are explored by the Survey results: parties in international sales contracts seek legal certainty, freedom of contract, and flexibility to design its duties, rights, and obligations. They seemingly achieve this by subjecting themselves to an ascertainable and intelligible legal framework that facilitates the transactions. Neutrality and international character were indicated as main legal considerations for a significant number of the respondents. Moreover, parties tend to analyze the applicable law, forum (state courts or private adjudication), and the enforcement mechanisms (predictability, cost, and time) together in their decision, thereby demonstrating their anticipation of the risks and legal measures to be taken in the course of a potential legal battle. The choice of forum, its adequacy and predictability, was pointed out as an important factor throughout the Survey responses. The comments suggest a fear of unwanted results, inefficient coercive mechanisms, and biased decisions from state courts, whereas arbitration was cited as a forum that would minimize concerns regarding predictability of the application of the rules, awards rendered, and enforcement of decisions. Furthermore, emphasis was added with respect to specific provisions of a governing contract law, and the relevant choice varied according to the parties’ position in the

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transaction and prior experiences – positive or negative – with the counterparty, and the law chosen. The Survey on choice of law, in addition to its pragmatic value, successfully addressed the main legal and economic considerations of parties while negotiating the governing contract law of international sales. It is therefore aimed to serve as practical toolkit for parties to an agreement, party advisors, legal practitioners and laymen to better understand the mechanics behind the choice of a governing contract law. The Survey also provides insight into the cost-benefit analysis exercised by those involved in international sales contracts, and the advanced precautions and strategies taken by parties and their advisors while analyzing and choosing a governing law in cross-border contracts. Some readers may be surprised by some of the Survey outcomes, which revealed incongruities between theory and practice – that is, a mismatch between parties’ wishes and parties’ actual choices. As a matter of fact, in contract negotiations, parties may frequently choose the substantive law to govern their contracts based on prior dealings, positive and negative experiences related to the trading partner, and/or the transaction. In addition, parties in the choice-of-law process may also use deductive reasoning. However, we should not overlook the fact that individual preferences are highly idiosyncratic and subject to subliminal influences, leading to scenarios where the choices taken are not always rational and parties might just choose to follow in another parties’ decision-making footsteps. Consequently, in some instances, like choosing an ice cream flavor, we may not always know the reasons behind parties’ choices: the underlying intention could be driven by momentary needs, affective valences, instincts, or other suggestible factors. Nonetheless, being aware of the factors subject to party’s rational assessment and control may help contracting parties to take advance precautions and implement strategies in an attempt to obtain mutual benefits from the transaction.

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Part II The Decline of Reservations

3

Reservations and the CISG: The Borderland of Uniform International Sales Law and Treaty Law after 35 Years*

Ulrich G. Schroeter

3.1

Introduction

A century ago, the goal of the international unification of private and commercial law was famously described by Lord Justice Kennedy as “the security and the peace of mind of the shipowner, the banker, or the merchant”,1 thereby indicating that the primary beneficiaries of uniform law making are private citizens. The most important vehicle in international law unification has nevertheless traditionally been the convention, i.e. treaties under public international law concluded between States (although more recently other instruments like model laws or mere ‘soft law’ texts have gained in importance2). The continued use of conventions can partially be explained by a second goal that States pursue through the unification of law and that Lord Justice Kennedy referred to as “the resulting moral gain […], a neighbourly feeling, a sincere sentiment of human solidarity…”,3 namely the promotion of friendly relations among States. The 1980 United Nations Convention on Contracts for the International Sale of Goods4 ranks today as one of the most successful conventions unifying matters of commercial law. With currently over 80 State parties,5 the Sales Convention’s provisions on contract formation and the law of sales potentially6 apply to more than 80 per cent of all international

* 1 2

3 4 5 6

The present chapter was first published in the Brooklyn Journal of International Law, Vol. 41, 2015. All web pages last accessed in June 2015. Lord Justice Kennedy, ‘The Unification of Law’, Journal of the Society of Comparative Legislation, Vol. 10, 1909, p. 212 at pp. 214–215. See J.A.E. Faria, ‘Future Directions of Legal Harmonisation and Law Reform: Stormy Seas or Prosperous Voyage?’, Uniform Law Review, Vol. 14, 2009, p. 5 at pp. 8–10; E.A. Farnsworth, ‘An International Restatement: The UNIDROIT Principles of International Commercial Contracts’, University of Baltimore Law Review, Vol. 26, 1997, p. 1. Kennedy, 1909, supra note 1, pp. 214–215. United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980, International Legal Materials, Vol. 19, 1980, p. 668 (hereinafter Sales Convention, Convention or CISG). As of 1 June 2015, 83 States had become contracting states of the Sales Convention. Notwithstanding the possible exclusion of the Sales Convention’s application to a particular sales contract by way of party agreement in accordance with Article 6 CISG.

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Ulrich G. Schroeter sales contracts concluded worldwide.7 And its preamble clearly reflects the two goals, which Lord Justice Kennedy had identified 70 years earlier, stating on one hand “that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade”, and on the other “that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States”. Thirty-five years after its adoption at a Diplomatic Conference in Vienna on 11 April 1980, the Sales Convention’s anniversary in 2015 provides a suitable occasion to consider a topic, which – maybe more than any other – touches upon both the creation of uniform private law and the legal relations between States: Reservations and the CISG.

3.1.1

Introducing Reservations

Within the realm of uniform private law, reservations are unusual creatures residing at the borderline between private law and the law of treaties. Tucked away in the far corner of uniform law conventions like the Sales Convention and others, they are usually placed in the concluding part of the convention’s text imaginatively titled ‘Final Provisions’ and have traditionally been ignored by academics.8 Only in recent years the CISG’s reservations have for the first time attracted more attention, primarily because State practice in this area developed in a surprising direction.9 At the same time, case law emerging under the Sales Convention has demonstrated the unexpected difficulties that reservations can cause in everyday disputes arising out of ordinary cross-border sales contracts. As will be demonstrated in more detail below, these difficulties are mostly triggered by one and the same factor, namely the dual character of reservations as an institution of both treaty law and internationally unified private law. In terms of customary public international law as codified in Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties,10 a reservation is

7

See U.G. Schroeter, ‘Empirical Evidence of Courts’ and Counsels’ Approach to the CISG (with Some Remarks on Professional Liability)’, in L. DiMatteo (Ed.), International Sales Law: A Global Challenge, Cambridge University Press, New York, 2014, p. 649. 8 See P. Winship, ‘Final Provisions of UNCITRAL’s International Commercial Law Conventions’, International Lawyer, Vol. 24, 1990, p. 711: “No commentator – and I barely exaggerate – spends much time examining the ‘Final Provisions’ of international conventions.” 9 See in particular infra 3.3.2.1. 10 The definition in Article 2(1)(d) of the 1969 Vienna Convention reflects the customary law notion of a reservation; T. Giegerich, ‘Treaties, Multilateral, Reservations to’, in R. Wolfrum (Ed.), Max Planck Encyclopedia of Public International Law, Oxford University Press, Oxford, 2010, Para. 1; C. Walter, in O. Dörr & K. Schmalenbach (Eds.), Vienna Convention on the Law of Treaties: A Commentary, Springer, Heidelberg, Dordrecht, London and New York, 2012, Art. 19, Para. 1.

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Reservations and the CISG: The Borderland of Uniform International Sales Law and Treaty Law after 35 Years a unilateral statement, however phrased or named, made by a State, when signing, ratifying, accepting, approving or acceding to a treaty, whereby it purports to exclude or to modify the legal effect of certain provisions of the treaty in their application to that State.

Beyond this commonly accepted definition, the subject of reservations has traditionally raised a host of difficult legal problems, so that a well-known public international law treatise once described it as “a matter of considerable obscurity in the realm of juristic speculation”.11 The CISG authorizes no less than five of such reservations in its Articles 92–96, although already this is a matter of some dispute, as will be shown in a moment.12 What is equally disputed is the relative degree to which reservations have actually been used by the CISG Contracting States. General assessments by commentators range from ‘reservations have been minimal’13 to ‘have been widely utilized’.14 If we let numbers speak (and leaving aside the significant differences in effect that the various reservations have upon the Convention’s practical application), a count is as follows: On the 1980 UN Sales Convention’s 25th birthday on 11 April 2005, the then 65 Contracting States had between them declared a total of 31 reservations,15 with the reserving States including some of the largest CISG Contracting States (such as the People’s Republic of China, Russia and the United States).16 After that date, only two further States (Paraguay in 2006 and Armenia in 200817) made reservations, and Armenia has since remained the last State to declare a reservation under the Sales Convention.

3.1.2

Experience with Reservations under the CISG: Taking Stock of the First 35 Years

Thirty-five years after the adoption of the Sales Convention on 11 April 1980 is an appropriate time to look back and assess the experiences that have been made with reservations under the Convention. From the perspective of international law, the purpose of such an assessment is threefold: 11 12 13 14

D.P. O’Connell, International Law, Vol. 1, 2nd edn, Stevens & Sons, London, 1965, pp. 250–251. See infra at 3.2.1. L. Spagnolo, CISG Exclusion and Legal Efficiency, Wolters Kluwer, Alphen aan den Rijn, 2014, pp. 70–71. C.P. Gillette & R.E. Scott, ‘The Political Economy of International Sales Law’, International Review of Law and Economics, Vol. 25, 2005, p. 446 at p. 476. 15 Reservations made by a contracting state in accordance with Articles 93 and 94 CISG were counted as one reservation, respectively, even if they related to more than one territorial unit (Article 93 CISG) or to more than one other State with closely related legal rules (Article 94 CISG). For some more recent numbers, see infra at 3.6. 16 U.G. Schroeter, ‘The Withdrawal of Reservations under Uniform Private Law Conventions’, Uniform Law Review, Vol. 20, 2015, p. 1 at p. 2. 17 See the further remarks on the Armenian reservation infra at 3.4.2.1.

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First, one of the interpretative goals stipulated in Article 7(1) CISG – that regard is to be had to the need to promote uniformity in the Sales Convention’s application – is commonly read as calling for an evaluation of existing case law18 and of legal writings19 that have previously addressed provisions in the Sales Convention. As Article 7(1) CISG’s guidelines also apply to the interpretation of the CISG’s Final Clauses (Articles 89–101 CISG),20 an overview over the past practice in applying the Sales Convention’s reservations may serve as a useful tool in further enhancing their future internationally uniform interpretation. Second, customary public international rules on treaty interpretation similarly envisage the taking into account of past interpretation practices. In particular, Article 31(3)(b) of the 1969 Vienna Convention on the Law of Treaties provides that in interpreting a treaty, there shall be taken into account ‘any subsequent practice in the application of the treaty that establishes the agreement of the parties regarding its interpretation’. When this provision is read in light of the Sales Convention’s nature as a uniform private law convention applied by commercial courts to contracts between private parties, its reference to the agreement of ‘the parties’ regarding the treaty’s interpretation should be understood as referring to the agreement among the courts in different CISG Contracting States, i.e. the prevailing court practice. If so construed, the approach of Article 31(3)(b) of the 1969 Vienna Convention on the Law of Treaties is arguably in line with the interpretative goals imposed by Article 7(1) CISG.21 (Where the two provisions deviate, Article 7(1) CISG should prevail, as the rules on treaty interpretation in 1969 Vienna Convention on the Law of Treaties give precedence to interpretation rules in particular treaties.22) And third, the experiences that have been made with reservations under the CISG may be helpful for future law unification projects in the area of contract and commercial law,

18 I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010, Art. 7, Paras. 10–13. 19 P. Perales Viscasillas, in S. Kröll, L. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck Publishing, Munich, 2011, Art. 7, Para. 43; P. Schlechtriem & U.G. Schroeter, Internationales UN-Kaufrecht, 5th edn, Mohr Siebeck, Tübingen, 2013, Para. 96. 20 U.G. Schroeter, ‘Backbone or Backyard of the Convention? The CISG’s Final Provisions’, in C.B. Andersen & U.G. Schroeter (Eds.), Sharing International Commercial Law Across National Boundaries: Festschrift for Albert H. Kritzer on Occasion of his Eightieth Birthday, Wildy, Simmonds & Hill, London, 2008, p. 427 at p. 428. 21 J. Hellner, ‘Gap-Filling by Analogy: Art. 7 of the U.N. Sales Convention in Its Historical Context’, in J. Ramberg (Ed.), Studies in International Law: Festskrift till Lars Hjerner, Norstedts, Stockholm, 1990, p. 219; U.G. Schroeter, UN-Kaufrecht und Europäisches Gemeinschaftsrecht – Verhältnis und Wechselwirkungen, Sellier European Law Publishers, Munich, 2005, § 8, Para. 18; W. Witz, in W. Witz, H.-C. Salger & M. Lorenz, International Einheitliches Kaufrecht: Praktiker-Kommentar und Vertragsgestaltung zum CISG, Verlag Recht und Wirtschaft, Heidelberg, 2000, Art. 7, Paras. 20–21. See also R. Happ & M. Roth, ‘Interpretation of Uniform Law Instruments According to Principles of International Law’, Uniform Law Review, 1997, pp. 702 et seq. 22 Schroeter, 2008, supra note 20, p. 428; Schroeter, 2005, supra note 21, § 8, Para. 32.

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as, e.g. a to-be uniform law instrument on general contract law.23 Should such a future instrument take the form of a convention (i.e. a public international law treaty),24 the subject of the inclusion and application of reservations would almost necessarily come up, and any lessons learned under the Sales Convention would ideally be taken into account in drafting a new sister convention.

3.1.3

Outline

In describing the lessons that have been learned, this chapter will not primarily focus on individual CISG reservations and the specific experiences relating to them. (This has already been done by colleagues elsewhere, in particular with respect to the withdrawal of Article 92 CISG reservations in Scandinavia25 and with respect to the reservations under Articles 95 and 96 CISG.26) Instead, it will provide a more general overview of the developments concerning the Sales Convention’s reservations, combined with a critical assessment of those developments. The present chapter will proceed as follows: Its Part 3.2 is dedicated to two basic issues, namely the disputed qualification of some of the CISG’s provisions as ‘reservations’ in the legal sense of the term27 and the historical background of these provisions.28 Part 3.3 will then discuss reservations’ general usefulness in a uniform private law context and whether reservations decrease uniformity29 or rather enable a wider uniformity in uniform law making.30 Part 3.4 subsequently addresses a number of difficulties that have arisen in practice under the Sales Convention, as notably the fact that reservations have often been 23 See UNCITRAL, 25 June to 6 July 2012, Possible Future Work in the Area of International Contract Law: Proposal by Switzerland on Possible Future Work by UNCITRAL in the Area of International Contract Law, U.N. Doc. A/CN.9/758 (8 May 2012) (the ‘Swiss Proposal’); I. Schwenzer, ‘Who Needs a Uniform Contract Law, and Why?’, Villanova Law Review, Vol. 58, No. 4, 2013, pp. 723–732; O. Meyer, ‘The “Swiss Proposal” on Future Work on International Contract Law: Building on Sandy Soil?’, in I. Schwenzer & L. Spagnolo (Eds.), Boundaries and Intersections, Eleven, The Hague, 2014, pp. 57–70; P. Perales Viscasillas, ‘Applicable Law, the CISG, and the Future Convention on International Commercial Contracts’, Villanova Law Review, Vol. 58, No. 4, 2013, pp. 733–759. 24 See Perales Viscasillas, 2013, supra note 23, p. 738; Schwenzer, 2013, supra note 23, pp. 727–728. 25 C.B. Andersen, ‘Reservations of the CISG: Regional Trends and Developments’, in I. Schwenzer & L. Spagnolo (Eds.), Globalization versus Regionalization, Eleven, The Hague, 2013, pp. 7–10; T. Neumann, ‘The Continued Saga of the CISG in the Nordic Countries: Reservations and Transformation Reconsidered’, Nordic Journal of Commercial Law, Issue #1, 2013, p. 1. 26 CISG Advisory Council Opinion No. 15, ‘Reservations under Articles 95 and 96 CISG, Rapporteur: U.G. Schroeter’, Internationales Handelsrecht, 2014, p. 116; see also U.G. Schroeter, ‘The Cross-Border Freedom of Form Principle under Reservation: The Role of Articles 12 and 96 CISG in Theory and Practice’, Journal of Law and Commerce, Vol. 33, 2014, p. 79. 27 Infra at 3.2.1. 28 Infra at 3.2.2. 29 Infra at 3.3.1. 30 Infra at 3.3.2.

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Ulrich G. Schroeter overlooked by courts31 and the significant uncertainty they seem to cause both in the eyes of government officials32 and – maybe more importantly – of judges and arbitrators deciding cases.33 Part 3.5 tries to look forward to the next 35 years and discusses the (likely) rule of reservations in future CISG practice, including the continuing trend to withdraw reservations,34 one reservation that may be here to stay35 and another reservation that may even gain in importance in the future.36 Part 3.6 briefly concludes.37

3.2

Basic Issues

3.2.1

‘Reservations’ and ‘Declarations’ under the CISG

It is a first indication of the uncertainties surrounding reservations under the CISG that is not only disputed how many different reservations the Convention’s text authorizes, but even whether the CISG contains reservations at all. 3.2.1.1 Views among Commentators In legal writings on the Sales Convention, there are insofar three schools of thought: The majority among CISG commentators assumes that the 1980 Sales Convention allows five reservations, namely those defined in Articles 92, 93, 94, 95 and 96 CISG.38 31 32 33 34 35 36 37 38

Infra at 3.4.1. Infra at 3.4.2.1. Infra at 3.4.2.2. Infra at 3.5.1. Infra at 3.5.2. Infra at 3.5.3. Infra at 3.6. J.E. Bailey, ‘Facing the Truth: Seeing the Convention on Contracts for the International Sale of Goods as an Obstacle to a Uniform Law of International Sales’, Cornell International Law Journal, Vol. 32, 1999, p. 273 at p. 311; M. Evans, in C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law, Giuffrè, Milan, 1987, Art. 98, Para. 2.1; F. Ferrari, in I. Schwenzer (Ed.), Schlechtriem/Schwenzer Kommentar zum Einheitlichen UN-Kaufrecht – CISG, 6th edn, C.H. Beck Publishing, Munich, 2013, Vor Artt. 89–101, Para. 9; H.M. Flechtner, ‘The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7(1)’, Journal of Law and Commerce, Vol. 17, 1998, p. 187 at p. 193; J. Herre, in S. Kröll, L. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck Publishing, Munich, 2011, Art. 98, Para. 1; J.O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 4th edn (edited and updated by H.M. Flechtner), Wolters Kluwer, Aalphen aan den Rijn, 2009, Para. 458; P. Huber, in Münchener Kommentar zum Bürgerlichen Gesetzbuch, 6th edn, C.H. Beck Publishing, Munich, 2012, Art. 98 CISG, Para. 1; J. Lookofsky, Understanding the CISG, 4th (worldwide) edn, Kluwer Law International, Alphen aan den Rijn, 2012, § 8.3–§ 8.8; U. Magnus, ‘Wiener UN-Kaufrecht (CISG)’, in J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Revised edn, de Gruyter, Berlin, 2013, Art. 98, Para. 1; F.G. Mazzotta, ‘Final Provisions (Articles 90–101 CISG)’, in C.B. Andersen, F.G. Mazzotta & B. Zeller (Eds.), A Practitioner’s Guide to the CISG, Juris, Huntington, 2010, p. 832; I.

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Writers of this group rarely give a reason for their position, maybe because its correctness is regarded as obvious. It indeed finds some support in the wording of Article 98 CISG, according to which “[n]o reservations are permitted except those expressly authorized in this Convention”, thereby indicating that the Convention must contain more than one reservation (‘those’). Furthermore, Articles 92–96 CISG seemingly match the general definition of Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties,39 as they all purport to exclude or to modify the legal effect of certain provisions of the CISG. The second group of commentators nevertheless believes that the Sales Convention contains no reservations at all, in spite of the reference to ‘reservations’ in Article 98 CISG. They rather draw a strict distinction between ‘declarations’ and ‘reservations’,40 pointing out that the language of Articles 92–96 CISG exclusively speaks of ‘declarations’, without ever mentioning the term ‘reservation’.41 A third group of writers accepts that Articles 92 and 94–96 CISG provide for reservations but doubts whether Article 93 CISG constitutes a reservation stricto sensu.42 This position resounds a long-standing discussion in general treaty law, where the prevailing view today is that “federal state clauses’ are not reservations in the sense of Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties”.43 This view was also expressed during the discussion of Article 93 CISG at the 1980 Vienna Diplomatic Conference by the Deputy Chief of the UN Treaty Session who then served as Assistant Secretary of the Second Committee.44

39 40

41

42 43

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Saenger, in H.G. Bamberger & H. Roth (Eds.), Kommentar zum Bürgerlichen Gesetzbuch, 3rd edn, C.H. Beck Publishing, Munich, 2012, Art. 98 CISG, Para. 1; Schlechtriem, Schwenzer & Hachem, 2010, supra note 18, Intro to Arts. 89–101, Paras. 6–7; M. Torsello, ‘Reservations to International Uniform Commercial Law Conventions’, Uniform Law Review, 2000, p. 85 at p. 91. Supra at 3.1.1. See L.G. Castellani, ‘Reviewing CISG Declarations: Some Lessons Learned’, in Unification of International Trade Rules in the Age of Globalization: China and the World, Conference Papers, Tsinghua University, Beijing, 2013; P. Mankowski, in F. Ferrari, E.-M. Kieninger, P. Mankowski et al., Internationales Vertragsrecht, 2nd edn, C.H. Beck Publishing, Munich, 2011, Art. 97 CISG, Para. 1. On the use of the terms ‘declaration’ and ‘reservation’ see also Mazzotta, 2010, supra note 38, pp. 831–832. M.G. Bridge, The International Sale of Goods, 3rd edn, Oxford University Press, Oxford, 2013, Para. 10.54; “[…] not reservations as such, but serve the same purpose as reservations”; probably also Castellani, 2013, supra note 40. F. Enderlein & D. Maskow, International Sales Law, Oceana Publishing, New York, 1992, Art. 98, Para. 2. International Law Commission, ‘Guide to Practice on Reservations to treaties, as finalized by the Working Group on Reservations to Treaties from 26 to 29 April, and on 4, 5, 6, 10, 11, 12, 17 and 18 May 2011’, U.N. Doc. A/CN.4/L.779 of 19 May 2011, p. 51; A. Aust, Modern Treaty Law and Practice, Cambridge University Press, Cambridge, 2000, pp. 170–171; S. Karagiannis, in O. Corten & P. Klein (Eds.), The Vienna Conventions on the Law of Treaties: A Commentary, Oxford University Press, Oxford, 2011, Art. 29 Convention of 1969, Paras. 19–24. United Nations Conference on Contracts for the International Sale of Goods, Vienna, 10 March – 11 April 1980, Official Records: Documents of the Conference and Summary Records of the Plenary Meetings and of the Meetings of the Main Committees, United Nations, New York, 1991 (‘Official Records’), p. 459 No. 18.

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3.2.1.2

Discussion

3.2.1.2.1 Declarations under Articles 92–96 CISG as Reservations It is submitted that Articles 92–96 CISG all qualify as reservations and that the majority view summarized earlier45 is accordingly correct. This is first of all due to the fact that the language used in Articles 92–96 CISG, notably the lack of the term ‘reservation’ therein, should be considered as irrelevant when it comes to the legal qualification of these treaty clauses. Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties itself makes this clear by defining ‘reservation’ as “a unilateral statement, however phrased or named …”,46 and the International Law Commission’s ‘Guide to Practice on Reservations to Treaties’47 as well as treaty law scholars48 agree that it is not the phrasing or name of a unilateral statement formulated in respect of a treaty that determines its legal nature, but the legal effect it purports to produce. That declarations made in accordance with Articles 92–96 CISG purport to exclude or to modify the legal effect of certain provisions of the Sales Convention (as required by Article 2(1)(d) of the 1969 Vienna Convention)49 become immediately obvious when looking at the wording of Article 95 CISG, which authorizes Contracting States to “declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph (1)(b) of article 1 of this Convention”, but Articles 92, 93,50 94 and 96 CISG similarly fit this description. Contrary to what has been implied by some authors,51 the term ‘declaration’ predominantly employed by the drafters of Articles 89–101 CISG is therefore not being used therein as an alternative to ‘reservation’, but rather as a wider, more comprehensive term. A declaration made by a Contracting State in relation to the Sales Convention may accordingly qualify as a reservation if it meets the conditions of Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties that have just been discussed. It may, however, also be a declaration that is not a reservation,52 but rather purports to produce a different legal

45 46 47 48 49 50 51 52

On the role of the different committees during the 1980 Diplomatic Conference in Vienna see Honnold, 2009, supra note 38, Para. 10. See supra note 38. Emphasis added. International Law Commission, supra note 43, p. 79. Giegerich, 2010, supra note 10, Para. 1. But see L.G. Castellani, ‘The CISG in Context of Complementary Texts’, in L.A. DiMatteo (Ed.), International Sales Law: A Global Challenge, Cambridge University Press, New York, 2014, p. 683 note 4. On Article 93 CISG see further infra at 3.2.1.2.2. See supra notes 40–41. But see M.G. Bridge, ‘Uniform and Harmonized Sales Law: Choice of Law Issues’, in J.J. Fawcett, J.M. Harris & M.G. Bridge, International Sale of Goods in the Conflict of Laws, Oxford University Press, Oxford, 2005, Para. 16.121: “From this it may be inferred that what the Vienna [Sales] Convention calls a declaration is a reservation for the purpose of both the Convention itself and the UN Convention on the Law of Treaties.”

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effect. Depending on their content, such declarations may inter alia be declarations amending prior declarations in accordance with Article 93(1) CISG in fine; declarations joining in another State’s declaration in accordance with Article 94(3) CISG or denunciations of the Convention in accordance with Article 101 CISG. Apart from these types of declarations that are expressly mentioned in Articles 89–101 CISG, Contracting States may also make other ‘declarations in general’, which similarly do not have the effect of reservations,53 as was specifically clarified during the discussions at the 1980 Vienna Diplomatic Conference.54 Such declarations in general55 are governed by the rules of general treaty law56 but must also be compatible with the provisions of the Sales Convention. (As has been argued elsewhere,57 interpretative declarations relating to matters governed by the Sales Convention must insofar be considered incompatible with Article 7(1) CISG.) Finally, the interpretation outlined above is supported by the legislative history of Article 98 CISG, the only of the Sales Convention’s provision to explicitly mention ‘reservations’. The Austrian delegation that had first proposed its inclusion at the Vienna Diplomatic Conference58 had later suggested an alternative wording, which after further modification by the French delegation read: “No reservation or declaration other than those expressly provided for in this Convention shall be permitted”.59 During the ensuing discussion, there was agreement among the delegates that at least the draft provisions corresponding to today’s Articles 92, 94 and 96 CISG constituted reservations, irrespective of whether or not the reference to ‘reservation or declaration’ would be kept.60 (Article 93 CISG was regarded as a slightly more complicated case,61 and Article 95 CISG had at this stage not been (re-) proposed.62) Against this historic background, the use of the terms ‘reservation’ in Article 98 CISG (as eventually adopted) and ‘declaration’ elsewhere in Articles 89–101 CISG cannot support any challenge of the prevailing and correct view that Articles 92–96 CISG all qualify as reservations. 53 Evans, 1987, supra note 38, Art. 98, Para. 2.3; Magnus, 2013, supra note 38, Art. 98, Para. 1; Schlechtriem, Schwenzer & Hachem, 2010, supra note 38, Art. 98, Para. 2. 54 Official Records, p. 459. 55 On ‘political’ declarations that occur in treaty practice see Aust, 2000, supra note 43, p. 103. 56 Evans, 1987, supra note 38, Art. 98, Para. 2.3; Ferrari, 2013, supra note 38, Art. 98, Para. 2; Herre, 2011, supra note 38, Art. 98, Para. 1; Magnus, 2013, supra note 38, Art. 98, Para. 1; Schlechtriem, Schwenzer & Hachem, 2010, supra note 38, Art. 98, Para. 2. 57 Torsello, 2000, supra note 38, p. 117; Schroeter, 2008, supra note 20, pp. 455–456; but see Mankowski, 2011, supra note 40, Art. 98 CISG, Para. 2. 58 Official Records, p. 146. 59 Official Records, p. 459. 60 See notably Official Records, p. 459, Nos. 15–16: “Mr. TARKO (Austria) said that his delegation had proposed that the word ‘declaration’ be included because the final clauses referred only to declarations and there might be some confusion between declarations proper and declarations containing reservations. […] If the sense was clear with the use of the word ‘reservation’ alone, his delegation would agree to the omission of the word ‘delegation’ ….” 61 See infra at 3.2.1.2.2. 62 See infra at 3.2.2.2.2.

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3.2.1.2.2 Article 93 CISG as a Reservation The nature of Article 93 CISG as a reservation requires some further discussion, as this qualification has been challenged for the additional reason that federal State clauses are generally not considered to be reservations in treaty law doctrine.63 The cornerstone on which the latter position rests is the definition of the term ‘reservation’ in Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties, which speaks of a unilateral statement made by a State whereby it purports to exclude or to modify the legal effect of certain provisions of the treaty in their application to that State.64 Federal State clauses, so the reasoning goes, are not covered by this definition because they do not purport to exclude or modify the legal effect of certain provisions of a treaty or the treaty as a whole with respect to certain specific aspects to an entire State, but rather aim at the non-application of an entire treaty to a part of the declaring State’s territory. This type of declaration constitutes a deviation from the default rule about the territorial scope of treaties in Article 29 of the 1969 Vienna Convention on the Law of Treaties, pursuant to which a treaty is binding upon each party in respect of its entire territory unless a different intention appears from the treaty or is otherwise established. Federal State clauses are accordingly not reservations, but rather an expression of a ‘different intention’ in the sense of Article 29 of the Vienna Convention: The State is not excluding the legal effect of the treaty in respect of a particular territory but is identifying ‘its territory’, in the sense of Article 29, where the treaty is to be applied.65 (This approach is also reflected in the 1974 United Nations Convention on the Limitation Period in the International Sale of Goods, where the federal State clause in Article 31 – the provision that Article 93 CISG was modelled after – is not contained in the Convention’s Part III titled ‘Declarations and reservations’, but rather in Part II titled ‘Implementation’.) Irrespective of whether the approach just outlined is considered to be convincing,66 it is submitted that its application does not affect the reservation status of Article 93 CISG, despite the latter’s common67 description as ‘federal State clause’. The reason is that an Article 93 CISG declaration not only defines the territory to which the declaring State will apply the 1980 Sales Convention but modifies the application of one provision of the Sales Convention in its application by courts of any Contracting State (erga omnes). The provision so modified is Article 1(1) CISG, as indicated by Article 93(3) CISG. (Although Article 93(3) CISG does not contain the arguably clearer terms “is not to be considered a Contract63 See supra notes 42–44. 64 Emphasis added. 65 International Law Commission, supra note 43, p. 50; K. Odendahl, in O. Dörr & K. Schmalenbach (Eds.), Vienna Convention on the Law of Treaties: A Commentary, Springer, Heidelberg, Dordrecht, London and New York, 2012, Art. 29, Para. 12 (who cites Art. 93 CISG as an example). 66 Cf. A. Aust, ‘Treaties, Territorial Application’, in R. Wolfrum (Ed.), Max Planck Encyclopedia of Public International Law, Oxford University Press, Oxford, 2006, Paras. 22–23. 67 See, e.g. Herre, 2011, supra note 38, Art. 93, Para. 1 and many others.

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ing State within paragraph (1) of Article 1 of this Convention” that are used in Article 92(2) CISG, the words “is considered not to be in a Contracting State” in Article 93(3) CISG should equally be understood as a reference to Article 1(1) CISG.68) Accordingly, Article 93 CISG in fact does meet the ‘modification of certain provisions’ criterion in Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties.69 The Sales Convention’s federal State clause remains, however, ill at ease with the final requirement contained in Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties, namely the modification of treaty provisions “in their application to that [i.e. the declaring] State”.70 As the wording of Article 93(3) CISG makes clear, a declaration under Article 93(1) CISG goes much further, as it results in the Sales Convention’s non-application to contracts concluded by private parties residing in a certain territory of the federal State and has to be observed by courts in all Contracting States (not only the declaring State),71 thereby creating the erga omnes effect described earlier. This apparent incompatibility is nevertheless not unusual, but rather occurs under almost every treaty creating uniform private law. The definition of Article 2(1)(d) of the 1969 Vienna Convention on the Law of Treaties has therefore long been recognized as hardly appropriate for normative treaties, which do not create a bundle of bilateral treaty relationships but establish generally applicable erga omnes rules in the common interest of the treaty community as a whole,72 with uniform private law conventions being one example. The solution lies in the principle lex specialis derogat legi generali, with Article 93(3) CISG insofar containing an (admissible73) deviation from general treaty law. In summary, the Sales Convention’s federal State clause in Article 93 CISG accordingly qualifies as a reservation. 3.2.1.3

A Different Question: Applicability of Articles 20–23 of the 1969 Vienna Convention on the Law of Treaties to the CISG’s Reservations At this point, it may be useful to clarify that the conclusions presented earlier do not mean that the rules on reservations contained in general treaty law and codified in Articles 20–23 of the 1969 Vienna Convention on the Law of Treaties necessarily apply to Articles 92–96 CISG.74 The reason is that the rules laid down in the 1969 Vienna Convention are generally 68 Evans, 1987, supra note 38, Art. 93, Para. 2.4. See also infra at 3.4.2.2.2.1. 69 In addition, it should be pointed out that otherwise also Article 94 CISG would arguably not qualify as a reservation, as this provision similarly results in a non-application of the entire Sales Convention. 70 Cf. Bridge, 2013, supra note 41, Para. 10.57 who addresses the same point with respect to the reservation under Article 95 CISG. But see Enderlein & Maskow, 1992, supra note 42, Art. 98, Para. 1. 71 Bridge, 2005, supra note 52, Para. 16.123; Schroeter, 2008, supra note 20, p. 444; Torsello, 2000, supra note 38, pp. 97–98. Contra F. De Ly, ‘Sources of International Sales Law: An Eclectic Model’, Journal of Law and Commerce, Vol. 25, 2005–2006, p. 1 at p. 9 (with respect to the similarly framed Article 92 CISG). 72 Giegerich, 2010, supra note 10, Para. 19. 73 See immediately infra under 3.2.1.3. 74 But see Enderlein & Maskow, 1992, supra note 42, Art. 98, Para. 1.

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Ulrich G. Schroeter agreed to be merely residuary in nature75 and are accordingly displaced whenever a given treaty contains different rules on particularities of its reservations. As the 1980 Sales Convention’s Final Clauses in Part IV (Articles 89–101 CISG) contain explicit provisions as well as general principles in accordance with Article 7(2) CISG governing the functioning of its reservations, there is hardly any room for recourse to the residuary Articles 20–23 of the 1969 Vienna Convention.76 (At the same time, there is no need to avoid a qualification of Articles 92–96 CISG as ‘reservations’ with the primary aim to prevent general treaty law from interfering with uniform private law:77 The residuary nature of Articles 20–23 of the 1969 Vienna Convention takes sufficiently care of that.)

3.2.2

Historical Background of the CISG’s Reservations in a Nutshell

We next turn to the historical background of the Sales Convention’s five reservations. Its knowledge is useful for purposes of interpreting the respective provisions, as recourse to the legislative history is recognized as one of the most important interpretative methods under Article 7(1) CISG.78 In this respect, the Sales Convention deviates from general rules on interpretation under treaty law, as Article 32 of the 1969 Vienna Convention on the Law of Treaties merely allows for a historic interpretation as a supplementary method (where interpretation otherwise ‘leaves the meaning ambiguous or obscure’ or leads ‘to a result which is manifestly absurd or unreasonable’). Again, Article 7(1) CISG must prevail in this context, as its principles also apply to the interpretation of the CISG’s reservations79 and thereby displace the residuary rules of the 1969 Vienna Convention.80 3.2.2.1 Effect of Article 98 CISG on the Reservations’ Initiation By way of a preliminary remark, it is helpful to first recall once more Article 98 CISG, which limits reservations under the CISG to those expressly authorized in the Convention.

75 Giegerich, 2010, supra note 10, Para. 7; A. Pellet, in O. Corten & P. Klein (Eds.), The Vienna Conventions on the Law of Treaties: A Commentary, Oxford University Press, Oxford, 2011, Art. 22 Convention of 1969, Para. 34. 76 See similarly Bridge, 2005, supra note 52, Para. 16.122; Schroeter, 2008, supra note 20, p. 431. 77 This position has more recently been adopted in UNCITRAL, Explanatory note by the UNCITRAL secretariat on the United Nations Convention on the Use of Electronic Communications in International Contracts, United Nations, New York, 2007, Para. 317: “This distinction [between reservations and declarations] is important because reservations to international treaties typically trigger a formal system of acceptances and objections, for instance as provided in articles 20 and 21 of the Vienna Convention on the Law of Treaties….” 78 Magnus, 2013, supra note 38, Art. 7, Para. 35; Schlechtriem & Schroeter, 2013, supra note 19, Para. 105; Schwenzer & Hachem, 2010, supra note 18, Art. 7, Para. 22. 79 Schlechtriem, Schwenzer & Hachem, 2010, supra note 38, Intro to Arts. 89–101, Para. 2; Schroeter, 2008, supra note 20, p. 428. Contra Enderlein & Maskow, 1992, supra note 42, Art. 7, Para. 2.2; Witz, 2000, supra note 21, Para. 6. 80 Supra note 22.

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This clause, which is based on Article 19(b) of the 1969 Vienna Convention on the Law of Treaties81 and today constitutes a common feature in uniform international private law conventions,82 has a further indirect effect upon the manner in which reservations become part of a convention, as it leads to a two-step process:83 In a first step, the content of each admissible reservation must be agreed upon among the drafters of the convention, before in a second step one or more Contracting States can declare (Article 19 of the 1969 Vienna Convention uses the term ‘formulate’) such an authorized reservation. Any State interested in using a certain reservation must therefore initiate its authorization already at the convention’s drafting stage and cannot wait until it later may contemplate a ratification of the convention. Restricting admissible reservations to those expressly authorized in a convention’s text at the same time means that the range of possible reservations is ‘frozen in’ at the moment the treaty’s text is being adopted in accordance with Article 9 of the 1969 Vienna Convention on the Law of Treaties. In case of the CISG, this date was 11 April 1980. 3.2.2.2 Historical ‘Sponsors’ of Individual Reservations under the CISG Against this background, it is of interest to briefly look at the way in which the five reservations authorized by the CISG made their way into the Sales Convention’s final text. In this regard, three groups of reservations can be distinguished: The first group comprises reservations that were proposed by particular States already during early stages of the preparations that culminated in the Vienna Diplomatic Conference of 1980. From the outset, the States concerned regarded the inclusion of these reservations as an indispensable condition without which they would not be able to ratify the Convention. The representatives of other States in turn viewed these reservations as a compromise necessary in order to convince those States to accept the Sales Convention’s text with the content the majority considered desirable.84 In view of these interests, the desirability of the reservations of this group was rarely challenged, and the discussions within the United Nations Commission on International Trade Law (UNCITRAL) and later at the Diplomatic Conference in Vienna were limited to drafting issues.

81 Enderlein & Maskow, 1992, supra note 42, Art. 98, Para. 1; Evans, 1987, supra note 38, Art. 98, Para. 2.2; Herre, 2011, supra note 38, Art. 98, Para. 1. 82 Mankowski, 2011, supra note 40, Art. 98 CISG, Para. 1. 83 See also infra at 3.3.2.2. 84 See on Article 94 CISG P. Schlechtriem, in P. Schlechtriem & I. Schwenzer (Eds.), Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd edn, Oxford University Press, Oxford, 2005, Art. 94, Para. 2; “… only in that way could, for example, the Scandinavian states be persuaded to apply the CISG at least in their relations with other countries”; on Article 96 CISG see Schroeter, 2014, supra note 26, pp. 85–86.

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This was true for the Article 94 CISG reservation, which looks back on a particularly long history; already the very first draft for a uniform sales law written by Ernst Rabel85 in 1935 contained a predecessor provision.86 Notably, the Scandinavian States had always made clear that they would only be willing to accede to the Sales Convention if they could continue to apply their regionally harmonized sales laws to their intra-Nordic trade.87 In order to be able to do so, they proposed and throughout supported a reservation like today’s Article 94 CISG. The Article 96 CISG reservation which makes an exception from the freedom-of-form principle under the Sales Convention88 was included upon the wish of the Soviet Union (USSR), which also spoke for other then-Socialist countries with planned economies.89 It first appeared (with a somewhat different wording) in a proposal made within UNCITRAL in 197190 and was subsequently included into the so-called New York draft of the Sales Convention of 1978,91 from where onwards it formed part and parcel of the general freedom-of-form discussion. The Article 92 CISG reservation was the last of this group to enter the scene. It was only requested once the decision had been reached within UNCITRAL to include both the provisions on the formation of contracts and the provisions on the sale of goods into one and the same Convention.92 During the discussion preceding this decision, the Scandinavian States had insisted on a possibility to ratify only the sales law part,93 which therefore was introduced in form of a reservation that became Article 92 CISG. The second group covers one boilerplate reservation, namely the ‘federal State clause’ in Article 93 CISG already addressed earlier.94 This provision was not included upon suggestion from a State, but rather from the UNCITRAL Secretariat that prepared a draft for the CISG’s final clauses95 for discussion at the Vienna Diplomatic Conference. The reser85 On Ernst Rabel see M. Rheinstein, ‘In Memory of Ernst Rabel’, American Journal of Comparative Law, Vol. 5, 1956, pp. 185–196; B. Großfeld & P. Winship, ‘The Law Professor Refugee’, Syracuse Journal of International Law and Commerce, Vol. 18, 1992, p. 3 at p. 11. 86 See Schroeter, 2005, supra note 21, § 10, Para. 2. 87 See J. Lookofsky, Understanding the CISG in Scandinavia, DJØF Publishing, Copenhagen, 1996, §§ 2–3 and 3–1; Schlechtriem, supra note 84, Art. 94, Para. 2. Other states that showed an interest in using Article 94 CISG were the Benelux countries (Belgium, the Netherlands and Luxembourg) as well as Australia and New Zealand; see Official Records, p. 436. 88 See Schroeter, 2014, supra note 26, p. 83. 89 See Id, pp. 81–82. 90 UNCITRAL Yearbook, Vol. II, 1971, p. 48. See in more detail Schroeter, 2014, supra note 26, pp. 85–86. 91 UNCITRAL Yearbook, Vol. IX, 1978, p. 14 at p. 21. 92 See in detail G. Eörsi, ‘Problems of Unifying Law on the Formation of Contracts for the International Sale of Goods’, American Journal of Comparative Law, Vol. 27, 1979, p. 311, who refers to this decision as ‘a significant step’. 93 See Official Records, p. 74. 94 See supra at 3.2.1.2.2. 95 ‘Draft Convention on Contracts for the International Sale of Goods: Draft Articles Concerning Implementation, Declarations, Reservations and other Final Clauses, prepared by the Secretary-General’, U.N. Doc.

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vation’s purpose is essentially unrelated to the uniform law content of the Sales Convention in that it exclusively responds to the particular territorial structure of some States (federal or other)96 and their impact on the implementation of uniform law conventions. In Vienna, Article 93’s inclusion was notably supported by Australia and Canada.97 The third and final group could be assigned the heading ‘last-minute additions’. It similarly comprises just one of the CISG’s reservations, namely Article 95 CISG.98 Unusually, this reservation neither had a direct predecessor in the 1964 Hague Uniform Sales Laws99 nor was it discussed within UNCITRAL or its working groups prior to the 1980 Diplomatic Conference in Vienna. It was not until the Vienna Conference was well under way that the delegation representing Czechoslovakia (CSSR) first proposed today’s Article 95 CISG during the second meeting of the Second Committee on 18 March 1980,100 where it was rejected.101 On 7 April 1980, a mere 4 days before the Conference’s scheduled ending on 11 April 1980, Czechoslovakia re-introduced its proposal in the Plenary, now offering two alternative wordings.102 The Plenary finally discussed the proposal during the late afternoon of 10 April 1980103 and accepted one of the proposed wordings by 24 votes to 7, with a comparatively high number of 16 abstentions.104 The majority decision to accept the reservation at all was clearly driven by the desire not to risk the support of the CSSR and other Socialist countries for the Sales Convention as a whole.105 The notable price for Article 95’s surprising last-minute adoption106 are uncertainties about its precise meaning that plague the provision’s practical application until this very day.107

96 97 98 99

100 101 102 103 104 105

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107

A/CONF.97/6, in Official Records, p. 66 at 67. On the discussion about the alternative drafts proposed by the UNCITRAL Secretariat, see in detail Evans, 1987, supra note 38, Art. 93, Paras. 1.1–1.5. See in more detail infra at 3.5.2. See Official Records, pp. 82, 434–436, 445–447. On the legislative history of Article 95 CISG, see CISG Advisory Council Opinion No. 15, 2014, supra note 26, p. 118. Article III of the Conventions relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) and to a Uniform Law on the International Sale of Goods (ULIS) of 1 July 1964 contained no more than quasi-predecessors, which were functionally equivalent but had a significantly different language and structure; see CISG Advisory Council Opinion No. 15, 2014, supra note 26, p. 118. U.N. Doc. A/CONF.97/C.2/L.7, Official Records, p. 145. Official Records, p. 439. Document A/CONF.97/L.4, Official Records, p. 170. Official Records, p. 229. Official Records, p. 230. CISG Advisory Council Opinion No. 15, 2014, supra note 26, p. 118; Evans, 1987, supra note 38, Art. 93, Para. 2.3; Gillette & Scott, 2005, supra note 14, p. 468 note 52: “In the face of the threat of non-adaption by Eastern European States, the Conference ultimately inserted Article 95 …”. See P. Winship, ‘The Scope of the Vienna Convention on International Sales Contracts’, in N. Galston & H. Smit (Eds.), International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender, New York, 1984, p. 1–44. See in more detail CISG Advisory Council Opinion No. 15, 2014, supra note 26, pp. 120–123.

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3.2.2.3 Authorization and Use of the CISG’s Reservations Finally, it is worth noting that all reservations authorized by the CISG have actually been used by one or more Contracting States. In this respect, the CISG differs from many other uniform law conventions whose text authorizes reservations that later turned out to be superfluous, as no State saw the need to declare such a reservation upon accession.108 The fact that such ‘orphan reservations’ are relatively common under other conventions proves the good draftsmanship in case of the CISG, where reservations were successfully restricted to the necessary minimum.

3.3

Reservations: Decreasing Uniformity or Enabling a Wider Uniformity?

In looking back on the role that reservations have played during the first 35 years of the CISG’s practical application, it appears helpful to commence with a general, bird’s eye assessment, before turning to some more specific questions.109

3.3.1

The Critical View: Reservations as a Source of Non-Uniformity

Taking the opinions expressed in legal writings as a starting point, it quickly becomes clear that the prevailing view of the CISG’s reservations is a sceptical or even outright critical one. Most of the critique has been directed at one and the same factor, namely the reservations’ perceived nature as a source of non-uniformity under the Sales Convention.110 The impact of such non-uniformity has been viewed as considerable,111 even undermining the Sales Convention’s very goal of creating a uniform law of international sales.112 Related points of criticism are the increased likelihood of confusion regarding the CISG’s practical

108 The 1974 United Nations Convention on the Limitation Period in the International Sale of Goods is one of many examples: Out of the five reservations authorized by the Limitation Convention, only one (Art. 34) was used by a single contracting state (Norway). 109 See infra 3.4. and 3.5. 110 C.B. Andersen, ‘Recent Removals of Reservations under the International Sales Law: Winds of Change Heralding a Greater Unity of the CISG’, Journal of Business Law, Vol. 8, 2012, p. 698 at p. 706; Andersen, 2013, supra note 25, pp. 1–2; Bailey, 1999, supra note 38, p. 311; Ferrari, 2013, supra note 38, Vor Artt. 89–101, Para. 9; Flechtner, 1998, supra note 38, p. 193; S.H. Jenkins, ‘Construing Laws Governing International and U.S. Domestic Contracts for the Sale of Goods: A Comparative Evaluation of the CISG and UCC Rules of Interpretation’, Temple International and Comparative Law Journal, Vol. 26, Fall 2012, p. 181 at p. 202; Mazzotta, 2010, supra note 38, p. 836; Neumann, 2013, supra note 25, p. 2. From a general treaty law perspective, see E.T. Swaine, ‘Reserving’, Yale Journal of International Law, Vol. 31, 2006, p. 307 at p. 330. 111 Flechtner, 1998, supra note 38, p. 197. 112 Bailey, 1999, supra note 38, p. 312.

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application113 and the resulting additional transaction costs.114 The critical view’s essentially thrust, however, remains non-uniformity: The presence of reservations means that the search for a uniform solution has partially failed.

3.3.2

A More Positive View: Reservations as a Tool Enabling a Wider Uniformity

On the eve of the Sales Convention’s 35th birthday, the present chapter offers an alternative and more positive view of the CISG’s reservation regime. It rests on two separate foundations that differ from those used by the prevailing view: On one hand, it takes into account recent developments with regard to the use of reservations by Contracting States115 (which admittedly could not be taken into account by most earlier writers – in this respect, it may be accused of profiting from the benefit of hindsight.) And on the other hand, it challenges the standard of uniformity implicitly underlying the general criticism of reservations by asking: Reduced uniformity compared to what?116 In a nutshell, the result of this combined approach can be described as follows: The use of reservations under uniform private law conventions like the CISG should not be viewed as a source of non-uniformity, but is more fittingly regarded as a tool enabling what may be called a ‘wider uniformity’. 3.3.2.1 Taking into Account the Withdrawability of Reservations A first justification for the present approach emerges when taking into account the possibility of withdrawing reservations, as provided for in the law of treaties in general (Article 22 of the 1969 Vienna Convention on the Law of Treaties) and in Article 97(4) CISG in particular: A reservation, once made, does not need to stay in effect forever but can also result in a merely temporal reduction of uniformity. The recent wave of withdrawals of CISG reservations that we have witnessed since 2011, with Finland, Sweden, Denmark, Latvia, the People’s Republic of China, Lithuania and Norway all having withdrawn some or all of their reservations,117 has reminded us of the inherent temporal scope of reservations under uniform private law conventions. While in the past reservation withdrawals had played almost no practical role under such conventions, as reservations usually remained

113 Id, p. 311. 114 R. Knieper, ‘Celebrating Success by Accession to CISG’, Journal of Law and Commerce, Vol. 25, 2005–2006, p. 477 at pp. 478–479; Gillette & Scott 2005, supra note 14, p. 469. 115 Infra at 3.3.2.1. 116 Infra at 3.3.2.2., in particular at 3.3.2.2.1. In a more general context, see Gillette & Scott 2005, supra note 14, p. 480: ‘Criticism of the CISG requires an answer to the question: compared to what?’ 117 See the details in Schroeter, 2015, supra note 16, pp. 2–3.

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Ulrich G. Schroeter unmodified until the respective State eventually denounced the Convention,118 the CISG – once again – has been a ground breaker in this regard. The withdrawability of reservations serves a useful function in the circumstances in which a State contemplating the ratification of or accession to a uniform private law convention finds certain provisions contained therein objectionable or contestable. (In case of uniform private law conventions, this is most likely to be the case where the convention dramatically departs from the State’s domestic law.119) A critical approach towards some of the convention’s content complicates the respective State’s position towards the convention; in that, it renders its decision for or against a consent to be bound (Article 11 of the 1969 Vienna Convention on the Law of Treaties) more difficult.120 In such a context, the option to ratify a convention in combination with making a withdrawable reservation offers the hesitant State the possibility to ‘test drive’ the convention: In doing so, it can experience the convention’s application in practice, without immediately having to commit to provisions it at first sight finds objectionable. At the same time, an ‘opting out’ of these provisions by way of a reservation is not necessarily made for eternity, as the reservation may be withdrawn ‘at any time’ (Article 97(4) CISG). This option may be more attractive to reluctant States than the obvious alternative, namely to refrain from immediate ratification of the Convention and to observe the development ‘from the outside’, i.e. the position of a non-Contracting State, before potentially ratifying at a later stage. One reason is that an early ratification (despite being accompanied by reservations) still brings the economic advantages that flow from the nonreserved parts of the Convention121 to the reserving State’s citizens and companies, while an abstention deprives them of these advantages. Another reason may lie in a Contracting State’s chance to influence the early interpretation of the Convention through its domestic courts, which will have the opportunity to play their part in the proverbial international ‘orchestra’ made up of courts from all Contracting States.122 This may be viewed as more advantageous than remaining a non-Contracting State with the prospect of later ratifying the Convention including the interpretation it has already received at that stage and that the new Contracting State will nevertheless need to ‘have regard to’ in accordance with

118 Schroeter, 2015, supra note 16, p. 2. For voices describing reservation withdrawals as ‘a rare event’ in general treaty practice see F. Horn, Reservations and Interpretative Declarations to Multilateral Treaties, Elsevier, Amsterdam, 1988, p. 226; Walter, 2012, supra note 10, Art. 22, Para. 1. 119 Gillette & Scott, 2005, supra note 14, p. 467. See also infra at 3.3.2.2.2. 120 See infra at 3.3.2.2.2. 121 See in detail Spagnolo, 2014, supra note 13, pp. 47–148. 122 The picture of an ‘orchestra without conductor’ was employed in the present context by P. Schlechtriem, ‘Einheitskaufrecht in der Rechtsprechung des Bundesgerichtshofs’, in C.-W. Canaris, A. Heldrich et al. (Eds.), 50 Jahre Bundesgerichtshof: Festgabe aus der Wissenschaft, Vol. 1: Bürgerliches Recht, C.H. Beck Publishing, Munich, 2000, p. 407 at p. 408.

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Article 7(1) CISG (as well as Article 31(3)(b) of the 1969 Vienna Convention on the Law of Treaties123). As a first intermediate result, we can therefore identify a crucial difference between the treaty law perspective and the uniform private law perspective: From the viewpoint of general treaty law, a reservations expresses a ‘no’, while from the viewpoint of contemporary uniform private law, it often merely expresses a ‘not yet’. This difference is further corroborated by State practice under the Sales Convention where most reservations were declared during the early years (and none since 2008) – a result that stands in contrast to observations under general treaty practice, where latecomers to treaties have been found to make more reservations than early ratifiers.124 3.3.2.2

Reservations and Treaty Design: A ‘Wider Uniformity’ under ‘Reservable’ Uniform Private Law Conventions

3.3.2.2.1 Measuring Uniformity: Selecting the Appropriate Standard We next turn to the standard of uniformity that should be used when measuring the effect of reservations. Insofar, the prevailing view that labels reservations a source of non-uniformity125 implicitly employs a complete uniformity within the scope of the convention as the standard of comparison: As far as a uniform law text has been agreed upon, it should ideally be applied identically in all Contracting States thereto, and reservations are disturbing this uniformity. At the opposite end of the range of possible standards lies another uniformity standard which is equally radical, namely a complete lack of uniformity within the scope of the convention: If we picture a uniform law text that has been adopted with a content that no State is willing to accept unmodified, then all reservations would be a good thing, as they would make the convention more acceptable to States126 and would therefore be a source of uniformity, because the convention otherwise would attract no Contracting States. (This picture is, of course, somewhat unrealistic, as such a uniform law text would probably not have been adopted in the first place.127) It is submitted that both of these ‘radical’ standards – complete uniformity and complete non-uniformity – are overly simplistic and should be replaced by a standard that is more attuned to the realities of uniform private law making. In this context, the perspective

123 See supra at 3.1.2. 124 See L.R. Helfer, ‘Not Fully Committed? Reservations, Risk, and Treaty Design’, Yale Journal of International Law, Vol. 31, 2006, p. 367 at p. 370; Swaine, 2006, supra note 110, p. 342 note 210. 125 Supra at 3.3.1. 126 See Knieper, 2005–2006, supra note 114, p. 479. 127 There are, however, conventions that were formally adopted and attracted almost no state parties, as, e.g. the European Convention providing a Uniform Law on Arbitration adopted in Strasbourg on 20 January 1966 that was only signed by two states (Austria and Belgium) and ratified by a single state (Belgium, subject to reservations). The convention never entered into force.

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should also be widened by looking beyond the scope of the adopted uniform law texts: Their scope could have been different had reservations been used when the respective text was drafted, which already indicates that reservations may well enable a ‘wider’ uniformity. 3.3.2.2.2 Treaty Design Particularities Affecting Uniform Private Law Conventions 3.3.2.2.2.1 Reservations and Treaty Negotiations As a starting point, it is useful to recall a point in which uniform private law making differs from treaty law making in general.128 In case of other treaties, the adoption of the treaty text in accordance with Article 9 of the 1969 Vienna Convention on the Law of Treaties is followed by a decision-making process in the individual States, during which each State decides whether or not to express its consent to be bound by the treaty (Article 11 of the 1969 Vienna Convention on the Law of Treaties) and – most important in our context – which reservations to make, thereby potentially ‘turning a prix fixe menu à la carte’.129 In case of uniform private law conventions, however, the latter freedom is often much more limited, as provisions like Article 98 CISG130 typically restrict the possible content of reservations to those expressly authorized in the convention.131 This in turn leads to the discussion about admissible reservations already taking place during the phase preceding the uniform law text’s adoption, with reservations forming part and parcel of the general treaty negotiations.132 The drafting of reservations under uniform private law conventions is therefore intrinsically tied to the drafting of the uniform law text they relate to, and both endeavours closely interact with each other. 3.3.2.2.2.2 Reservations v. Other Design Options Against this uniform private law making background, reservations do not necessarily appear as an impediment to uniformity, but rather as a tool that provides a sensible design option in addition to those otherwise available.133 A situation in which these options need to be compared arises every time that no agreement about the content of a uniform law text can be reached, usually because the various domestic laws dealing with the respective topic differ to such an extent that delegates cannot agree on a universally acceptable compromise text.134 The existence of differences between domestic laws is as such not surprising, as it constitutes the prerequisite for uniform private law making (though not necessarily

128 129 130 131

Supra at 3.2.2.1. Swaine, 2006, supra note 110, p. 307. See supra at 3.2.1.2.1. and 3.2.2.1. Mankowski, 2011, supra note 40, Art. 98 CISG, Para. 1. In other types of treaties, provisions of this kind are much less common; see G.F. Jacob, ‘Without Reservation’, Chicago Journal of International Law, Vol. 5, 2004, p. 287 at p. 290; Swaine, 2006, supra note 110, p. 325. 132 See supra at 3.2.2.1. 133 Cf. Helfer, supra note 124, p. 378. 134 Gillette & Scott, 2005, supra note 14, p. 460.

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for treaty making in general135): Wherever all domestic laws have developed the same solution for a salient problem, there is no need for a uniform law in the first place, as it could do no more than codifying the already uniform solution through a uniform wording, thereby adding uniformity in form to the existing uniformity in substance. Uniform law making efforts therefore necessarily presuppose that local approaches to a certain problem differ and that any uniform law solution (whatever its content) will accordingly require some of the States involved to accept a text that is at least partially ‘foreign’ to them. In such a situation, a number of different options are at the uniform law makers’ disposal: Many controversies about the desirable uniform law solution may be solved through negotiations that eventually lead to a compromise acceptable to most or all of the drafters. A prominent example from the 1980 Sales Convention’s drafting history was the muchdiscussed regulation of the buyer’s notice of non-conformity, which resulted in a compromise solution combining a comparatively strict rule (Articles 39 and 43 CISG) with limited exceptions (Articles 40 and 44 CISG).136 It is in situations in which no commonly acceptable compromise text can be agreed upon that a choice must be made between a narrower and a wider controversial text,137 which amounts to a choice between a ‘narrower’ or a ‘wider’ uniformity: A ‘narrower’ uniformity results from decisions to exclude the controversial issue(s) from the scope of the uniform text, thereby leaving it non-unified. This type of solution guarantees that no State is repelled from accepting the uniform text because of an unacceptable wording but at the same time restricts the text’s scope within which uniformity can develop. When the 1980 Sales Convention was drafted, this approach was used with respect to the (material) ‘validity’ of the sales contract, as no compromise about an acceptable text could be reached.138 The resulting ‘validity exception’ in Article 4 sentence 2(a) CISG accordingly excludes this matter from the Convention’s material scope, although the meaning of this provision has in itself created much controversy.139 In contrast, a ‘wider’ uniformity is chosen whenever a controversial issue is covered in the uniform law text but accompanied by an authorized reservation that allows States to ‘opt out’ of the compromise found. As such reservations may later be withdrawn, this 135 See James K. Sebenius, Negotiating the Law of the Sea, Harvard University Press, Cambridge and London, 1984, p. 113. 136 See CISG Advisory Council Opinion No. 2, ‘Examinations of the Goods and Notice of Non-Conformity (Articles 38 and 39), Rapporteur: E.E. Bergsten’, Internationales Handelsrecht, 2004, p. 163 Comments 1–3.5; Gillette & Scott, 2005, supra note 14, p. 460. 137 Helfer, 2006, supra note 124, p. 375 stresses the “broad freedom of international contract” in negotiating treaties. 138 See H.E. Hartnell, ‘Rousing the Sleeping Dog: The Validity Exception to the Convention on Contracts for the International Sale of Goods’, Yale Journal of International Law, Vol. 18, No. 1, 1993, p. 1 at pp. 22–45. 139 See U.G. Schroeter, ‘The Validity of International Sales Contracts: Irrelevance of the “Validity Exception” in Article 4 Vienna Sales Convention and a Novel Approach to Determining the Convention’s Scope’, in I. Schwenzer & L. Spagnolo (Eds.), Boundaries and Intersections, Eleven, The Hague, 2014, pp. 95–117.

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approach enables a wider uniformity by way of a more comprehensive scope of the convention140 – proof that reservations may in fact serve the goal of private law unification. 3.3.2.2.3 Further Advantages of Reservations in a Treaty Design Context In addition, the use of reservations offers a number of further advantages, all of which eventually support the quest for uniformity. First, it allows for a more ambitious (‘deeper’141) content of the uniform private law text concerned, which in the long term results in a wider uniformity than the alternative exclusion of controversial issues.142 The freedom-ofform question constitutes an example from the Sales Convention’s drafting history: Although the (efficient143) freedom-of-form principle was inacceptable as a universally applicable rule to the Socialist planned economies when the Convention was drafted in the 1970s,144 it was eventually included in Articles 11 and 29 CISG but accompanied by an authorized reservation (Article 96 CISG). The formal validity of sales contracts thereby became a matter governed by the Convention, with the resulting pre-emption of domestic laws.145 Although the freedom-of-form principle was initially affected by the numerous reservations under Article 96 CISG that were made, a significant number of these reservations have since been withdrawn.146 Had the drafters of the Convention opted for a narrower scope of the uniform sales law excluding the issue of formal validity, the degree of uniformity would be significantly lower today. Second, the use of reservations can eventually be advantageous to uniformity if it can solicit additional ratifications through a limited option to reserve. An example: By authorizing the non-application of one provision (Article 1(1)(b) CISG), Article 95 CISG enables the application of the other 87 provisions in Parts I-III of the Sales Convention; a compromise that may well pass for a ‘good deal’. And third, any decision in favour of a ‘wider’ uniformity accounts for the fact that reservations – because of their withdrawability147 – are a more flexible component of uniform international law when compared to the convention’s text itself: Once it has been adopted and ratified by a relevant number of States, a uniform private law convention

140 But see Gillette & Scott, 2005, supra note 14, p. 461. 141 Swaine, 2006, supra note 110, pp. 311 and 331. 142 For a similar argument in relation to treaties in general, see Helfer, 2006, supra note 124, pp. 368 and 378; Swaine, 2006, supra note 110, pp. 331–333. 143 For an efficiency assessment from a law and economics perspective, see M. Cantora, ‘The CISG after Medellin v. Texas’, Journal of International Business and Law, Vol. 8, 2009, p. 111 at pp. 125–127; Spagnolo, 2014, supra note 13, p. 81. 144 See in detail Schroeter, 2014, supra note 26, pp. 81–83. 145 See Schlechtriem & Schroeter, 2013, supra note 19, Paras. 112–113. 146 See already supra at 3.3.2.1. 147 Supra at 3.3.2.1.

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cannot realistically be modified.148 In contrast, the position of an initially hesitant reserving State can be modified, namely through the withdrawal of its reservation. 3.3.2.2.4 Conclusion As a second intermediate result, we can accordingly conclude that a more ambitiously framed uniform private law text in combination with authorized reservations eventually results in a ‘wider’ uniformity than a narrower uniform private law text without reservations. Insofar, reservations serve as a tool contributing to the international unification of laws. 3.3.2.3 Limits There are, however, inherent limits to the use of reservations as a tool enabling a wider uniformity. These limits are on the one hand reached whenever an authorized reservation is built ‘for eternity’ (and will accordingly never be withdrawn), as such reservations do not aim at providing a mere ‘test drive’149 of the new uniform law convention. To a certain extent, Article 93 CISG falls into this category (to be addressed in more detail below150). On the other hand, the more positive view proposed here does not apply to reservations that are so far-reaching as amounting to a rejection of the uniform law’s content in disguise: Little is gained by adding a Contracting State that has opted out of too much, creating the risk that the entire convention ‘may ultimately be perceived as a mere sham, form with no substance’.151 A prominent example of the latter type of reservation was Article V of the 1964 Hague Convention relating to a Uniform Law on the International Sale of Goods (ULIS). It read: Any State may, at the time of the deposit of its instrument of ratification of or accession to the present Convention declare, by a notification addressed to the Government of the Netherlands, that it will apply the Uniform Law only to contracts in which the parties thereto have, by virtue of Article 4 of the Uniform Law, chosen that Law as the law of the contract. Under the 1964 Hague Convention, the United Kingdom and the Gambia both made use of this reservation. The effect has been striking: Although the 1964 Convention has been in force for both countries since 1972 and 1974, respectively, and still is in force today, not a single case has ever been reported from the United Kingdom or the Gambia in which the ULIS was applied. The reason is that – according to Article V – the ULIS applies to a contract of sale only if it has been specifically chosen by the parties to the contract as the 148 149 150 151

Schroeter, 2005, supra note 21, § 13, Para. 60. Supra at 3.3.2.1. Infra at 3.5.2. Gillette & Scott, 2005, supra note 14, p. 469.

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Ulrich G. Schroeter law thereof, and such a positive choice is hardly ever made in practice.152 The reservation has rendered the 1964 Uniform Sales Law accordingly meaningless in the two reserving States. At the 1980 Diplomatic Conference in Vienna, proposals were nevertheless made to include in the Sales Convention a reservation similar to the one mentioned above.153 In their support, the Australian delegate suggested that the reservation would reassure businessmen in some countries and would maximize the number of States which would ratify the Convention.154 Luckily, the proposals met with overwhelming opposition and were eventually rejected. In support of their rejection, delegates in Vienna pointed out that States using this type of ‘opting in’ reservation would in consequence have almost no obligations under the Convention155 and could hardly be counted as Contracting States.156 And indeed: In view of their extent, reservations of the type described do not qualify as tools enabling a wider uniformity of uniform private law, irrespective of their withdrawability. In fact, they would arguably go beyond being sources of some non-uniformity by “upset[ting] the whole process of progress towards the unification of private law”157 – a situation that should be avoided.

3.4

Difficulties in Practice under the Convention

Even if reservations are viewed as a merely temporary restriction of the Convention’s applicability,158 reservations that have been made temporarily affect the Convention’s practical application until they are withdrawn. (And as the example of the Scandinavian Article 92 reservations159 demonstrates, ‘temporarily’ may well mean 22 years or more.) It is therefore of interest to briefly evaluate the practical effects that the CISG’s reservations have had in the past 35 years.

152 Lord Collins of Mapesbury (Ed.), Dicey, Morris & Collins on The Conflict of Laws, 15th edn, Sweet & Maxwell, London, 2012, Paras. 33–019. Interestingly, contractual clauses specifically choosing the CISG as the applicable law are nowadays becoming more and more common in practice; see, e.g. Distributor Z (U.S.) v. Company A (Mexico), Distributor B (U.S.), Final Award, ICC Case No. 13184, Yearbook Commercial Arbitration, Vol. XXXVI, 2011, p. 96 at p. 101: “This agreement shall be governed and interpreted in accordance with the United Nations Convention on Contracts for the International Sale of Goods and, as to matters not addressed in that Convention, by and in accordance with Mexican law applicable in Mexico City.” 153 Official Records, p. 144. 154 Official Records, p. 437. 155 Remark by delegate Plantard (France), Official Records, p. 438 No. 53. 156 Remark by delegate Tarko (Austria), Official Records, p. 437 No. 42. 157 Remark by delegate Plantard (France), Official Records, p. 438 No. 53; in agreement Winship, 1984, supra note 106, pp. 1–49. 158 See supra 3.3.2.1. 159 See Id; Andersen, 2013, supra note 25, pp. 9–10; Andersen, 2012, supra note 110, p. 708; Neumann, 2013, supra note 25.

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In doing so, the focus will once more not be on the way in which each reservation has resulted in the non-application of certain CISG provisions, but rather on general difficulties that have emerged in practice. As will be shown, all of those difficulties can essentially be traced back to one and the same reason, namely the nature of reservations as instruments of treaty law that affect the application of uniform sales law to contracts between private parties.160

3.4.1

Reservations Overlooked by Courts

In a number of cases, courts simply overlooked CISG reservations they should have taken into account in deciding the cases before them. A reason for these mistakes may have been the position of reservations that are tucked away in the far corners of the Sales Convention, in a Part titled ‘Final Clauses’ that may seem as if directed at government officers only. In this respect, another prominent convention in the area of international commerce – the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – is structured somewhat differently, as its drafters positioned two of the reservations authorized thereunder (the ‘reciprocity reservation’ and the ‘commercial reservation’) directly in Article I(3) of the New York Convention. This approach made these reservations more difficult to overlook, as they form part and parcel of the Convention’s introductory provision. In contrast, courts have to read the Sales Convention’s text from beginning to end, because its Article 1 does not explicitly refer to the reservations in Articles 92–95 CISG – a factor which may well affect the Convention’s application.161 Another factor that appears to affect the relevant court practice is the court’s location inside or outside a reserving State. Reservations have been more frequently overlooked by courts in Contracting States that had not themselves made a reservation but were called upon to apply the Sales Convention in constellations in which they had to take a reservation made by another Contracting State162 into account.163 This phenomenon is not entirely surprising, as it is in conformity with observations from general treaty practice where 160 See supra at 3.1.1. 161 But see Article 12 CISG, which largely duplicates the language of Article 96 CISG in order ‘to draw attention to the fact that [the freedom-of-form rule in Article 11 CISG] might be affected by a reservation’; Honnold, 2009, supra note 38, Para. 129 note 2. 162 Reservations authorized by Articles 92, 93, 94 and 96 CISG (but not the one authorized by Article 95 CISG) must be observed by courts in all contracting states, although this is far from undisputed. See in detail Schroeter, 2008, supra note 20, pp. 444–447. 163 Examples are Oberlandesgericht Naumburg (Germany), 27 April 1999, CISG-online 512 = Transportrecht – Beilage Internationales Handelsrecht (2000), pp. 22–23 (Danish Art. 92 CISG reservation overlooked); Oberlandesgericht Frankfurt am Main (Germany), 4 March 1994, CISG-online 110 (Swedish Art. 92 CISG reservation overlooked); critical assessment of these decisions by M.M. Fogt, ‘Rechtzeitige Rüge und Vertragsaufhebung bei Waren mit raschem Wertverlust nach UN-Kaufrecht’, Zeitschrift für Europäisches Privatrecht, 2002, p. 580 at p. 587 note 22.

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reservations made by other States are frequently given less attention than reservations declared by the home State.164 An explanation in case of uniform law conventions is that a reserving State’s government will take better care to provide its domestic courts with information about the reservations it has declared than about foreign reservations – when it comes to reservations of the latter kind, courts are often required to make do with information published by the convention’s depositary. Nevertheless, reservations have occasionally also been overlooked by a reserving State’s own domestic courts.165 And finally, there have been cases in which the court had noticed the possible effect of a foreign reservation but refused to address the matter ex officio because the parties had failed to raise the CISG’s applicability to the dispute.166

3.4.2

Uncertainty Created by Reservations

In cases in which reservations were not outright overlooked by courts, the primary difficulty in practice has been a frequent uncertainty about reservations’ meaning. Uncertainty of this kind has demonstrated itself both in the context of the making of reservations by States167 and, maybe even more important, of court and arbitral proceedings applying the Sales Convention to sales contracts.168 3.4.2.1 Uncertainty Affecting Contracting States Making a Reservation The first group among a reservation’s addressees that can be affected by uncertainty are government officials in States that are about to ratify, accept, approve or accede to the Sales Convention. In spite of John Honnold’s confident statement that “[t]hese matters are handled by government officers who have experience with similar provisions in other conventions”,169 there have been indications that the making of reservations is occasionally a matter of difficulty. The CISG itself provides little guidance in this respect: Article 98 164 Swaine, 2006, supra note 110, p. 327. 165 See Oberlandesgericht Düsseldorf (Germany), 2 July 1993, Journal of Law and Commerce, Vol. 16, 1997, pp. 357–362, where the Court did not address the interpretative declaration regarding the application of Article 95 CISG that has been made by Germany. The wording of this declaration reads: “The Government of the Federal Republic of Germany holds the view that Parties to the Convention that have made a declaration under article 95 of the Convention are not considered Contracting States within the meaning of subparagraph (a) (b) of article 1 of the Convention. Accordingly, there is no obligation to apply – and the Federal Republic of Germany assumes no obligation to apply – this provision when the rules of private international law lead to the application of the law of a Party that has made a declaration to the effect that it will not be bound by subparagraph (1) (b) of article 1 of the Convention. Subject to this observation the Government of the Federal Republic of Germany makes no declaration under article 95 of the Convention.” 166 Standard Bent Glass Corp. v. Glassrobots Oy, U.S. Court of Appeals for the Third Circuit (United States), 20 June 2003, 333 F.3d 440. See in more detail Spagnolo, supra note 13, pp. 285–297. 167 Infra at 3.4.2.1. 168 Infra at 3.4.2.2. 169 Honnold, 2009, supra note 38, Para. 458.

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CISG limits reservations to those expressly authorized in the Convention, and Article 97 CISG addresses formal aspects170 of declarations to be made under the Convention’s final provisions. The actual wording of reservations, on the contrary, has traditionally been left to the reserving State’s officials, and the 1980 Sales Convention continues this tradition by giving them no orientation apart from the language of Articles 92–96 CISG. Where the language of these provisions contains uncertainties (even if only in the eyes of the government official concerned), these uncertainties may result in the making of unclear reservations.171 Under the Sales Convention, a much-discussed example was the reservation against oral contracts made by the People’s Republic of China in 1986 (but since withdrawn172), which deviated from the language of Article 96 CISG, albeit in only minor respects.173 A both more recent and more intriguing example is the (‘second’174) Armenian declaration made by the Republic of Armenia upon its accession to the Sales Convention in 2008. It reads: Pursuant to Article 95 of the Convention, the Republic of Armenia declares that it will not apply the Article 1, subparagraph (1)(b) of the Convention to the parties that declare not to be bound by the Article 1, subparagraph (1)(b) of the Convention. The meaning of this declaration is not entirely clear, and its wording is quite obviously not in conformity with Article 95 CISG, despite its express reference to this provision. While one can only speculate about the precise purpose and historical background of the declaration, it can be surmised that its drafters were uncertain about the meaning of Article 95 CISG and therefore attempted to provide a clarification in their declaration. In doing so, they may have overlooked Article 98 CISG. (Note that Armenia on the same occasion also entered a reservation against oral contracts and that the wording of this declaration was framed in perfect conformity with Article 96 CISG.) It is a somewhat unfortunate effect of the unclear Armenian declaration (as of any other unclear declaration) that the uncertainty that affected government officials is thereby transferred into private practice under the Convention, with courts and arbitral tribunals

170 171 172 173

Id. See Schroeter, 2008, supra note 20, pp. 449–452. Infra at 3.3.2.1. See X. Wang & C.B. Andersen, ‘The Chinese Declaration against Oral Contracts under the CISG’, Vindobona Journal of International Commercial Law and Arbitration, Vol. 8, 2004, p. 145 at p. 146; Schroeter, 2008, supra note 20, pp. 450–451. 174 The ‘first’ Armenian declaration was made when Armenia deposited an instrument of accession in 2006, but subsequently withdrew its declaration of accession before the Sales Convention could enter into force for Armenia. Interestingly, this ‘first’ declaration also had an unclear content; see in more detail Schroeter, 2008, supra note 20, pp. 449–450.

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Ulrich G. Schroeter having to determine the declaration’s precise effect.175 A pragmatic solution would be to simply apply the declaration in full accordance with its wording, as supported by Article 31(1) of the 1969 Vienna Convention on the Law of Treaties. This would probably mean that the Armenian ‘Article 95-style’ reservation would have no scope in practice, as it must be considered highly unlikely that the parties to any sales contract will ever expressly declare not to be bound by Article 1(1)(b) CISG, as the reservation’s wording presupposes. (Arguably, this result would not even be an undesirable outcome.) 3.4.2.2

Uncertainty Affecting Judges and Arbitrators

3.4.2.2.1 General Throughout practice under the Sales Convention, the more important group to be affected by reservation-induced uncertainty are nevertheless judges, arbitrators and attorneys advising buyers or sellers. While such uncertainty may on occasion arise from individual Contracting States’ declarations (as just mentioned176), it is more often created by Articles 92–96 CISG themselves. The reason can – again – be traced to the dual character of reservations under uniform private law conventions, being creatures of treaty law and of uniform private law at the same time.177 It is the resulting need of judges at civil and commercial courts to also handle the treaty law side of reservations that may give rise to difficulties: Even experienced judges are presumably puzzled when faced with provisions that were drawn up against a public international law background, with the obligations of States as sovereign entities in mind. 3.4.2.2.2 Uncertainty under Specific CISG Reservations The experience of 35 years demonstrates, however, that the risk of uncertainty is not the same under each of the CISG’s reservations. It rather depends on the manner in which the reservations were drafted and notably the care that was taken in spelling out their effect upon the Convention’s application to individual sales contracts. In this respect, the numerical order of Articles 92–96 CISG happens to correspond to the easiness in which the reservations have been applied by courts and arbitral tribunals, with an imaginary curve commencing with the two easiest-to-apply (Articles 92 and 93 CISG) and making its way downhill via an intermediate degree of easiness (Article 94 CISG) towards the reservations that have caused the most difficulties (Articles 95 and 96 CISG).

175 See also Schroeter, 2008, supra note 20, pp. 451–452. 176 Supra at 3.4.2.1. 177 See already supra at 3.1.1.

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3.4.2.2.2.1 Articles 92 and 93 CISG A prize for excellent drafting goes to Article 92 CISG, which reads: 1. A Contracting State may declare at the time of signature, ratification, acceptance, approval or accession that it will not be bound by Part II of this Convention or that it will not be bound by Part III of this Convention. 2. A Contracting State which makes a declaration in accordance with the preceding paragraph in respect of Part II or Part III of this Convention is not to be considered a Contracting State within paragraph (1) of article 1 of this Convention in respect of matters governed by the Part to which the declaration applies. Article 92 CISG is divided into two paragraphs, with Article 92(1) CISG addressing the public international law side of the reservation (“… that it [i.e. the reserving State] will not be bound by…”) and Article 92(2) CISG clearly stipulating the reservation’s effect upon the Convention’s application in private court cases (in which the reserving State is not to be considered a Contracting State when the court applies Article 1(1) CISG). Article 92(2) CISG is therefore specifically addressed to courts and arbitral tribunals and prevents them from having to ‘translate’ a reservation framed in treaty law terminology into a rule that works in the context of the Sales Convention’s sphere of application.178 Article 93 CISG has a similar, although slightly more complicated structure, within which Article 93(3) CISG fulfils the same function as Article 92(2) CISG.179 It is worth noting that a comparable paragraph had still be missing from the older federal State clause in Article 31 of the 1974 United Nations Convention on the Limitation Period in the International Sale of Goods, which only addressed the public international law side of the reservation. After this had been noted, today’s Article 93(3) CISG was added during the 1980 Vienna Diplomatic Conference with an aim towards “providing a gloss for the term ‘Contracting State’ in relation to the federal State clause, something that had been omitted in the 1974 Limitation Convention”.180 (On the same occasion, the Limitation Convention was revised by way of a 1980 Protocol, and a similar paragraph was included in its Article 31(4).) 3.4.2.2.2.2 Article 94 CISG In comparison, Article 94 CISG remained without a clear counterpart to Articles 92(2) and 93(3) CISG. Instead, Article 94(1) and (2) CISG as adopted primarily focus on the 178 See Schroeter, 2008, supra note 20, p. 431. 179 Schroeter, 2008, supra note 20, p. 445. On the slight difference in the language of Article 92(2) CISG and Article 93(3) CISG see already supra at 3.2.1.2.2. 180 Official Records, p. 445.

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reservation’s public international law side by providing that Contracting State(s) “may at any time declare that the Convention is not to apply to contracts of sale or to their formation where …”. The reservation’s effect in practice is only addressed indirectly by the words “that the Convention is not to apply”, which has resulted in a heated dispute whether an Article 94 reservation needs to be observed only by courts in a reserving State181 or by all courts applying the Convention.182 A clear provision along the lines of Articles 92(2) and 93(3) CISG could have prevented this uncertainty from emerging in the first place. 3.4.2.2.2.3 Articles 95 and 96 CISG Article 95 CISG was drafted even more one-sided when it provides that “[a]ny State may declare at the time of the deposit of its instrument of ratification, acceptance, approval or accession that it will not be bound by subparagraph (1)(b) of article 1 of this Convention”. Couched in classical public international law terms,183 Article 95 CISG thereby merely excludes the reserving State’s duty under public international law to apply Article 1(1)(b) CISG,184 but entirely fails to specify what this means for the Convention’s application by courts and arbitral tribunals. This uncertainty, which can be traced to the provision’s lastminute addition185 and the resulting lack of scrutiny at the drafting stage,186 has given rise to extensive discussions among CISG commentators.187 The same essentially applies to the reservation of Article 96 CISG, albeit in a slightly different way: In Article 12 CISG, Article 96 CISG is even being accompanied by a sister provision placed in Part I of the Sales Convention, which is clearly directed at courts in Contracting States (and maybe also at arbitral tribunals188). The language of Article 12 CISG, however, was apparently not drafted sufficiently clearly in that it uses an expression similar to Article 94(1), (2) CISG (“does not apply” in Article 12 CISG, as opposed to “is not to apply” in Article 94(1), (2) CISG)189 and has in consequence given rise to a similar 181 De Ly, 2005–2006, supra note 71, p. 10; Ferrari, 2013, supra note 38, Art. 94, Para. 3; R. Herber & B. Czerwenka, Internationales Kaufrecht, C.H. Beck Publishing, Munich, 1991, Art. 94, Para. 8; Mankowski, 2011, supra note 40, Art. 94 CISG, Para. 14. 182 Flechtner, 1998, supra note 38, p. 194; Honnold, 2009, supra note 38, Para. 46.1; Magnus, 2013, supra note 38, Art. 94, Para. 7; Schlechtriem, Schwenzer & Hachem, 2010, supra note 38, Art. 94, Para. 7; Schroeter, 2008, supra note 20, pp. 444–445; Torsello, 2000, supra note 38, p. 97. 183 Schroeter, 2008, supra note 20, p. 440. 184 See CISG Advisory Council Opinion No. 15, 2014, supra note 26, pp. 120–121 (Opinion 1 and Comments 3.17–3.19). 185 Supra at 3.2.2.2. 186 G.F. Bell, ‘Why Singapore Should Withdraw Its Reservation to the United Nations Convention on Contracts for the International Sale of Goods (CISG)’, Singapore Year Book of International Law, Vol. 9, 2005, p. 55 at p. 62; Schroeter, 2008, supra note 20, p. 431. 187 CISG Advisory Council Opinion No. 15, 2014, supra note 26, p. 116 Comments 3.12–3.17. 188 On the difficult question whether the Sales Convention is (in a technical sense) directly addressed at arbitral tribunals, see Schlechtriem & Schroeter 2013, supra note 19, Para. 33; N. Schmidt-Ahrendts, ‘CISG and Arbitration’, Belgrade Law Review, 2011, p. 211 at 214. 189 Honnold, 2009, supra note 38, Para. 129, admits that the language of Article 12 CISG ‘is difficult to parse’.

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amount of academic dispute, as well as divergent case law.190 As a result, Articles 95 and 96 CISG may eventually have caused more uncertainty than the other three CISG reservations combined.191 3.4.2.2.3 Summary In summary, it is helpful to recall a remark once made by a delegate during the preparation of the 1988 United Nations Convention on International Bills of Exchange and International Promissory Notes, who pointedly said that [t]he provision in question [Article 30 of the 1969 Vienna Convention on the Law of Treaties] was more suitable for Judges of the International Court of Justice at The Hague than for the judges of domestic commercial courts. It was essential to regulate the matter by way of a clear provision, drafted in precise and habitual terms.192 In case of the Sales Convention’s reservations, this important guideline has not always been sufficiently observed. (The only upside of this neglect may be that it has given certain authors something to write about.)

3.5

Looking Forward to the Next 35 Years: The (Likely) Role of Reservations in Future CISG Practice

When attempting a look into the Sales Convention’s future with an aim towards identifying its reservations’ role in the years to come, three prognoses come to mind.

3.5.1

The Continuing Trend to Withdraw Reservations

3.5.1.1 Reasons for the Trend The recent trend among CISG Contracting States to withdraw reservations in accordance with Article 97(4) CISG that has been referred to earlier193 as well as elsewhere194 is likely to continue in the years to come. This prognosis is supported by three different reasons: First, general policy arguments militate in favour of further withdrawals, as they reduce

190 191 192 193 194

CISG Advisory Council Opinion No. 15, 2014, supra note 26, p. 116 Comments 4.15–4.20. See in detail CISG Advisory Council Opinion No. 15, 2014, supra note 26. See Winship, 1990, supra note 8, p. 728. Supra at 3.3.2.1. Andersen, 2012, supra note 110, pp. 706–709; Schroeter, 2015, supra note 16, pp. 2–4.

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Ulrich G. Schroeter the potential for confusion in the Convention’s practical application.195 Second, principles of treaty law as embodied in the International Law Commission’s ‘Guide to Practice on Reservations to Treaties’ call upon reserving States to undertake a periodic review of their reservations and consider withdrawing those which no longer serve their purpose.196 And third, the view proposed here that characterizes reservations as a uniformity-enabling tool197 implies that States withdraw reservations once the initial reasons against a full accession198 or the uncertainty about the Convention’s application in practice199 have disappeared – a point that has arguably been reached at least as far as the written form reservation under Article 96 CISG is concerned.200 (Rumour has it that Hungary will therefore withdraw its Article 96 reservation in the near future.) 3.5.1.2 Potential Withdrawals of Article 95 CISG Reservations It will be particularly interesting to see when future withdrawals will affect those two reservations that have hitherto remained (almost201) untouched by withdrawals, namely the reservations under Articles 94 and 95 CISG. With respect to Article 95 reservations, discussions about a possible withdrawal have been reported from a number of reserving States: In the United States, the matter was investigated in 2012 at a meeting of the State Department Advisory Committee on Private International Law,202 but the view among CISG experts from the United States apparently remains divided.203 Indications for an upcoming withdrawal of its Article 95 reservation have also been reported from the People’s Republic of China.204 In addition, academic commentators have in the past voiced pleas in favour of similar withdrawals to be made

195 See CISG Advisory Council Declaration No. 2, Use of Reservations under the CISG, Rapporteur: Schroeter, 2014, supra note 26, pp. 131–132; Giegerich, 2010, supra note 10, Para. 5. 196 International Law Commission, supra note 43, Para. 2.5.3. 197 See supra at 3.3.2. 198 Supra at 3.3.2.2. 199 Supra at 3.3.2.1. 200 See Schroeter, 2014, supra note 26, p. 89. 201 Canada in 1992 withdrew an Article 95 CISG reservation, which it had initially (in combination with a declaration under Article 93 CISG) made only for the province of British Columbia. 202 See P. Winship, ‘Should the United States withdraw its CISG Article 95 Declaration?’, State Department Advisory Committee on Private International Law Annual Meeting, The George Washington University Law School, Washington, DC, 11–12 October 2012. 203 Cf. H.M. Flechtner, Letter to K. Loken, Assistant Legal Adviser, Office of Private International Law (30 January 2012); A. Markel, ‘American, English and Japanese Warranty Law Compared: Should the U.S. Reconsider Her Article 95 Declaration to the CISG?’, Pace International Law Review, Vol. 21, 2009, p. 163 at pp. 199–203; F.G. Mazzotta, ‘Reconsidering the CISG Article 95 Reservation Made by the United States of America’, International Trade and Business Law Review, Vol. XVII, 2014, pp. 442–446; Winship, 2012, supra note 202. 204 Andersen, 2013, supra note 25, pp. 11–12; W. Li, ‘On China’s Withdrawal of Its Reservation to CISG Article 1(b)’, Renmin Chinese Law Review, Vol. 2, 2024, p. 300 at pp. 313–318; Spagnolo, 2014, supra note 13, p. 71.

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by other reservation States,205 as, e.g. Singapore.206 Until today, none of these initiatives has resulted in a declaration of withdrawal being formally notified to the Convention’s depositary in accordance with Article 97(2), (4) CISG. It is submitted that a withdrawal of Article 95 reservations would – of course – be a useful contribution to further uniformity under the Sales Convention, but from a comparative perspective does not rank as a high priority. This is due to the effect of this reservation, which (only207) excludes the reserving State’s obligation to apply Article 1(1)(b) CISG:208 This very provision, however, has today lost much of its practical importance, because the Convention now applies in accordance with Article 1(1)(a) CISG in the vast majority of cases, given that the number of CISG Contracting States has reached 83.209 Any withdrawal of an Article 95 reservation would therefore merely open up a second avenue towards the application of the Convention that, in practice, would rarely come into play anyway. 3.5.1.3 Less Likely Withdrawals of Article 94 CISG Reservations Compared to Article 95 reservations, a withdrawal of Article 94 reservations would be both more valuable for the uniform application of the Sales Convention and more unlikely to occur in the foreseeable future. The greater value of such a withdrawal arises from the more far-reaching effect of Article 94 reservations, which exclude the application of the entire Convention whenever they apply, even if only to contracts between parties residing in reservation States (currently: the intra-Nordic trade). That the Scandinavian States are nevertheless unlikely to initiate a withdrawal of their Article 94 reservations is indicated by recent developments: Although Scandinavian commentators have for some time suggested that Denmark, Finland, Iceland, Norway and Sweden should withdraw their respective reservations under Article 94 CISG,210 they admitted as recently as 2012 that ‘there is currently little support among Scandinavian legislators for that proposal’.211 In fact, there more recently has been a rather clear sign against such a withdrawal, as Denmark, Finland, Norway and Sweden

205 Castellani, 2014, supra note 49, p. 685. 206 Bell, 2005, supra note 186, p. 55. 207 See in a similar sense the observation of delegate Novossiltsev (USSR) during the 1980 Vienna Conference, Official Records, p. 439: ‘The proposed reservation [Article 95 CISG] would represent a very small departure from the Convention compared with the acceptance of by States of Part II or Part III only’ [as allowed under Article 92 CISG]. 208 See CISG Advisory Council Opinion No. 15, 2014, supra note 26, pp. 120–121 (Opinion 1 and Comments 3.17–3.19). 209 Bridge, 2013, supra note 41, Para. 10.57; Spagnolo, 2014, supra note 13, p. 71. 210 M.M. Fogt, ‘The Stipulation and Interpretation of Freight Prepaid Delivery Clauses under the CISG – Preliminary Considerations for Reform of Part II of the CISG and a Limited Withdrawal of Scandinavian Declarations’, European Legal Forum, 2003, p. 61, at pp. 64–65; J. Lookofsky, ‘The CISG in Denmark and Danish Courts’, Nordic Journal of International Law, Vol. 80, No. 3, 2011, p. 295 at pp. 301–302. 211 Lookofsky, 2012, supra note 38, § 8.6.

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even extended their Article 94 reservations when they withdrew their Article 92 reservations in 2011–2014:212 In that context, they declared that [i]n addition to the previous declaration made under Article 94 […] the Convention will not apply to the formation of contracts of sale where the parties have their places of business in Denmark, Iceland, Finland, Sweden or Norway.213 They thereby extended the already existing non-application of the Convention between Scandinavian parties in sale of goods matters (resulting from the existing reservations under Article 94 CISG) also to matters of contract formation that had previously been covered by the Article 92 reservations concurrently withdrawn. This combination of Article 92 CISG withdrawals with new Article 94 CISG reservations indicates the Nordic countries’ intention to make sure that the application of the Sales Convention to the interScandinavian trade will continue to be excluded.214 Against this background, it must seem unlikely that they will in the near future withdraw the very reservations they so recently confirmed.

3.5.2

A Reservation Here to Stay: The Federal State Clause (Article 93 CISG)

Another reservation that is here to stay, albeit for a different reason, is Article 93 CISG.215 It becomes apparent when looking in more detail at the purposes for which the Sales Convention’s ‘federal State clause’ has been used in treaty practice. Two purposes can be distinguished: The first is the making of an Article 93 reservation in order to allow a federal State to adopt the CISG incrementally as the adopting legislation goes through the separate legislatures of each of the territorial units of that State.216 Where it is used to this end, the federal State clause works in conformity with the general view described earlier217 that regards reservations as a uniformity-enabling tool; it thus leads to a merely temporary reduction of uniformity. A practical example was the adoption of the Sales Convention by Canada: Upon accession to the Convention in 1991, the Government of Canada declared, in accordance with Article 93 CISG, that the Convention will extend to the provinces of

212 See Schlechtriem & Schroeter, 2013, supra note 19, Para. 811. 213 Declaration by Denmark of 2 July 2012. (The other Scandinavian States made declarations that were identical or similar.) 214 Schroeter, 2015, supra note 16, pp. 7–8. 215 See on Article 93 CISG already supra at 3.2.1.2.2. 216 Bridge, 2013, supra note 41, Para. 10.54 note 402. 217 See supra at 3.3.2.

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Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Island and the Northwest Territories. In April 1992, it then declared the Convention to apply also to Quebec and Saskatchewan,218 before further extending the CISG to the Territory of the Yukon (in June 1992) and – although only a decade later (in 2003) – to the Territory of Nunavut. It is the second purpose that may give Article 93 CISG an ‘eternal’ character. Federal State clauses can also be used in deference to local or regional particularities that exist in certain territorial units of a federal State, geographical or otherwise. Where this is the case, the reservation is likely to stay in effect as long as these particularities remain unchanged. Under the Sales Convention, all Article 93 reservations currently in force seem to fall into this category: Australia has declared that the Convention shall not apply to the territories of Christmas Island, the Cocos (Keeling) Islands and the Ashmore and Cartier Islands; Denmark has declared that the Convention shall not apply to the Faroe Islands and Greenland and New Zealand has declared that the Convention shall not apply to the Cook Islands, Niue and Tokelau. In present practice under the Convention, the Article 93 reservation is accordingly a pure ‘island reservation’. The special geographical situation of islands, often reflected in their special status under domestic constitutions, means that these reservations are unlikely to be withdrawn. At the same time, the amount of international trade conducted by parties from those islands is very limited. From a practical perspective, the effect of Article 93 CISG upon the Convention’s application is therefore close to zero.219 (It is another, more difficult question whether the status of the important international trading hub Hong Kong and of Macao is equally covered by Article 93 CISG or not – a question that has been addressed in more detail elsewhere.220)

218 Canada thereby used the option offered by Article 93(1) CISG in fine to ‘amend’ a declaration under the federal State clause ‘at any time’, which has to be distinguished from the withdrawal of a reservation as authorized by Article 97(4) CISG. A later amendment through unilateral declaration is not expressly foreseen for any other CISG reservation. 219 For a similar assessment, see De Ly, 2005–2006, supra note 71, p. 10; Magnus, 2013, supra note 38, Art. 93, Para. 8. 220 M. Buschbaum, ‘Anwendbarkeit des UN-Kaufrechts im Verhältnis zu Hongkong’, Praxis des Internationalen Privat- und Verfahrensrechts, Vol. 24, 2004, p. 546; U.G. Schroeter, ‘The Status of Hong Kong and Macao under the United Nations Convention on Contracts for the International Sale of Goods’, Pace International Law Review, Vol. 16, 2004, p. 307; F. Yang, ‘A Uniform Sales Law for the Mainland China, Hong Kong SAR, Macao SAR and Taiwan – the CISG’, Vindobona Journal of International Commercial Law and Arbitration, Vol. 15, 2011, p. 345.

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3.5.3

A Reservation Which May Gain in Importance: Article 94 CISG as a Tool to Accommodate a Regionalisation of Uniform Law Making

Finally, there is one reservation authorized by the Sales Convention, which may potentially gain in importance in the future, namely Article 94 CISG. In addition to the current use of this reservation by the Nordic States that was addressed earlier,221 Article 94 CISG could also be used in order to give precedence to other uniform law rules shared between certain CISG Contracting States.222 The existing trend towards a regionalisation of uniform law making that has been much discussed in legal writing223 may give rise to such rules that then would compete with the CISG. Certain rules, notably those emerging from European Union directives, arguably already do so, albeit only with respect to limited subject matters.224 Rules made by other regional economic international organisations (REIOs) may follow. As long as no Contracting State takes any action to the contrary, regionally unified or harmonised laws remain pre-empted by the Sales Convention in accordance with general rules governing the relationship between the Convention and other rules of law.225 There may, however, be pressure upon Contracting States to give precedence to regional law that may, e.g. result from a duty to guarantee the full application of rules issued by regional organisations. A possible source of such a duty is Article 351(2) of the Treaty on the Functioning of the European Union, which obliges EU Member States to “take all appropriate steps to eliminate the incompatibilities established” to the extent that a concurrent international agreement (as, e.g. the CISG) is not compatible with EU Treaties or EU secondary law. As an appropriate step of this kind is notably the denunciation of a concurrent treaty,226 the European Commission could theoretically request EU Member States, which have ratified the Sales Convention to denounce the Convention in accordance with Article 101 CISG.227 Should a Member State refuse to comply with such a request, the Commission

221 Supra at 3.5.1.3. 222 S. Leible, ‘Konflikte zwischen CESL und CISG – Zum Verhältnis zwischen Art. 351 AEUV und Artt. 90, 94 CISG’, in P. Mankowski & W. Wurmnest (Eds.), Festschrift für Ulrich Magnus zum 70. Geburtstag, Sellier European Law Publishers, Munich, 2013, p. 615; Mankowski, 2011, supra note 40, Art. 94 CISG, Para. 5; Schroeter, 2005, supra note 21, § 10. 223 See more recently the chapters in U. Magnus (Ed.), CISG vs. Regional Sales Law Unification, Sellier European Law Publishers, Munich, 2012; E.T. Laryea, ‘Globalizing International Trade Investment and Commercial Laws Through Regionalism: The Prospects’, in I. Schwenzer & L. Spagnolo (Eds.), Globalization versus Regionalization, Eleven, The Hague, 2013, pp. 57–77; U.G. Schroeter, ‘Global Uniform Sales Law – With a European Twist? CISG Interaction with EU Law’, Vindobona Journal of International Commercial Law and Arbitration, Vol. 13, 2009, pp. 179–180. 224 See in detail Schroeter, 2005, supra note 21, § 6 and § 15. 225 Schroeter, 2005, supra note 21, §§ 7–15; Schroeter, 2009, supra note 223, p. 190. 226 European Commission v. Portugal, European Court of Justice, 7 July 2000, Case C-84/98; Budéjovický Budvar, národní podnik v. Rudolf Ammersin GmbH, European Court of Justice, 18 November 2003, Case C-216/01. 227 Schroeter, 2005, supra note 21, § 13, Para. 59.

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could initiate an action under Article 226 of the Treaty on the Functioning of the European Union before the European Court of Justice against the State for failure to fulfil obligations. (In recent years, the European Commission has increasingly brought such actions for failure to adopt appropriate measures to eliminate incompatibilities with the EC Treaty of Bilateral Investment Treaties (BITs) entered into with third countries prior to the respective Member States’ accession to the European Union.228 It could do the same with respect to the Sales Convention.) Against this background, a reservation in accordance with Article 94 CISG would constitute a preferable alternative to the complete denunciation of the Sales Convention.229 The making of such a reservation would grant European Union law precedence over the CISG’s rules but would leave the Convention in force. From the perspective of global uniform sales law, this is the lesser of two evils when compared with the all-or-nothing solution offered by Article 101 CISG.230 And from the perspective of European Union law, the making of an Article 94 CISG reservation would constitute a sufficient elimination of possible incompatibilities between the two legal regimes:231 In its recent case law, the European Court of Justice has held that provisions reserving the application of EU law that are contained in concurrent international agreements may serve to eliminate incompatibilities.232 In particular, the ECJ mentioned “a clause which would reserve certain powers to regional organisations” (commonly referred to as ‘REIO clause’) and expressly acknowledged “that such a clause should, in principle, as the Commission admitted at the hearing, be considered capable of removing the established incompatibility”.233 Having said this, it should be kept in mind that – as discussed earlier234 – it is one matter for the Sales Convention to authorize a certain reservation, but quite another whether Contracting States will or should make use of it. Where the choice is between the CISG and regionally unified law, it is submitted that the Sales Convention should preferably be left untouched, as cross-border trade is best served by a globally unified sales law.235 Article 94 CISG should accordingly offer no more than a last resort in case that political pressure imposes a different choice.

228 See, e.g. European Commission v. Austria, European Court of Justice, 3 March 2009, Case C-205/06. 229 Note that contrary to the CISG’s reservations under Articles 92, 93 and 95 CISG and also contrary to the residuary rule in Article 19 of the 1969 Vienna Convention on the Law of Treaties, an Articles 94 CISG reservation may not only be made by a state when signing, ratifying, accepting, approving or acceding to the Convention but also at any time thereafter. On the relationship of reservations and denunciations from a general treaty law perspective see also Helfer 2006, supra note 124, pp. 379–381. 230 Schroeter, 2005, supra note 21, § 13, Para. 59. 231 Contra Leible, 2013, supra note 222, p. 614. 232 European Commission v. Austria, supra note 228, Para. 32. 233 Id, Paras. 41–42. 234 Supra at 3.2.2.1. 235 Schroeter, 2009, supra note 223, p. 189.

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3.6

Conclusion

The present chapter has tried to provide an overview of the experiences that have been made with the 1980 Sales Convention’s reservations during their first 35 years, from 1980 to 2015. In doing so, it has also attempted to challenge the traditionally prevailing notion which views reservations as a ‘necessary evil’236 and to demonstrate that reservations can instead be viewed as a tool enabling a wider uniformity under uniform private law conventions.237 When considering the widespread withdrawals of CISG reservations that have occurred since 2011,238 it is therefore one possibility to describe this development as a ‘decline of reservations’ in accordance with the title of our panel today.239 Another possibility would be to view these withdrawals as indications of a ‘mission accomplished’. In concluding, it is helpful to once more come back to numbers. When the 1980 Sales Convention entered into force on 1 January 1988, the then 14 Contracting States240 had between them declared nine reservations, amounting to almost one reservation per Contracting State. As noted in the introduction,241 by the Convention’s 25th birthday, both total numbers had increased to 65 Contracting States and 31 reservations, but the reservation/Contracting State ratio had dropped from almost 1:1 to less than 1:2. This year, as we are celebrating the CISG’s 35th birthday, we count 83 Contracting States, but only 23 reservations. (If we furthermore deduct the ‘eternal’ federal State reservations that probably will remain in effect forever,242 we arrive at a ratio of 20:83, or almost 1:4.) In conclusion, this development confirms a personal experience that many people have made: At 35, one may be not be as young and fresh anymore as at 25 but maybe a little wiser. And for a uniform law, that may well be the more important quality.

236 237 238 239

Andersen, 2013, supra note 25, p. 5. Supra at 3.3.2. Supra at 3.3.2.1. Conference ‘35 Years CISG and Beyond’ held at the University of Basel (Switzerland) on 29–30 January 2015, organized by the University of Basel, the Swiss Association of International Law and UNCITRAL. 240 For the purposes of the present calculations, a ‘contracting state’ is every state that has deposited an instrument of ratification, acceptance, approval or accession with the Secretary-General of the United Nations in accordance with Article 91(4) CISG, even if the Convention has not yet entered into force for that state due to Article 99(2) CISG; see Enderlein & Maskow, 1992, supra note 42, Introductory Remarks on Part IV CISG on the Sales Convention’s use of the term ‘Contracting State’. On 1 January 1988, Lesotho, France, the Syrian Arab Republic, Egypt, Hungary, Argentina, Zambia, the People’s Republic of China, Italy, the United States, Finland, Sweden, Austria and Mexico (in chronological order) had become contracting states of the CISG. 241 Supra at 3.1.1. 242 See supra at 3.5.2.

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Reservations, the Case of the Scandinavian Countries

Jan Ramberg The traditional co-operation between the Scandinavian states in legislation was particularly important in the field of sales law. The Sale of Goods Acts of Denmark (1906), Norway (1907) and Sweden (1905) were practically identical. In the early 1900s, Finland was within the Russian sphere of influence, and consequently, a co-operation with the other Scandinavian states was deferred until the 1960s. The Scandinavian states never ratified the 1964 international sales law conventions.1 Instead, the efforts to modernize the sales law became strongly linked to the previous Sale of Goods Acts of Denmark, Norway and Sweden. Upon the ratification of the United Nations Convention on the International Sale of Goods (CISG), it became a difficult matter to decide whether the common legal heritage should be retained or whether the international trend represented by CISG should be allowed to supersede. Practical considerations called for the latter option, as domestic regimes based upon different principles than those adopted in CISG would create confusion. So, in order to avoid setting up two completely separate legal regimes for contracts for international sale of goods as distinguished from domestic sales, all Scandinavian states, except Denmark, opted for a revision of the national Sale of Goods Acts bringing them on line with the system and most of the contents of CISG. A new Sale of Goods Acts came into force in Finland, 1988; Norway, 1989 and Sweden 1991, while Iceland adopted a new Sale of Goods Act similar to the Norwegian one in 2000. In view of the traditional co-operation, it was expected that Denmark would follow the path of the other Scandinavian countries so as to safeguard the common heritage within the law of sales.2 However, this did not happen and probably never will, it being well known that any shortcomings of new legislation – such as the distinction between direct and indirect loss in the Sale of Goods Acts of Finland, Norway and Sweden – become more readily apparent with the passage of time.

1 2

The Uniform Law on the International Sale of Goods and the Uniform Law on the Formation of Contracts for the International Sale of Goods. See concerning the expected continuation of the legislative process, A. Vinding Kruse, Købsretten, Copenhagen 1989, p. 140.

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4.1

The Withdrawal of the Article 92 Reservation

Formation of contract was considered a matter of general contract law which should not require any particular rules for contracts of sale. As a result, Denmark, Finland, Norway and Sweden – but not Iceland – made a reservation to the effect that they should not be considered contracting states with respect to Part II of CISG dealing with formation (Article 92). The Scandinavian states co-operated with each other when they adopted their contracts acts in the early 1900s. There, Chapter 1 contains rules relating to formation of contracts, and understandably, Scandinavian legislators were reluctant to abandon the common legal heritage. In spite of this resistance to change, the confusion resulting from leaving the important matter of formation of contract to the chosen law in contracts concluded with parties from other than the Nordic countries triggered the withdrawal of the Article 92 reservation.

4.2

Article 94 Reservation

In order to maintain the traditional status of Scandinavian Sales Law, the Scandinavian states also made a reservation to the effect that such law should apply in sales transactions between parties having their places of business in Denmark, Finland, Iceland, Norway and Sweden (Article 94). However, Article 94 requires for such a reservation to be allowed that the rules in the reservation states are ‘closely related’. This is no longer true with respect to Denmark when only the other Scandinavian states opted for an internationalisation of their Sale of Goods Acts according to the system and principles of CISG. It may be argued that the reservations with respect to Denmark should now be withdrawn, as otherwise the Scandinavian states would find themselves in a situation where they are in breach of their international obligations. Yet, it does not follow that courts and arbitral tribunals should ignore the reservations, which are still in effect.3

4.3

Will the Concept of ‘Scandinavian Sales Law’ Remain?

The resounding success of CISG will influence not only further legislation in the field of sale of goods in Scandinavia but also, generally, willingness to accept CISG in practice. It may well be that the Article 94 reservation will be withdrawn and that, at the very least, the inappropriate division between direct and indirect loss in the Finnish, Norwegian and Swedish Sale of Goods Acts will be replaced by a liability system identical or at least more compatible with CISG Articles 74 and 79. However, this does not necessarily mean that 3

J. Ramberg & J. Herre, Internationella Köplagen, Norstedts Juridik, Stockholm 2009, p. 643.

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CISG will actually govern in practice. There will always be parties that opt out of CISG wholly or in part and, indeed, as already suggested, they should be induced to do so when they seek more certainty than would be offered by some of the abstract and open-ended provisions of CISG. International organizations, such as the International Chamber of Commerce, have traditionally provided assistance to merchants by uniform rules and standard forms, and they will continue to do so in order to achieve an efficient inter-action between law and practice.

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The Reservation from the Freedom of Form Principle of the CISG: The Case of Russia*

Djakhongir Saidov

5.1

Introduction

Achieving and maintaining uniform application remains a key challenge for the United Nations Convention on Contracts for the International Sale of Goods 1980 (hereinafter referred to as the ‘Convention’ or the ‘CISG’). There are a number of areas which pose difficulties to the Convention’s aspiration for uniform application,1 and they include an open-ended nature of many of its provisions; its silence on some important legal questions,2 raising the issue of whether such questions are governed by the Convention and, if so, how to resolve them;3 the existence of several language versions of the CISG. Yet, another area which can hinder uniform application as well as legal certainty relates to reservations that the states ratifying the Convention can make and have made. The effect of most reservations is that they create different versions of the Convention.4 The CISG authorises states to make five reservations: declaring that a state will not be bound by Part II or Part III of the Convention;5 restricting the Convention’s application to only some of the country’s territorial units;6 excluding the application of the CISG to contracts between parties from countries with closely related legal systems;7 declaring that a state will not be bound by

* 1 2 3 4

5 6 7

All web pages were last accessed in June 2015. See Art. 7(1) CISG. Such as the question of how an interest rate is to be determined (see Art. 78 CISG that provides for the right to interest but does not contain a mechanism for determining an interest rate). See Art. 7(2) CISG. See C. H. Andersen, ‘Recent Removals of Reservations under the International Sales Law – Winds of Change Heralding a Greater Unity of the CISG’, JBL, 2012, p. 699, at p. 701; H. M. Flechtner, ‘The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7(1)’, J L Commerce, Vol. 17, Issue 2, 1998, p. 192, at p. 196. See Art. 92 CISG. See Art. 93 CISG. See Art. 94 CISG.

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Djakhongir Saidov Article 1(1)(b)8 and excluding the application of the Convention’s provisions that provide for freedom of form.9 Of all reservations, the latter is probably one which has the strongest adverse impact on certainty and uniformity in the Convention’s application. First, being the most popular of all reservations, having been initially made by ten countries,10 it is likely to be relevant in a greater number of cases compared to other reservations. Second, this reservation is also one which has given rise to a considerable degree of uncertainty in terms of its meaning and effect. Finally, unlike other reservations, it affects the very substance of the Convention. With these considerations in mind, this paper seeks to evaluate the meaning and consequences of this reservation with the focus being on the experience of the Russian Federation, a successor to the USSR, which, in turn, was the main driving force in introducing this reservation into the CISG. Looking at the experience of Russia is particularly interesting today in the light of two factors. One is that formalism, at least in the context of international transactions, appears to be in decline. More specifically, freedom of form is increasingly perceived as a more suitable approach to the governance of international trade, as opposed to one requiring contracts to be in writing,11 and this is evidenced by the fact that some countries that had initially made this reservation have subsequently withdrawn it.12 The other factor relates to what seems to be a trend of countries withdrawing their reservations under the CISG.13 The reasons for this series of withdrawals of reservations are twofold. The circumstances in several countries, which led them to opt for a particular reservation, have ceased to exist.14 It is also possible that ‘the world is becoming less reserved against the CISG’.15 There are some broad questions that arise against this background. How does the Russian legal community interpret the uncertainties surrounding the meaning and effect of this reservation and is this interpretation correct? Will Russia follow suit and withdraw this reservation? If not, what is the impact, if any, of Russia’s reservation on the Conven8 9 10 11

12 13

14

15

See Art. 95 CISG. See Art. 96 CISG. Argentina, Belarus, Chile, China, Estonia, Hungary, Latvia, Lithuania, the Russian Federation and Ukraine. “[B]ecause many contracts need to be concluded and modified at a speed which might not be possible if formalities are imposed”. See I. Schwenzer, P. Hachem & C. Kee, Global Sales and Contract Law, Oxford, Oxford University Press, 2012, Para. 22.13. Such as Estonia, Latvia, Lithuania and China (see ). Such as a recent withdrawal by Scandinavian countries of their reservation under Art. 92 (see supra note 5 and the accompanying main text). See, generally, Andersen, 2012, supra note 4; T. Neumann, ‘The Continued Saga of the CISG in the Nordic Countries: Reservations and Transformation Reconsidered’, Nordic J Commercial L, Issue 1, 2013, p. 699. See CISG-AC Declaration No. 2, ‘Use of Reservations under the CISG’, Rapporteur: Professor Dr. Ulrich G. Schroeter, University of Mannheim, Para. 2, available from: . Andersen, 2012, supra note 4, p. 699, at p. 712.

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tion’s aspiration of uniform application, on international trade and, finally, on Russia itself? It is these questions that this paper seeks to address.

5.1.1

General

The CISG reflects the position that in international trade, there should be no restriction as to the form in which contracts are concluded,16 modified or terminated, thereby promoting party autonomy.17 This position is primarily set out in Article 11 which provides that “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form” and that a contract “may be proved by any means, including witnesses”. In a similar vein, Article 29(1) provides that “[a] contract may be modified or terminated by the mere agreement of the parties”.18 At the Vienna conference, at which the CISG was adopted, this position was not acceptable to some countries whose legal systems required contracts to be made in writing. The most prominent country amongst those opposed to ‘freedom of form’ was the USSR. To ensure that the Convention was acceptable to the USSR as well as to other countries with various legal, political and socio-economic systems, the drafters incorporated the provisions allowing states to make a reservation from the Convention’s provisions allowing for freedom of form.19 The inclusion of the reservation provisions was, in other words, a necessary compromise to ensure the widest possible acceptance of the Convention that gave birth to different substantive versions of the CISG. This kind of in-built flexibility, endangering legal certainty and uniformity, is sometimes necessary for the sake of creating a uniform law instrument in the first place.20

16 This includes freedom of form in which an offer and an acceptance are communicated. 17 In that parties are allowed to choose for themselves as to how and in what form they want to make their contracts. 18 A number of provisions in Part II, dealing with the formation of contracts by means of an offer and an acceptance also allow for the possibility of an oral form of communication. 19 See, e.g., J. Rajski, ‘Article 96’ in C. M. Bianca & J. Bonell (Eds.), Commentary on the International Sales Law, Milan, Giuffrè, 1987, pp. 657-658; P. Schlechtriem, Uniform Sales Law – The UN-Convention on Contracts for the International Sale of Goods, Vienna, Manz, 1986, p. 43, n. 135. For a curious historical account, see C. H. Лебедев, ‘Листая страницы истории’ in М.Г. Рoзенберг, Венская конвенция OOH 1980г. о международной купле-продаже товаров. K 10-летию ее применения в России (Mосква, Статут 2001) 5-6 (recalling how what was to become the core of the text of Arts. 12 and 96 was drafted on a napkin by Professor Allan Farnsworth, a member of the US delegation, during his conversation at a coffee break with Professor Sergey Lebedev, a member of the USSR delegation). 20 M. Torsello, ‘Reservations to International Uniform Commercial Law Conventions’, Uniform L Rev, Vol. 5, Issue 1, 2000, p. 85, at pp. 86, 90.

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The right to make this reservation is set out in Article 96 which provides that [a] Contracting State whose legislation requires contracts of sale to be concluded in or evidenced by writing may at any time make a declaration in accordance with article 12 that any provision of article 11, article 29, or Part II of this Convention, that allows a contract of sale or its modification or termination by agreement or any offer, acceptance, or other indication of intention to be made in any form other than in writing, does not apply where any party has his place of business in that State A companion Article 12, to which Article 96 refers, contains a somewhat similar provision.21 Any provision of article 11, article 29 or Part II of this Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance or other indication of intention to be made in any form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under article 96 of this Convention.22 The USSR availed itself of this reservation,23 which now applies to the Russian Federation,24 the successor to the USSR’s membership in the United Nations and to its rights and obligations under multilateral treaties. Considering that formal requirements are often perceived as being obstacles to a smooth and speedy commercial exchange,25 the question may arise as to why some countries choose to impose the writing requirement in their legislation and seek to maintain the same position in respect of the CISG by declaring the reservation under Article 96. The answer

21 The need for two articles containing a similar provision is not entirely clear (see U. G. Schroeter, ‘The CrossBorder Freedom of Form Principle under Reservation: The Role of Articles 12 and 96 CISG in Theory and Practice’ (forthcoming in J L Commerce, pp. 79-117, available from: ), referring to Art. 12 as being ‘superfluous’). The only reason may be that Art. 12 addresses the consequences of the reservation for parties to a sales contract, whereas Art. 96 provides for the right of states to make this reservation (with this right being within the realm of public international law) (see F. Enderlein & D. Maskow, International Sales Law, New York, Oceana Publications, 1992, p. 74. 22 In its second sentence, Art. 12 further states that the “parties may not derogate from or vary the effect of this article”. 23 Having ratified the CISG on 16 August 1990; the CISG entered into force for the USSR on 1 September 1991. 24 Having made, on 24 December 1991, the declaration on its succession of all obligations of the USSR in accordance with the United Nations Charter (see, generally, Лебедев (n. 19) 4-8). 25 See, e.g., Schwenzer, Hachem & Kee, 2012, supra note 11; A. von Mehren, ‘Chapter 10: Formal Requirements’, in A. von Mehren (ed), International Encyclopedia of Comparative Law, Tubingen, J. C. B. Mohr (Paul Siebeck) – Dordrecht, Amsterdam – Martinus Nijhoff Publishers, 1998, n. 10; МИ Брагинский и ВВ Витрянский, Договорное право: Общие положения (Москва, Статут 1998) 274 (in the context of Russian law).

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to this question may also throw an insight into how likely it is that a country such as Russia will withdraw this reservation. Generally speaking, there are a number of reasons why legal systems may require contracts to be made, modified or terminated in writing.26 First, a contract being in writing is likely to show that the parties were serious about undertaking contractual obligations. A written agreement is, in other words, powerful evidence of the parties’ intention to enter into a legally binding contract. A related point is that the existence of this requirement ‘heightens awareness’ of the parties that an act of legal significance is likely to occur between them,27 thereby stimulating responsible and well-thought-out conduct. Second, written form provides clarity as regards the content of the parties’ rights and obligations. Third, the requirement as to contract being in writing protects parties from ‘ill-considered actions’.28 Fourth, written form enables and promotes awareness of third parties of the transaction between the contracting parties. Fifth, through this requirement, the state and the public become capable of monitoring the assumption of certain types of obligations. Finally, the writing requirement can deter those obligations or transactions which are deemed undesirable or as being of marginal value. Do some of the reasons explain the declaration by the USSR of the reservation under Article 96, its continued use by Russia and the Russian domestic law requirement of written form in relation to some categories of sales transactions? The tradition of formalism in Russia has deep historical roots by going back at least to the times of reforms by Peter the Great when the main reason for introducing formal requirements in carrying out the acts of legal significance was to prevent fraudulent acts as well as to increase state fiscal revenues.29 Formalism continued to prevail up to the pre-Soviet revolutionary times.30 When it comes to Soviet law, the formal requirements, particularly in relation to enterprises involved in foreign economic and trade activity, strengthened further.31 The reason for strict requirements as to form in which transactions were made lay in the nature of the Soviet economic system and organisation based on the administrative-command methods and state monopoly over foreign trade.32 Contracts were an instrument of executing the 26 27 28 29

All these reasons are set out in von Mehren, 1998, supra note 25, n. 9, n. 28. Id., n. 9-10. Id., n. 28. The fiscal function of formal requirements acquired particular significance from the 19th century. See ДВ Курлычев, ‘Требования к оформлению внешнеэкономических сделок’, at: . Similarly, when the contractual writing requirement was imposed in England three centuries ago, that was done with a view to preventing fraud and perjury (see M. Davies & D. V. Snyder, International Transactions in Goods: Global Sales on Comparative Context, New York, Oxford University Press, 2014, p. 145). 30 Id. 31 See The Resolution of the Council of Ministers of the USSR No. 122, ‘On the procedure of signing international trade transactions’ (dated 14 February 1978), which contained the following requirements in respect of foreign trade transactions carried out by soviet enterprises: (1) the writing form; (2) two signatures by duly authorised persons. 32 Курлычев, supra note 29.

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Djakhongir Saidov state economic plan.33 State trading enterprises operated within the system of economic accountability (‘hozraschyot’).34 All this explains why strict formal requirements were maintained and why a failure to comply with them rendered contracts invalid under Soviet law.35 Despite the fact that many of the reasons for strict formal requirements have disappeared with the break-up of the USSR with its command-administrative economic system, the Russian legislation today continues to impose the writing requirement in a number of cases that are relevant to the present discussion. Before these cases are turned to, it needs to be noted that the rationale now used in doctrine to justify the continued use of the writing requirement is, understandably, largely different to that used in the context of Soviet law and is, on the whole, along the lines of the general reasons for formal requirements, mentioned above.36 More specifically, it is said that written form makes the legal relationship between the parties more certain, reducing the risk of disputes as to the existence of a contract and its content.37 It helps contracting parties to understand the legal significance and consequences of their actions as well as provides information to the interested third parties.38 Nevertheless, the echo of a more ‘regulatory’ rationale can still be found. Thus, it has been said that one of the main reasons for formal requirements in international transactions is the need of the state to regulate currency matters and foreign economic activities that manifests itself in state control over movement of goods and financial assets.39 It is probably this rationale that largely explained the long-standing strict formal requirement of the Russian Civil Code in respect of international contracts that has existed until very recently. Specifically, the Civil Code provided that a failure of a “foreign commercial transaction” to comply with “the simple written form […] shall render the transaction invalid”.40 However, in 2013, this provision was abolished.41 This means that whilst the requirement of simple written form is still generally applicable, as explained in the following paragraph, a failure to comply with simple written form will no longer render an international trans-

33 34 35 36 37 38 39

O. I. Ioffe, ‘Chapter 5: Contract in the Socialist Economy’, in von Mehren, 1998, supra note 25, pp. 18-19. G. Eörsi, ‘Chapter 5: Contract in the Socialist Economy’, in von Mehren, 1998, supra note 25, p. 5. See Art. 45 of the Civil Code of the Russian Socialist Federative Soviet Republic (RSFSR). See supra note 26 and the following accompanying main text. Брагинский и Витрянский, supra note 25, pp. 273-274. Id. ДВ Курлычев, ‘форма договора во внешнеэкономической деятельности’, available from: . 40 Art. 162(3) of the Civil Code of the Russian Federation (hereinafter referred to in footnotes as ‘CC’) (for the English translation, see C. Osakwe (translation and commentary), Russian Civil Code: Parts 1-3: Text and Analysis, Moscow, Wolters Kluwer, 2008). 41 See Federal Law on ‘The Introduction of Changes to Sub-Sections of the 4th and 5th Sections of Chapter One and to Article 1153 of Chapter Three of the Civil Code of the Russian Federation’, dated 7th May 2013, N-100-FZ.

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action invalid. Parties will simply be deprived of the right to rely on the testimony of witnesses in proving the conclusion of the contract and its terms, but will not be deprived of their right to present written and other evidence.42 The abolition of the rule invalidating an international transaction for its non-compliance with written form could be seen as reflecting the view that such a strict approach may not be suitable for international transactions as well as an attempt to facilitate international commercial exchange. That said, one main reason for this change has been said to be unequal legal treatment of persons involved in foreign transactions, on the one hand, and persons involved in domestic transactions, on the other.43 The former had been subject to the rule that invalidated transactions which did not comply with written form, whilst the latter had not been subject to it. The following transactions are required to be concluded in simple written form (with the exception of those transactions that require notarial certification): (1) those “between legal persons or between a legal person and a citizen” and (2) those “between citizens for an amount exceeding ten thousand rubles,44 and in the cases specified by law regardless of the amount of the transaction”.45 As explained, non-compliance with these requirements deprives the parties of the right to rely on the testimony of witnesses in proving the conclusion of the contract and its terms, but not of the right to present written and other evidence.46 It can be deduced from these requirements that the simple written form requirement is probably applicable to all ‘commercial’ sales contracts; that is, those where the goods are not bought for personal, family or household use.47 Commercial sales contracts are usually concluded by legal persons, or by parties at least one of whom is a legal person, and both these cases are subject to simple written form. Where commercial transactions

42 See Art. 162(1) CC. 43 See . 44 This provision has been changed recently. The previous version provided for the sum “exceeding ten times the amount of the minimal monthly wage established by law” (see Art. 161(1) CC prior to the changes of 2013 in Osakwe, 2008, supra note 40). 10,000 rubles are equivalent approximately to $USD189.456 (the currency rate as at early December 2014). 45 Art. 161(1) CC. 46 See Art. 162(1) CC. In retail sale (defined in Art. 492 CC as one where “the seller engaged in entrepreneurial activities in the sphere of retail trade undertakes to transfer to the buyer goods of personal, family, household or any other use unrelated to entrepreneurial activities” (Osakwe, 2008, supra note 40), it is only the seller who is deprived of the right to rely on testimony of witnesses in proving the conclusion of the contract if the required form is not complied with (see Art. 493 (second sentence); for the criticism of this rule as being too harsh on the seller, see АП Сергеев и ЮК Толстой, Гражданское право: Учебник, Часть 2 (Москва, Проспект 1997) 47, n. 4). It also needs to be borne in mind that “the contract of retail sale shall be deemed concluded in the proper form from the time the seller issues to the buyer a cash register or sale receipt or any other document certifying payment of goods” (Art. 493 CC (first sentence) in Osakwe, 2008, supra note 40). The commentary suggests, however, that the documentation mentioned in this provision cannot be seen as tantamount to the writing form and should be merely seen as proof of payment (Сергеев и Толстой (note 46) 47). 47 See Art. 2(a) CISG.

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are made between ‘citizens’, they still seem to be subject to simple written form because where citizens are engaged in business activities, they are governed by the rules which regulate activities of legal persons.48 However, mention must be made of Article 159(2) of the Civil Code, according to which “all transactions which may be performed at the time of their conclusion may be concluded orally, with the exception of transactions for which a notarial form is stipulated, as well as transactions which are invalid if the simple written form is not adhered to”.49 Because a failure to comply with simple written form no longer invalidates a ‘foreign commercial transaction’, this provision is now applicable to such a transaction.50 This provision was probably intended to apply to small, day-to-day transactions, such as buying goods over the counter or from a vending machine. Whilst these scenarios will rarely arise in the context of international sales, the potential relevance of Article 159(2) to international sales cannot be ruled out. Therefore, it seems that it cannot be said that all commercial transactions are always subject to the simple written form requirement.

5.1.2

Effect of the Reservation

The most controversial issue arising in connection with the reservation from the Convention’s freedom-of-form requirement concerns the effect of this reservation. The reason is that whilst Articles 12 and 96 exclude the Convention’s freedom-of-form provisions (where a contracting party has its place of business in a reservation state), they do not specify what law is to govern the question of whether the contract is subject to some requirements as to form and, if so, what these requirements are. One question that arises from this lack of clarity is whether the reservation means that whenever one contracting party has its place of business in a Contracting State, such as Russia, that has made a declaration under Article 96, a contract can never be made or modified in a form other than in writing. So far, the answer given by Russian courts and arbitration tribunals is, generally, ‘yes’. The Supreme Arbitration Court has relatively recently held that by virtue of the reservation declared by the Russian Federation, an international sales contract could not be made in

48 See Art. 23(3) CC (“The rules of the present Code which regulate the activities of legal persons that are commercial organizations shall be applied accordingly to entrepreneurial activities of citizens conducted without formation of a legal person, unless otherwise specified by the law, other legal acts or otherwise indicated by the nature of the legal relations”). But see Сергеев и Толстой, supra note 46, n. 61, stating that a transaction between two citizens engaged in business activities can be made orally if the amount of the transaction does not exceed ten times the amount of the minimal monthly wage (the requirement before the recent legislative changes, see supra note 44). 49 See Osakwe, 2008, supra note 40. 50 See also Art. 161(2) CC: “Conformance to the simple written form is not required for transactions which, in accordance with Article 159 of the present Code, may be concluded orally”, Osakwe, 2008, supra note 40.

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a form other than in writing.51 Since the agreement between the parties was not in writing, the court held that no contract of sale existed between the parties.52 More than a decade earlier, the Supreme Arbitration Court held in its Resolution that Article 12 of the CISG “establishes that a contract of sale shall be made or modified in writing”.53 The same approach is taken in the decisions by tribunals of the International Commercial Arbitration Court (ICAC) (a Russian arbitration institution, as opposed to judiciary). But whilst the above decisions of the Supreme Arbitration Court do not expressly provide that Russian law always governs the issue of form and legal consequences of non-compliance with the form requirements, the decisions of arbitration tribunals seem to do so more explicitly. One tribunal54 stated that “in accordance with the reservation made by the Russian Federation (Articles 12 and 96 CISG), [a term agreed to orally] is inadmissible and in accordance with art. 162(3) of the Russian Civil Code it is invalid”.55 In the same vein, another tribunal56 held that if one of the parties to an agreement is a Russian company, according to art. 12 of the Vienna Convention of 1980, alterations of the conditions of the agreement – and the understanding proposed by the [Buyer] assumes alteration of the content of the St. Petersburg amicable agreement – is admissible only in written form and cannot be proved solely by the testimony of witnesses. This provision of the Vienna Convention of 1980 takes into consideration peremptory norms of Russian civil legislation (art. 162 of Russian Civil Code), according to which non-observance of simple written form of an external economic agreement entails its nullity.57 At this point, it needs to be recalled again that the Russian legislation no longer invalidates international contracts that are not in writing, as was the case at the time when these cases were decided. Therefore, there is room for speculating whether these courts and tribunals

51 Supreme Arbitration Court of the Russian Federation, VAS-16382/09, 23 December 2009 (the abstract of the case is available from: ); a full text of the decision is available in Russian from: . 52 Id. 53 Supreme Arbitration Court of the Russian Federation, Information Letter 29, 16 February 1998, available from: . 54 ICAC, 107/2002, 16 February 2004, available from: . 55 Id. 56 ICAC, 125/2003, 9 June 2004, available from: . 57 Id. See also МГ Рoзенберг, ‘Венская конвенция 1980г. в практике МКАС при ТПП Рф’ in Рoзенберг, supra note 19, 28-29, stating that the ICAC has invariably interpreted the effect of the Russian reservation with reference to the peremptory norms of the Russian legislation and bearing in mind that the CISG does not deal with the issue of validity. This position reflects the view that the issue of whether there are any form requirements is seen by the ICAC tribunals as one of validity.

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would have interpreted the effect of the reservation by the Russian Federation any differently had these cases been considered at present time, when the Civil Code does not invalidate foreign economic contracts that are not in writing. It can certainly be speculated that an expansive interpretation of Articles 12 and 96 was influenced, at least in part, and driven by the existence of this ‘peremptory’ rule of validity.58 There are some cases taking different approaches to those discussed above. In one arbitration case,59 the buyer argued that fax messages were invalid because they were not in writing. The tribunal held that the issue of ‘validity’ was outside the CISG according to its Article 4(a) and was to be resolved on the basis of the applicable domestic law, which happened to be Russian law. Having defined ‘writing’ in accordance with Russian law, the tribunal held that communications by fax were included in the definition of ‘writing’.60 Another case,61 decided by the Supreme Arbitration Court, appears to have taken the approach whereby the issue of whether any form requirements must be complied with is to be resolved on the basis of the law applicable by virtue of the rules of private international law. The decisions that take the position that written form always has to be observed and/or that the specific form requirements and the consequences of non-compliance with such requirements are always to be determined in accordance with Russian law (that is, in accordance with the law of the reservation state) do not really elaborate on the reasons for taking their respective positions. There is, however, some support for this view in commentary that suggests that the effect of the reservation is that the question of whether any, and what, formal requirements are applicable is to be answered on the basis of domestic law of the reservation state, such as Russia. The justification is that doing otherwise – that is, to use the rules of private international law to determine the applicable law – would ignore the policies that the reservation and non-reservation states adopted when they became parties to the CISG.62 Put differently, by declaring the Article 96 reservation, the reservation states sent a clear signal that written form was a matter of ‘fundamental policy’63 to them. Non-reservation states, in turn, by having agreed to the Convention providing for the possibility of such a reservation were willing to subordinate their preference for freedom

58 Another reason could be the then existing mandatory conflict of laws rule in Art. 1209 CC, requiring Russian law to apply to the question of form to transactions involving Russian parties (see notes 66, 73-76 below and the accompanying main text). 59 ICAC, 55/1998, 10 June 1999, available from: . 60 Id. 61 Supreme Arbitration Court of the Russian Federation, Resolution No. 6134/01, 20 March 2002, available from: ; see also Schroeter, supra note 21, n. 21-22, interpreting this case in the same way. 62 See P. Winship, ‘Harmonizing Formal Requirements for Cross-Border Sales Contracts’, Int’l Rev, Vol. 6, Issue 2, 2012, p. 10. 63 Id, 10.

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of form to ‘the greater good of having wider participation in the Convention’.64 This view may also flow from an expansive reading of Articles 12 and 96 whereby the exclusion of the Convention’s freedom-of-form provisions is seen as an indication of the intent of the Contracting States always to apply written form in cases where a party has its place of business in a reservation state.65 If this position is taken, it is a short step to argue that it would only be sensible to apply the law of the reservation state in which one of the parties has its place of business. Finally, it can be argued that it is justifiable always to resort to the law of the reservation state where its rules of private international law require that written form be observed whenever a party to the contract is a person from the reservation state. For example, until recently, Article 1209 of the Russian Civil Code has provided that the “form of a foreign economic transaction in which at least one of the participants is a Russian legal person shall be governed, regardless of the place of conclusion of the transaction, by Russian law”.66 It can be contended that such a provision constitutes an overriding mandatory provision67 which must be applicable in all cases, regardless of the otherwise applicable law. On the whole, however, there appear to be more compelling arguments against assuming that a contract, involving a party from a reservation state, must always be in writing and that the law of the reservation state necessarily governs the issues of the applicability and content of formal requirements and non-compliance with them. First, at the Vienna conference, a proposal that the formal requirements of the law of the relevant reservation states were to be applicable was rejected on the basis that such an approach would make the formal requirements of the law of a reservation state applicable too widely.68 This unequivocally shows that the effect of the Article 96 reservation was not intended to be an outright fall-back on the law of the reservation state in which one of the contracting parties has its place of business. Second, this intention is further evidenced by the fact all that Articles 12 and 96 expressly state is that the Convention’s freedom-of-form provisions ‘do not apply’.69 Interpreting it as requiring written form and that written form be defined 64 Id. See also Andersen, 2011, supra note 4, p. 705, taking this view with reference to the issue of ‘extension of comity’. 65 See also P. Viscasillas in S. Kröll, L. Mistelis & P Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG) – Commentary, Munich, CH Beck, Hart Publishing, 2011, Art. 12, Para. 7. 66 By virtue of the Federal Law on ‘The Introduction of Changes to Part Three of Civil Code of Russian Federation’, N 260-FZ, dated 30 September 2013, this provision is now abolished. 67 Defined as “provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under the rules of private international law” (Schroeter, supra note 21 at n. 25). 68 See, e.g., Rajski, 1987, supra note 19, p. 657. 69 See Arts. 12 and 96. See also CISG AC Opinion No. 15, Reservations under Articles 95 and 96 CISG, Rapporteur: Professor Ulrich G. Schroeter, University of Mannheim, Para. 4.17, available from: .

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by the law of the reservation state will certainly stretch the language of these provisions and contravene the drafters’ intention, which, it is submitted, must be respected.70 Third, an interpretation, such as one adopted in some of the decisions coming from Russia, whereby Russian law must always govern the formal requirements and consequences of non-compliance with them, will make Russian law applicable whenever one contracting party has its place of business in Russia. Such a result would be extraordinary, considering that it has no regard for any connecting factors – for example, a place of the conclusion of the contract or a place where one of the parties has its place of business – on which the rules of private international law are based. It is difficult to see a justification for Article 96 producing this kind of universal application of the law of the reservation state whenever a contracting party has a place of business in that state.71 Finally, it has rightly been pointed out that the difficulty with this position becomes quite apparent in the case where both contracting parties have their places of business in two different reservation states.72 This position has no answer to the question of the law of which of the two reservation states should govern the issues of formal requirements and non-compliance with them. That again goes to show that the Article 96 reservation was not intended to mean an automatic fall-back onto the law of a reservation state. As to the argument relating to the mandatory nature of the private international law rules of a reservation state requiring that the law of this reservation state be applied when it comes to formal requirements, it may be that this rationale underpins the decisions of the ICAC tribunals,73 mentioned above.74 However, where a foreign court is seized of a dispute involving a contracting party from a reservation state, that court will not be obliged to apply the mandatory rules of private international law of the relevant reservation state since, at most, it will have discretion as to whether or not to apply such rules.75 This means that the pronouncements made in the Russian cases above – to the effect that, where a contracting party has its place of business in Russia, written form is always required and/or that formal requirements of Russian law are automatically applicable – cannot be viewed as correct. The effect of the Article 96 reservation is to exclude the Convention’s freedom of form provisions. The next step should be to apply the relevant rules of private international law with a view to determining the applicable law that would govern the issue of whether there are any formal requirements that need to be observed. It may well be the

70 71 72 73

See CISG-AC Opinion No. 15, supra note 69, Para. 4.18. CISG-AC Opinion No. 15, supra note 69, Para. 4.19; Schroeter, supra note 21, pp. 24-25. CISG-AC Opinion No. 15, supra note 69, Para. 4.20; Schroeter, supra note 21, p. 27. See Art. 28(2) of the Law on International Commercial Arbitration, N 5338-1, dated 7 July 1993 (available in Russian from: ), that provides that in the absence of choice of the applicable law by the parties, an arbitration tribunal ought to apply the law applicable by virtue of the rules of private international law, which the tribunal deems applicable. 74 For a similar supposition, see Schroeter, supra note 21, p. 25. 75 For a detailed discussion and further references, see Id.

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case that the law thus applicable is based on the principle of freedom of form and contains no requirements as to form. The conclusion is that whilst Russian courts and tribunals may have been justified in applying Russian law by virtue of the then-existing mandatory rule of private international law, it could not have been assumed that whenever a contract involved a Russian party, a contract ought to have been in writing. In the light of the recent abolition of the said mandatory rule in Article 1209 of the Civil Code, the argument discussed in this paragraph has now lost its relevance in the context of the reservation by the Russian Federation. If it is this argument that underpins the decisions by the ICAC tribunals discussed above, it is arguable that were these cases to be resolved today, they would be decided differently. The Russian law rules of private international law now provide that the “form of a transaction shall be governed by the law of the country that governs the transaction itself”.76 Let us now turn to the position, taken in one of the cases above,77 that the issue of form is one of validity. This position is also irrelevant now since the compliance with written form has consequences only for the parties’ evidentiary position, as opposed to the validity of a contract. Nevertheless, since it was the basis of some of the decisions, it may be helpful to briefly consider this point. If taken, this view should not necessarily lead to the law of the reservation state, in which a contracting party has its place of business. Whether that is the case depends on the application of the rules of private international law. However, with respect to a contract not involving parties from the Article 96 reservation states, it is submitted that viewing the issue of whether some formal requirements must be observed as that of ‘validity’ is highly undesirable.78 If that were the case, courts in countries, such as the United States, which have not made the reservation under Article 96, but which in their domestic laws impose requirements as to form,79 could potentially treat oral contracts as invalid by applying their domestic law on the basis that formalities are the issues of validity which are, of course, outside the CISG.80 That would be contrary to the intention of such countries to use the Convention’s freedom-of-form principle when it comes to international sales transactions, notwithstanding certain formal requirements of their domestic law. Accepting the arguments put forward in this section will not suffice to eliminate the uncertainty regarding the question of the precise effect of the Article 96 reservation. The next controversial question is whether a reference to the law, applicable by virtue of rules of private international law, is a reference to its domestic law or, in the case where the state

76 See Art. 1209(1) (first sentence) CC (translation by the author). 77 ICAC, 10 June 1999, supra note 59. 78 See, similarly, M. G. Bridge, The International Sale of Goods, 3rd edn, Oxford, Oxford University Press, 2013, Para. 10.59; M. Djordjevic in Kröll, Mistelis & Viscasillas, 2011, supra note 65, Art. 4, Para. 19. 79 See §2-201(1) of the US Uniform Commercial Code (UCC). 80 See Art. 4(a) CISG.

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is a CISG Contracting State, to the CISG. If this Contracting State has made a reservation under Article 96, then this question is irrelevant81 because this state has adopted a different version of the CISG, that is, without its freedom-of-form provisions. The question is relevant where a Contracting State is a non-reservation state that has adopted the CISG in full, with its freedom-of-form provisions. One view is that a reference is to the Contracting State’s domestic law because Articles 12 and 96 explicitly state that the Convention’s freedom-ofform provisions ‘do not apply’ where a party has a place of business in a state that has made a reservation under Article 96.82 This approach is based on the text of the Convention. A different and, it is submitted, a preferable view is that it is not for the Convention to answer this question for the reason that this issue is outside the Convention’s scope. Rather, it is up to the relevant private international law rules to decide whether a reference is to domestic law of the Contracting State or to its law, inclusive of the CISG.83 With a traditional analysis being that the law of that country should be applied “as much as possible in the same manner as a judge in that country would apply” it,84 it would (and should) be the Convention’s freedom-of-form provisions, such as Article 11, that should apply in most cases.85 This view’s premise is that the function of Articles 12 and 96 is simply to exclude the Convention’s principle of freedom of form and therefore, the scope and reach of these provisions should extend no further.

5.1.3

Articles 12 and 96: Preconditions for Their Applicability and for the Right of a State to Make a Reservation

The next question is whether the pre-conditions for the exercise of the right to this reservation are still being met in the case of the Russian Federation and, if not, whether this means that the reservation by Russia is no longer effective. To answer this question, it is necessary to briefly examine the key pre-conditions for the applicability of Articles 12 and 96. First, these provisions concern the exclusion of contracts that were made, modified or terminated in a form “other than writing”. Is it with reference to the CISG, the applicable domestic law, domestic law of the reservation state (in which one of the contracting parties

81 See, similarly, Schlechtriem, 1986, supra note 19, p. 44. 82 See, e.g., Flechtner, 1998, supra note 4, at pp. 195-196; J. Herre in Kröll, Mistelis & Viscasillas, 2011, supra note 65, Art. 96, Para. 6; also cases referred to in CISG-AC Opinion No. 15, supra note 69, n. 135. 83 CISG-AC Opinion No. 15, supra note 69, Para. 4.22. 84 CISG-AC Opinion No. 15, supra note 69, Para. 4.22. 85 Viscasillas, 2011, supra note 65, Para. 10 (“it is the CISG that is the applicable law and not the domestic rules of the non-reservation state. Which would have the negative effect to bring into play domestic form requirements of certain states that have internally and intentionally decided to abandon them”). See also cases referred to in ‘Digest of Article 12 Case Law’ in UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, 2012 edn, available from: .

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has its place of business) or some other autonomous standard that the meaning of ‘writing’ needs to be ascertained? The question may be of some importance in the context of Russia’s reservation. A general definition of ‘written form’ under Russian law is that it is complied with if a transaction is “concluded by means of compilation of a document expressing its content and signed by the party or parties concluding the transactions, or by their duly authorized representatives”.86 If the parties have made a written agreement that has not been signed by them, a party could argue that the agreement was not made ‘in writing’ as understood by Russian law. In contrast, the Convention’s definition of writing only provides that “writing includes telegram and telex” (Article 13). This definition is clearly far from exhaustive and it is difficult to say whether there are any specific requirements of writing discernible from the CISG.87 In any case, it is certainly arguable that the requirement of a signature is not part of the Convention’s understanding of what ‘writing’ means. This demonstrates that there is uncertainty as regards a standard or a definition with reference to which ‘writing’ in Articles 12 and 96 is to be defined. The practical relevance of this problem lies in the following scenario. Suppose that a contracting party, based in Russia, wishes to argue that the contract without a signature is not a written contract under Russian law, triggering adverse evidentiary consequences, and that it is Russian law that is applicable to the contract by virtue of the conflict of laws rules. The other contracting party argues that despite it not being signed, the contract is ‘in writing’ within the meaning of Articles 12 and 96 and therefore, the fact that Russia has made this reservation is irrelevant and no adverse evidentiary consequences under Russian law can follow. Currently, there is no unanimity in literature regarding the standard that governs the meaning of writing with some advocating an autonomous standard88 whilst some others89 appear to recommend the application of Article 13 only in cases specified in it, that is, where the communications are in the form of a ‘telegram’

86 Art. 160(1) CC (Osakwe, 2008, supra note 40). Art. 434 CC (Id.) provides further that a contact can also be concluded “by means of exchange of documents through the mail, telegraph, teletype, telephone, electronic and other means of communications which make it possible to reliably determine that the document originated from a party to the contract” (see further Art. 11(4) the Federal Law ‘On Information, Information Technologies and Protection of Information’ and Art. 4 of the Federal Law ‘On Electronic Signature’). See also Art. 438 CC, not requiring a written form in the case of acceptance of an offer by performance. It provides that “performance by the person receiving the offer…of actions directed at performance of the conditions of the contract stipulated in it…is considered to an acceptance, unless otherwise specified by law, other legal acts, or indicated in the offer [Acceptance by performance]” (Osakwe, 2008, supra note 40). 87 A leading scholarly commentary advocates the following view of the Convention’s writing requirement in Art. 13: “The objective of the Article is to ensure that a legally relevant communication(s) is manifest or can be made manifest by a print-out (‘retrievable’) and, thereby, can be read and understood, and, if necessary, used for evidentiary purposes” (P. Schlechtriem & M. Schmidt-Kessel in I. Schwenzer (Ed.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford, Oxford University Press, 2010, Art. 13, Para. 5). 88 Torsello, 2000, supra note 20, 104. 89 Schlechtriem & Schmidt-Kessel, 2010, supra note 87, Para. 4.

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or ‘telex’. For the sake of uniformity, an agreement on some autonomous definition would ideally be preferable, but the CISG is, unfortunately (albeit understandably, considering it provides for freedom of form), not well designed for developing a comprehensive definition of ‘writing’. It is therefore reasonable to expect that courts in the Article 96 reservation states will rely on the meaning of ‘writing’ determined on the basis of the applicable law.90 The key pre-condition for the right of the state to make a reservation under Article 96 is that the legislation of that state must require “contracts of sale to be concluded in or evidenced by writing”.91 The question that arises in this regard is this: If the legislation of a reservation state has changed since it joined the CISG, in that its legislation no longer requires contracts of sale to be made in or evidenced by writing, does this mean that the reservation of that Contracting State is no longer effective? Once again, there are different answers given in literature. One view92 is that the reservation continues to be effective because the Convention provides the procedure for the removal of a reservation in its Article 97(4).93 In other words, if it has not been invoked, the reservation continues to be in force since Article 97(4) must be the only way to remove a reservation. This approach promotes legal certainty and prevents courts in various Contracting States from having to make their own evaluation of whether their domestic law still meets the requirements of Article 96. Whilst this view seems correct, there is also a view according to which the reservation must become ineffective whenever its pre-conditions cease to exist.94 Considering this divergence of views and particularly the second view advocating the ineffectiveness of a reservation, it becomes relevant to consider the meaning of ‘contracts of sale’ in Article 96 and to return to the formal requirements of the Russian legislation with a view to determining whether the pre-conditions of the reservation are still in place. As far as the meaning of ‘contracts of sale’ is concerned, it needs to be noted that at the Vienna conference, a proposal to limit a range of sales contracts that were subject to formal requirements and that would have enabled a state to declare the reservation was rejected.95 The reason was that providing for specific types of sales contracts, which would have enabled a state to declare the reservation, would have encouraged a wide use of the reser90 Cf. Id., Art. 12, Para. 5. 91 Art. 96 CISG. 92 See U. G. Schroeter, ‘Backbone or Backyard of the Convention? The CISG’s Final Provisions’ in C. B. Andersen & U. G. Schroeter (Eds.), Sharing International Commercial Law across National Boundaries: Festschrift for Albert H. Kritzer on the Occasion of His Eightieth Birthday, London, Wildy, Simmonds & Hill Publishing, 2008, pp. 435-436. 93 Art. 97(4) CISG: “Any State which makes a declaration under this Convention may withdraw it at any time by a formal notification in writing addressed to the depositary. Such withdrawal is to take effect on the first day of the month following the expiration of six months after the date of the receipt of the notification by the depositary.” 94 See Torsello, 2000, supra note 20, p. 111. 95 See, e.g., Schlechtriem, 1986, supra note 19, p. 43.

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vation clause. This fact points to the drafters’ intention that ‘contracts of sale’ subject to written form must be all sales contracts, as opposed to only certain types of sales contracts.96 Is it relevant to include non-commercial sales contracts? It is suggested that the answer should be ‘no’97 because non-commercial sales contracts, such as consumer contracts, normally raise considerations unique to them98 and may be subject to formal requirements for reasons that are irrelevant to commercial sales. Returning now to the current position of the Russian law, it would appear, on the basis of the discussion above,99 that commercial contracts of sale generally continue to be subject to the written form requirement.100 However, bearing in mind that, according to Article 159(2), transactions “which may be performed at the time of their conclusion may be concluded orally”, it would seem that the preconditions for the Article 96 reservation are not fully present. Nevertheless, it is submitted that this reservation by the Russian Federation is still in force because the procedure for removing reservations under Article 97(4) has not been invoked.101

5.1.4

Impact of the Reservation

What is the impact, if any, of the Article 96 reservation by the Russian Federation on the CISG, international trade and Russia itself? As stated earlier, any reservation to a uniform law treaty is generally considered to have some detrimental impact on this treaty’s ability to be ‘uniform’, which, by definition, means one law. A reservation, in contrast, creates more than one version of a treaty. This means that even where there are no uncertainties regarding the interpretation and effect of a reservation, an international regime will be non-uniform in areas covered by a reservation. However, a negative impact of this particular reservation on the CISG goes further in that, as shown above, there are a number of issues which are far from settled. As a result, an additional degree of legal uncertainty has been generated by this reservation and, as the conventional wisdom has it, uncertainty is not good for business and international trade, seventy to eighty per cent of which is said to be potentially governed by the CISG.102 This uncertainty, particularly if coupled with other areas of uncertainty relating to the Convention’s substantive provisions, may encourage traders to exclude the CISG. The impact can thus be damaging for the Conven-

96 97 98 99 100

See P. Schlechtriem, I. Schwenzer & P. Hachem in Schwenzer, 2010, supra note 87, Art. 96, Para. 2. See Bridge, 2013, supra note 78, Para. 10.59, who appears to take a similar view. Such as protection of consumers (see, e.g., Schwenzer, Hachem & Kee, 2012, supra note 11, Para. 22.07). See the paragraph in the main text accompanying notes 44-50. See Art. 161(1) CC, stating that the transactions, mentioned in the main text accompanying supra notes 4448, “must be concluded in simple written form”. 101 For the reasons why this view is taken, see supra notes 92-94. 102 See P. Schlechtriem & I. Schwenzer in Schwenzer, 2010, supra note 87, Introduction, I.

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tion’s aspiration of becoming a uniform sales law and at least for those sectors and contracts within international trade that are governed by the CISG. That said, the possibility of a negative impact of one reservation by one country, even as big and influential as Russia,103 must not be overestimated. If the CISG, on the whole, is viewed by business persons as meeting their needs and expectations, it is unlikely that the reservation by Russia will deter them from dealings with Russian businesses on the basis of the CISG or induce them to exclude the Convention from governing their contracts with Russian businesses. Simple pragmatism dictates that parties who deal with their counter parties from Russia should ensure that the requirements of writing, as understood by Russian law, be observed104 in order to eliminate many of the legal risks mentioned above. The downside of this state of affairs is that the need to comply with formal requirements may slow down commercial exchange and give rise to additional transaction costs, which are exactly the opposite of what the CISG and the whole movement to unify international commercial law are trying to achieve. The CISG is well known within the Russian legal community. Its important role in governing international sales transactions is not infrequently emphasised in Russian legal literature.105 Russia has been playing a very significant role in developing the case law on the Convention,106 and there is no doubt that many of the cases decided under the CISG not only should,107 but over time, do influence how the CISG is interpreted in subsequent cases and how it is perceived by the international legal and business community. It can also be speculated that the CISG has played its positive role in stimulating and encouraging commercial exchange between Russian and non-Russian parties.108 All this suggests that the CISG is important for Russia and, therefore, the Russian legal community is unlikely to be indifferent to any negative impact that may flow from its Article 96 reservation. There have been calls by some Russian scholars to consider whether the current formal requirements in Russian law are adequate-to-modern commercial realities, particularly in the context of international transactions.109 But even those scholars would not go so far

103 Russia’s share in the world trade today is said to be less than 5%, with its volume being USD$500 billion, compared to the total volume of world trade of about USD$19 trillion (see: ). 104 On which see supra note 86 and the accompanying main text. 105 See, e.g., Лебедев, supra note 19, 4 (referring to the CISG as a “highly significant treaty”); A. C. Комаров, ‘Венская конвенция 1980 г. Принципы УНИДРУА’ in Рoзенберг, supra note 19, 9 (“a constantly increasing role of the Vienna Convention 1980” (translation by the author)). 106 According to the CISG pace website, there are currently 305 reported cases decided in the Russian Federation. This number is third only to Germany (523) and China (432) (see: . 107 See Art. 7(1) CISG. 108 See Andersen, 2012, supra note 4, p. 711, making the same conjecture in the context of China (“The CISG has […] arguably helped support a surge in Chinese exports”). 109 Курлычев, supra note 39.

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as to advocate that formal requirements for international transactions be abandoned because “state control over foreign trade transactions” is deemed to be essential.110 The recent abolition of the rule invalidating international transactions that are not in writing seems to be a response to the considerations of this kind: a middle ground has been struck between not pursuing formalism too rigorously, on the one hand, and abolishing the written form requirement altogether, on the other. It is also likely that the Russian legislator intended to make it easier for its business enterprises to trade internationally. Whether that intention will stretch further to withdraw the reservation under Article 96 remains to be seen.

5.2

Conclusion

Being a Contracting State to the CISG, Russia demonstrates its support for the movement to unify the law of international sales with a view to facilitating international trade and development.111 At the same time, the Russian Federation’s reservation under Article 96 signals that in some areas, such as that relating to formal requirements governing a contract, the goal of the international unification of sales law should be subordinate to Russia’s public policy considerations, which for a long time seemed to have been strongly engrained in legal thinking in Russia. The recent legislative reform, abolishing the rule invalidating foreign economic contracts that are not in writing, probably shows that Russia has taken a step to alleviate the rigours of formal requirements for parties contracting internationally. It is too early to say whether this reform signals that Russia may want to withdraw its reservation under Article 96. The legal reality is that the reservation is still very much in force for Russia. In any case, this reservation will probably induce commercial parties, one of which is based in Russia, to comply with the formal requirements of the Russian legislation, although this incentive is unlikely to be as strong as it was at the time when the rule invalidating international contracts, not complying with simple written form, was in force. Still, whilst written form undeniably has its benefits,112 ensuring that contracts are in writing may slow down commercial exchange and give rise to transaction costs. In addition, this work has shown that the Article 96 reservation has produced a substantial degree of legal uncertainty arising from divergent views as to the interpretation of its meaning and effect. These negative consequences will be alleviated if an international consensus emerges as to how the various legal questions, highlighted in this work, should be dealt with. Any prospect of such a consensus is dependent on a continuous engagement between all the relevant 110 Id. 111 See the Preamble to the CISG. 112 See supra notes 26, 37-39 and the accompanying main text.

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stakeholders: judges, arbitrators, legal practitioners and scholars. Considering that Russia is important for the CISG and the CISG is important for Russia, the dialogue between the international and the Russian legal community is vital for both Russia and the CISG.

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The Application of the CISG in International Commercial Arbitration in China

Shiyuan Han

6.1

Introduction

The United Nations Convention on Contracts for the International Sale of Goods (hereinafter the CISG) till time being is the most successful achievement of international uniform private law movement. It has become a ‘lingua franca’ of international sales1 with 83 Contracting States.2 Uniform law texts alone do not necessarily produce uniform law.3 Emphasis therefore should be put on the uniformity of the CISG’s application and interpretation on the world-wide scale. China as one of the earliest Contracting States, what is the situation of the CISG’s application in international commercial arbitration in this country? How long, if there is any disparity between the situation of the CISG’s application in China and other developed jurisdictions in the world, is the way for China to follow in order to realize the aim of uniformity? To answer these questions, it is necessary to use first-hand materials to do empirical research. This paper is a case study of the China International Economic and Trade Arbitration Commission (hereinafter the CIETAC) arbitration awards 2008–2011. The empirical research uses 67 pieces CISG-related arbitration awards provided by the CIETAC as original examples. The CIETAC, as the earliest arbitration commission in China, acquires an international reputation for its arbitration awards. A large number of CIETAC arbitration awards (1988–2008) have been included in the Pace Law School Albert H. Kritzer CISG

1

2 3

P. Schlechtriem, ‘Keynote Address: Pace University School of Law Conference on the United Nationals Convention on Contracts for the International Sale of Goods (CISG): Of Words and Issues – Finding a Common Language for Common Issues’, in Pace International Law Review (Ed.), Review of the Convention on Contracts for the International Sale of Goods (CISG) 2003–2004, Munich, Sellier, European Law Publishers, 2005, pp. 84-85. (accessed 7 January 2015). C. Witz, in F. Ferrari (Ed.), The 1980 Uniform Sales Law. Old Issues Revisited in the Light of Recent Experiences, Munich, Sellier, European Law Publishers, 2003, pp. 279 et seq.; From U. Magnus, ‘Tracing Methodology in the CISG: Dogmatic Foundations’, in A. Janssen & O. Meyer (Eds.), CISG Methodology, Munich, Sellier, European Law Publishers, 2009, p. 34.

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Shiyuan Han Database4 and have become the object of research papers.5 The 67 CIETAC cases studied in this paper are in Chinese and have not been translated into English and included in the Pace CISG Database. In addition, for security reasons as required by the CIETAC – both the case number and the award number may not be mentioned directly – the author only uses the date of the award and the subject matter of the contract to identify the cases. The CISG as a uniform law is not a stable and rigid thing, but a growing thing full of vigour. Correct application of the CISG by courts and arbitral tribunals is the motive power of the growth. The court judgements and arbitration awards applying the CISG have, in addition to solving disputes in international transactions, a further function, namely promoting the growth of the uniform law. In this sense, to promote the growth of the uniform law is a joint undertaking. The CIETAC arbitration awards applying the CISG are the contribution made by Chinese lawyers to the joint undertaking. In this paper, the author tries to evaluate this part of Chinese contribution.

6.2

A Description and an Analysis of the Arbitral Awards Concerning the CISG of CIETAC 2008–2011

6.2.1

Length of CIETAC Arbitral Awards

Different courts or arbitration commissions may have a different style of awards. To make a statistical survey of the 67 pieces of arbitral awards of the CIETAC, there are totally 826,272 Chinese characters. The shortest one is composed of 2,578 Chinese characters,6 and the longest one is composed of 49,620 Chinese characters.7 The average is 12,332 per piece. If we minus both the shortest piece and the longest one, the average is 11, 909 Chinese characters per piece. So people may say that there are averagely 12,000 Chinese characters

4 5

6 7

(accessed 5 January 2015). See, e.g., A. Vincze, ‘Conformity of the Goods in the UN Convention on Contracts for the International Sale of Goods (CISG) – Overview of CIETAC’s Practice’, in C. B. Andersen & U. G. Schroeter (Eds.), Sharing International Commercial Law across National Boundaries: Festschrift for Albert H Kritzer on the Occasion of his Eightieth Birthday, London, Wildy, Simmonds & Hill Publishing, 2008, pp. 552-581; F. Yang, ‘CISG, CIETAC Arbitration and the Rule of Law in P.R. of China: A Global Jurisconsultorium Perspective’, in C. B. Andersen & U. G. Schroeter (Eds.), 2008, pp. 600-626; M. R. Shulman & L. Singh, ‘Zhongguo tongguo zhongcai jigou lüxing Lianheguo guoji huowu xiaoshou hetong gongyue [China’s Implementation of the UN Sales Convention through Arbitral Tribunals 中国通过仲裁机构履行《联合国国际货物销售合同公 约》]’, trans. W. Wang, 5 Journal of CUPL, No. 1, 2011, pp. 43-67; F. Yang, ‘Zhonghuo dui CISG de baoliu ji gai gongyue zai CIETAC zhongcai zhong de shiyong [China’s Reservations of the CISG and the Application of the CISG in CIETAC Arbitration 中国对CISG的保留及该公约在CIETAC仲裁中的适用]’, 2 International Law Review of Wuhan University, 2008, pp. 307-329. CIETAC Award, 24 April 2008 (Iron ore case, Korean buyer v. Chinese seller). CIETAC Award, 21 September 2009 (Sulphur case, Mainland China buyer v. Hong Kong Seller).

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per piece CIETAC award. What is the concept of 12,000 Chinese characters? It is the length of an article that most Chinese law journals welcome.

6.2.2

Reasoning and Citations of Legal Rules

If one looks at arbitration awards of the CIETAC, one may find out that they are normally in the same pattern, namely composing of three major parts: I ‘Facts and Issues’; II ‘Arbitral Tribunal’s Opinion’ and III ‘Award’. Of course, there will be a part of ‘Procedure’ before part I ‘Facts and Issues’. In part III, it is a normal practice to formulize that “According to the above opinion, the Tribunal renders the following award……” People cannot find out any citation of legal rules in this part. People may call this a CIETAC style. Of course, no citation of legal rules in ‘Award’ part does not mean that there is not any citation of legal rules in the whole arbitration award. There are a lot of arbitration awards in the part of ‘Arbitral Tribunal’s Opinion’ of which people may find out the citation of concrete legal rules applied in the case. As a result, there are 54% cases in which arbitral tribunals have shown citation of concrete legal rules (see Table 6.1 below; 42% of the total 67 cases have cited Chinese domestic laws; only 21% cases have cited the rules of the CISG). There are still 46% cases that have not shown any concrete citation of law. Table 6.1 Citation

No Citation

Total Cases

CISG

Chinese Domestic Law

2008

0

6

8

14

2009

8

8

7

19

2010

2

7

10

19

2011

4

7

6

15

Total

14

28

31

67

36* (*Since it occurs often to cite both the CISG and Chinese domestic laws in one award, the number here is not the result of 14 plus 28.)

6.2.3

Considering Practices in Other Jurisdictions

In China, no matter from judgements by courts or from awards by arbitral tribunals, people may seldom find any clear consideration of a foreign case law to help reasoning. This is true with the 67 CIETAC cases studied in this paper. Anyway, the situation is not

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an unbreakable iceberg. In a recent Supreme People’s Court judgement, the appellant submitted the rules of the UCC and relevant American case law8 and claimed that, according to the US legal rules, the contract in that case was concluded and valid. The Supreme People’s Court confirmed the claim and continued the following reasoning: Considering the understandings of the fundamental breach under the CISG by other countries’ case law, the buyer in this case still can use the goods or resell them even though with some discount of price, without any unreasonable inconvenience. So the non-conformity with the quality is in itself no more than a non-fundamental breach.9 From this case, it is shown that some Chinese judges have the conscious of considering practices in other jurisdictions when it is necessary and have tried to do so positively in practice. Since the abovementioned judgement is made by the Supreme People’s Court, people may expect it plays an important guiding role in the future.

6.2.4

Ratio of Win of Home Parties to Foreign Parties

Professor Magnus has once alerted people to a ‘political’ interpretation of the CISG. By political interpretation, he means that state courts in their judgements on international relations systematically favour their own citizens. The court of a country could easily reject claims by foreign claimants against home defendants and grant claims by home claimants against foreign defendants in a systematic way. It is not necessary that this is done openly. It is entirely sufficient and possible to do it in a hidden way via the interpretation of the vague and flexible terms of the respective law. Sales law – and in particular the CISG – contains so many vague and flexible terms that their systematic interpretation in favour of the home industry would pose no real difficulty.10 Professor Magnus raises a test of the ‘political’ attitude of courts concerning the CISG, namely to take the last twenty CLOUT cases relating to the CISG. In theory, at least ten foreign parties and ten home parties should have won their case had the courts decided

8

Lomaglio Assocs. v. LBK Mktg. Corp., 1999, U.S. Dist. LEXIS 14185, 1, 1999 WL 705208 (S.D.N.Y. 9 September 1999). 9 Thyssen Krupp Metallurgical Products GmbH v. Sinochem International (Overseas) Pte Ltd, Civil Judgment of Supreme People’s Court of PRC, (2013) Minsizhongzi No. 35, 30 June 2014. 10 U. Magnus, 2009, supra note 3, pp. 35-36.

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in a neutral, impartial manner.11 In other words, the ratio of win of foreign parties to home parties should be 1 to 1. Counting the win-and-lose result of the 67 pieces of the CIETAC cases, the result is shown in Table 6.2. The counting focuses only on the result for the claim where there is counterclaim. The ratio of the wins of home parties to foreign parties is 1.86 to 1. What does this result mean to us? Does it mean that there exists a serious ‘political’ interpretation of the CISG in the practices of the CIETAC? This will be analyzed later. Table 6.2 Home Party Win

Foreign Party Win

Draw

Total

2008

7

5

2

14

2009

15

4

0

19

2010

11

7

1

19

2011

8

6

1

15

Total

41

22

4

67

6.2.5

The Application of the CISG

Whether the CISG or Chinese national laws should be applied in the 67 pieces CIETAC cases has been evaluated by the CIETAC arbitral tribunals in their ‘Tribunal Opinions’. After sorting them out, the author draws the following Table 6.3 to show the result. Analysis of the data will be in the following parts of the paper. Table 6.3 Autonomic Application of Non-Autonomic Applica- Applicable Total the CISG tion of the CISG Domestic Law DeterAutonomic Incorrectly Expressly Impliedly mined Application Treated as Choosing Choosing According to Non-Auto- the CISG by the CISG by Private nomic Appli- the Parties the Parties Internacation tional Law 2008

5

2

5

1

1

14

2009

9

1

6

2

1

19

2010

7

0

9

1

2

19

11 Id., p. 36.

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Shiyuan Han

Autonomic Application of Non-Autonomic Applica- Applicable Total the CISG tion of the CISG Domestic Law DeterAutonomic Incorrectly Expressly Impliedly mined Application Treated as Choosing Choosing According to Non-Auto- the CISG by the CISG by Private nomic Appli- the Parties the Parties Internacation tional Law 2011

4

2

5

2

2

15

Total

25

5

25

6

6

67

6.3

Applicability of the CISG

The applicability of the CISG by arbitral tribunals has been discovered as a subject of discussion, not only in Europe12 but also in China.13 Just as has been pointed out by Professor U. P. Gruber, [t]he courts [of arbitration] give different reasons for the application of the CISG. Sometimes they apply art.1(1)(a) of the CISG, sometimes they apply rules of private international law and sometimes they treat CISG as a part of the lex mercatoria or as a part of existing trade usages.14 In the practice of the CIETAC, the reason for the application of the CISG is either the choice of the parties or applying Article 1(1)(a) of the CISG. The latter reason for the application of the CISG has been criticized by a Chinese scholar.15 However, different understandings of the nature of arbitration may lead to different answers to the applicability of the CISG in arbitration. For the aim of this paper, the following parts will base on general practice of the CIETAC, namely autonomic or direct application of the CISG in arbitration, to make further analyzing.

12 See U. P. Gruber, ‘The Convention on the International Sale of Goods (CISG) in Arbitration’, 2009 International Business and Law Journal, 2009, pp. 15-34; A. Janssen & M. Spilker, ‘The Application of the CISG in the World of International Commercial Arbitration’, 77 RabelsZ, 2013, pp. 131-157. The author would like to express thanks to Mr. Dr. A. Janssen for providing me this paper, which calls my attention to the discussions of the topic in Europe. 13 T. Du, ‘CISG zhi zhongcai shiyong wenti [Applicability of the CISG in Arbitration; CISG 之仲裁适用问 题]’, 3 Dongfang faxue [Oriental Law], 2009, pp. 88-101. 14 U. P. Gruber, 2009, supra note 12, p. 23. 15 T. Du, 2009, supra note 13, p. 89.

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6.3.1

Autonomic Application

6.3.1.1

Autonomic Application Has Been Correctly Followed in Most CIETAC CISG Cases The CISG prevails over recourse to private international law. In those countries, however, where international uniform substantive rules are in force, such as those set forth by the Convention, courts must determine whether those international uniform substantive rules apply before resorting to private international law rules at all. This means that recourse to the Convention prevails over recourse to the forum’s private international law rules. This approach has been justified on the grounds that, as a set of uniform substantive law rules, the Convention is more specific insofar as its sphere of application is more limited and leads directly to a substantive solution, whereas resort to private international law requires a two-step approach – that is, the identification of the applicable law and the application thereof.16 According to the criterion set forth in Article 1(1)(a), the Convention is ‘directly’ or ‘autonomously’ applicable, i.e., without the need to resort to the rules of private international law, when the States in which the parties have their relevant places of business are Contracting States.17

According to Certain Issues of the Ministry of Foreign Trade and Economic Cooperation in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods,18 [S]ince our government has already signed the Convention, it should assume the commitments on the implementation of the Convention. Therefore, according to the provision of Article (1) of the Convention, from January 1, 1988, the contracts for sale of goods reached between the Chinese companies and the companies in the aforementioned countries (except Hungary) will automatically apply to the provisions of the Convention and the disputes or

16 UNCITRAL, UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (2012 Edition), p. 4. Available from (accessed 10 December 2014). 17 Id., p. 5. 18 Certain Issues of the Ministry of Foreign Trade and Economic Cooperation in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods, Wai Jing Mao Fa Zi [1987] No. 22, (4 December 1987); Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods, Fa (Jing) Fa [1987] No. 34, (10 December 1987).

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litigations arisen should be also settled under the Convention, unless otherwise agreed. Here, it also mentioned ‘automatic application’. According to dominating theory, CISG Article 1(1)(a) requires automatic application.19 Where the CISG is applicable by virtue of Article 1(1)(a), there are 5/6 CIETAC cases have been directly or autonomously applied the CISG. Only for the matters not covered by the CISG (for example, the validity of the contract), the contracts have been governed by the law of the country with the closest connection thereto. 6.3.1.2 A Few Cases Incorrectly Treated as Non-Autonomic Application However, there are still 1/6 CIETAC cases where the CISG is applicable by virtue of Article 1(1)(a), and the arbitral tribunals have not directly or autonomously applied the CISG. These cases have been incorrectly treated as non-autonomic application, governed by the law determined by the private international law of the forum. These cases include at least the following types: 6.3.1.2.1 Concurrently Applying Both Chinese Domestic Law and the CISG Following rules of private international law of the forum, an arbitral tribunal recognized that Chinese law has the closest connection to the contract and therefore determined to apply Chinese law to the contract. At the same time, the arbitral tribunal admitted that the parties have their places of business in different Contracting States of the CISG, and they have not excluded the CISG by an agreement, so the CISG should also be applied.20 6.3.1.2.2 Using the CISG to Supplement Chinese Law Since the parties have not agreed upon applicable law to their contract, an arbitral tribunal applied Chinese law to the contract as a result of applying the rule of private international law of the forum. Where there is no relevant Chinese law, since the parties have their places

19 P. Schlechtriem & P. Butler, UN Law on International Sales, Berlin, Springer-Verlag, 2009, p. 13. For Chinese periodical materials, see, e.g., H. Shan, ‘Cong guoji sifa jiaodu kan Lianheguo guoji huowu xiaoshou hetong gongyue zai woguo de shiyong [An Analysis of the Application of the CISG in China: From Private International Law’s Perspective 从国际私法角度看《联合国国际货物销售合同公约》在我国的适用]’, 5 Zhengzhi yu Falü [Political Science and Law] 2003, p. 79; Z. Chen & J. Wu, ‘Lun Lianheguo guoji huowu xiaoshou hetong gongyue zai woguo de shiyong [On the Application of the CISG in China 论《联合国国际货物销 售合同公约》在中国的适用]’, 10 Faxue [Law Science], 2004, p. 109; P. Che, ‘Lianheguo guoji huowu xiaoshou hetong gongyue de ke shiyong xing wenti [Several Issues on the Applicability of the CISG 《联合 国国际货物销售合同公约》的可适用性问题]’, 4 Duiwai jingmao shiwu [Practice in Foreign Economic Relations and Trade] 2008, p. 58. 20 CIETAC Award, 2 June 2008 (Plywood case, Singapore buyer v. Chinese seller); CIETAC Award, 20 October 2008, (Plastic bag case, Chinese seller v. American buyer). Although the arbitral tribunals did not show their opinions expressly, actually they applied Chinese domestic law prior to the CISG.

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of business in different Contracting States of the CISG, the CISG will be applied as a supplement to Chinese domestic law.21 6.3.1.2.3

Applying the CISG Only When It Has Different Provisions from Chinese Domestic Law In one case, the arbitral tribunal recognized Chinese domestic law as applicable law by applying rules of private international law. Meanwhile, it said that if the CISG had any different provision, the CISG would be applied except those China had declared preservation.22 Except the above types, there are still a few low-level mistakes in applying the CISG. For example two tribunals have misrecognized non-Contracting States (i.e. India23 and Philippines24) as Contracting States and applied the CISG directly. Ignoring the CISG Article 1(3), one tribunal misunderstood the nationality of a party instead of the place of business of the party as one of the criteria of the applicability of the CISG. Accordingly, the case to which the CISG should be applied directly has been applied domestic law determined according to private international law rule.25 On the latter issue, Chinese scholars have emphasized that the place of business of the parties should not be determined according to their nationalities.26 The above misapplication of law of a few arbitral tribunals may be attributed to conceptual misunderstanding of the CISG. In order to clear up the misunderstanding, some conceptual clarification is needed. This task may involve in the relation of international law and domestic legal system,27 the divergence of ‘dualism’ and ‘monism’, transformation

21 22 23 24 25 26

CIETAC Award, 18 December 2009, (Numerical control machine case, Korean seller v. Chinese buyer). CIETAC Award, 26 October 2011, (Frozen salmon fillets case, American buyer v. Chinese seller). CIETAC Award, 25 December 2008, (Iron ore case, Chinese buyer v. Indian seller). CIETAC Award, 11 September 2009, (Copper ore case, Chinese buyer v. Philippine seller). CIETAC Award, 5 August 2011, (Roasted MoS2 case, The British Virgin Islands seller v. German buyer). Y. Zhao, ‘Lianheguo guoji huowu xiaoshou hetong gongyue de shiyong fanwei ji qi tedian [The Scope of Application and Characters of the CISG 《联合国国际货物销售合同公约》的适用范围及其特点]’, 2 Waijiao xueyuan xuebao [Foreign Affairs Review], 1986, p. 72. 27 See, e.g., Z. Li, ‘Effect of Treaties in Domestic Law: Practice of the People’s Republic of China’, 16 Dalhousie L.J. 62, 1993, pp. 62-97; T. Wang, ‘Tiaoyue zai Zhongguo falü zhong de diwei [The Position of Treaties in Chinese Legal System 条约在中国法律制度中的地位]’, Chinese Yearbook of International Law, 1994, pp. 3-18; H. Chen, W. Zhou & H. Jiang, ‘Guoji tiaoyue yu guoneifa de guanxi ji Zhongguo de shijian [The Relation between International Treaties and Domestic Laws and Relevant Practice in China 国际条约与国 内法的关系及中国的实践]’, 2 Zhengfa luntan [Tribune of Political Science and Law], 2000, pp. 117-123; H. Wang, ‘Lun guoji tiaoyue zai liangan shiyong zhi bijiao [A Comparative Study on the Application of International Treaty in Two Governments Cross Strait 论国际条约在两岸适用之比较]’, 5 Zhonghua guojifa yu chao guojie fa pinglun [Chinese (Taiwan) Review of International and Transnational Law] 2, 2009, pp. 265-294; E. Wan (Ed.), Guojifa yu guoneifa guanxi yanjiu [A Study on the Relation between International Law and Domestic Law 国际法与国内法关系研究], Beijing, Peking University Press, 2011; D. Shelton (Ed.), International Law and Domestic Legal Systems: Incorporation, Transformation, and Persuasion, New York, Oxford University Press, 2011.

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or incorporation of a treaty, the distinction of self-executing treaties and non-self-executing treaties, etc. These are the basic theoretical and practical issues, even though no final conclusion has yet been reached on most of these issues. For the purpose of this paper, the author will touch on those topics on the possible minimum only when it is necessary to analyze the CISG’s effectiveness, implementation and application in China. Since the CISG is a treaty, its subjects are ‘Contracting States’. As an agreement among the Contracting States, the CISG of course has binding force on the Contracting States since it comes into force, and the Contracting States have an obligation to implement it inside its territory. Till this point, the CISG is still a thing outside the domestic legal system, even though a Contracting State has an obligation to implement it. If we focus on China, both the Chinese Constitutional Law and the Legislation Law have no provision on how a treaty like the CISG becomes a part of Chinese domestic legal system. Before the realization of the transformation, a Chinese party is not bound by the rules of the CISG. After the Chinese government joined the CISG, China did not enact a special law to transform the content of the CISG into domestic legal system. So people should not treat the transformation of the CISG into Chinese legal system following a ‘transformation’ manner. Two pieces of official reactions as to the CISG are noticeable: one is the former Ministry of Foreign Trade and Economic Cooperation’s notice to relevant government departments and companies ‘Certain Issues of the Ministry of Foreign Trade and Economic Cooperation in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods’, the other is the Supreme People’s Court’s Circular ‘Circular of the Supreme People’s Court on Transmitting Certain Issues of the MOFTEC in Connection with the Implementation of United Nations Convention on Contracts for the International Sale of Goods’. The above Chinese official documents require Chinese parties and courts to implement the CISG. It should be noticed that, the subject of the implementation here is not the Chinese government, but Chinese parties and all-level people’s courts. So we may say that, the two documents actually carried out the function to transform the CISG into a part of Chinese domestic legal system, and the manner of the transformation may be called a kind of ‘incorporation’. Once the CISG became a part of Chinese domestic legal system, Chinese courts and arbitral tribunals shall apply the CISG when it is applicable by virtue of Article 1(1)(a) or all the prerequisites for the applicability of the CISG are met. Accordingly the CISG is a kind of self-executing treaty in China. Some Chinese arbitral tribunals prefer applying Chinese domestic law to applying the CISG, one important reason is their misunderstanding of the provision of Article 142(2) of the General Principles of Civil Law, which reads: If any international treaty concluded or acceded to by the People’s Republic of China contains provisions differing from those in the civil laws of the People’s

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The Application of the CISG in International Commercial Arbitration in China Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People’s Republic of China has announced reservations.

If we analyze the provision of the Article 142(2), two points may be pointed out. First, as a premise, it clearly affirms an international treaty concluded or acceded to by China is a kind of ‘source of law’ in China. Second, as its main purpose of norm, it provides the hierarchical structure of effectiveness of different sources of civil laws, namely international treaty takes precedence to domestic civil laws. Anyway, the formulation of Article 142(2) is easy to arouse a misconception that, it seems to provide a burden of proof for those who claim to apply international treaty to prove the different provision in it. The ‘burden of proof’ is of course absurd and it is difficult to find a second example from the whole world. So it is necessary to emphasize the purpose of norm of Article 142(2) to avoid the misconception. The CISG is not only a uniform law but also a part of the domestic legal system of the Contracting State. When a court or an arbitral tribunal applies the CISG, it is not applying a strange thing existing outside of the domestic legal system, but a part of the domestic legal system. There should not be any discrimination of the CISG as if the domestic laws are the national legislature’s own ‘children’ and the CISG is only an adopted one. Since the General Principles of Civil Law clearly provides international treaty a status of source of law and its higher level of effectiveness than other civil laws, the CISG should be applied prior to other domestic civil laws.

6.3.2

Non-Autonomic Application

6.3.2.1 Expressly Choosing the CISG by the Parties From the statistic data of Table 6.3, there are 25 pieces of cases where the parties expressly chose the CISG as applicable law. The number occupies 41% of the total number 61 of the cases which actually applied the CISG. Among these 25 cases, there are situations where one or both parties’ place of business is not in a Contracting State,28 and situations where both parties’ place of business is in different Contracting States.29 There are cases where 28 E.g., CIETAC Award, 11 January 2008, (Multifunctional filter case, Chinese buyer v. Indian seller); CIETAC Award, 28 November 2008, (Machine case, Chinese buyer v. UK seller); CIETAC Award, 18 August 2009, (Medicine case, Chinese seller v. Malian buyer); CIETAC Award, 26 April 2010, (Nickel ore case, Chinese buyer v. Philippine seller) No. 1; CIETAC Award, 26 April 2010, (Nickel ore case, Chinese buyer v. Philippine seller) No. 2. 29 E.g., CIETAC Award, 2 February 2010, (Polycrystalline silicon case, Singaporean buyer v. Chinese seller); CIETAC Award, 17 September 2010, (Medicago processing machine case, Chinese buyer v. Spanish seller); CIETAC Award, 7 April 2011, (Fiber cement board production line case, Chinese buyer v. German seller); CIETAC Award, 15 July 2011, (Sodium sulfide case, Russian buyer v. Chinese seller); CIETAC Award, 22 July 2011 (Band steel case, Korean buyer v. Chinese seller).

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the parties expressly agreed upon the CISG as the applicable law from the very beginning in the International Sale of Goods contract and cases where the parties reached an agreement to apply the CISG afterwards during the arbitration hearing.30 6.3.2.1.1 Whether the CISG Is Excluded by Choosing ‘Chinese Law’? Where the parties agree upon Chinese law as applicable law, does the indication per se exclude the CISG’s application? In order to describe the CIETAC arbitration’s position on this issue, cases should be analyzed separately. First, if the meaning of ‘Chinese law’ used by the parties clearly did not include the CISG, e.g. using ‘Chinese law’ and the CISG parallel and alternatively,31 arbitral tribunals would not include the CISG inside ‘Chinese law’. It is another issue whether the CISG can be used to supplement the Chinese law when the latter has a gap. Where the parties agreed upon both Chinese law and the CISG as applicable laws, and it was not specified which one applied firstly, one Arbitral Tribunal took the position “to apply the CISG if there is a conflict between Chinese law and the CISG.”32 Second, where it was unclear whether the ‘Chinese law’ in the parties’ meaning includes the CISG, in the practices of the CIETAC, it is a very popular position to treat ‘Chinese law’ and the CISG as two separate things and the CISG is not a part of the ‘Chinese law’ (as if following ‘dualism’).33 Here in the understanding of these arbitral tribunals, ‘Chinese law’ means Chinese domestic law. Does it mean the exclusion of the CISG?34 If it is a matter regulated by both the Chinese Contract Law and the CISG (e.g. whether a nonperformance is a fundamental breach), the application of Chinese Contract Law means an exclusion of the CISG. If it is a matter not regulated by the Chinese Contract Law but regulated by the CISG (e.g. calculation of damages), whether the CISG can be used to fill the gap in the Chinese Contract Law can be divided into different types to find relevant answers in the CIEATC arbitration awards. If the parties have places of business in different Contracting States, the CIETAC arbitral tribunals were normally willing to use the CISG rules to fill the gap in Chinese Contract Law.35 In this type of cases, if the parties had not 30 E.g., CIETAC Award, 9 April 2008, (Chemistry analyzer case, Mainland Chinese buyer v. Hong Kong seller); CIETAC Award, 9 November 2010, (Tea processing machine case, Japanese seller v. Chinese buyer). 31 CIETAC Award, 24 January 2008, (Toluene case, Hong Kong seller v. Mainland Chinese buyer). 32 CIETAC Award, 17 September 2010, (Medicago processing machine case, Chinese buyer v. Spanish seller). 33 It is difficult to say that the CIETAC arbitral tribunals follow a constant position either dualism or monism. As an account of this topic, see J. Han, ‘CISG zai Zhongguo guoji shangshi zhongcai zhong de shiyong [The Application of the CISG in International Commercial Arbitration in China CISG 在中国国际商事仲裁中 的适用]’, International Law Review of Wuhan University, No. 2, 2008, p. 276. 34 Professor Che takes the position that, the agreement “the contract (or a special part of it) applies the law of P.R. China” will constitute a total or partial exclusion of the application of the CISG. See P. Che, 2008, supra note 19, p. 59. 35 CIETAC Award, 9 September 2008, (Machines case, Chinese buyer v. Israel seller); CIETAC Award, 4 June 2009, (Neodecanoyl Chloride case, Chinese buyer v. Japanese seller); CIETAC Award, 20 July 2010, (Machine

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agreed on any applicable law, the CISG would be applied directly. When the parties had agreed on ‘Chinese law’ as applicable law and arbitral tribunals interpreted it meaning Chinese domestic law, they were still willing to use the CISG rule to fill the gap in Chinese Contract Law, the reason was that the parties had not expressly excluded the application of CISG. However, if one party’s place of business was not in a Contracting State, the arbitral tribunals would not apply the CISG to fill the gap in the ‘Chinese law’.36 However, there are still some arbitration awards the tribunals of which seem to follow ‘monism’. For example, in the 22 January 2010 Award, the parties whose places of business were in different Contracting States had agreed upon that the law of P. R. China was applicable law. The Arbitral Tribunal, following Article 142(2) of the General Principle of Civil Law, decided that the CISG would be applied when it contained provisions differing from those in Chinese domestic civil laws.37 Another example is the 27 September 2011 Award. In this case, an Irish buyer and a Chinese seller had chosen Chinese law as applicable law for their contract. The Arbitral Tribunal of the case, in the same manner as the above example, decided to apply the CISG when it contained provisions differing from those in Chinese domestic civil laws according to Article 142(2) of the General Principles of Civil Law.38 The question of whether a general reference to national law includes a reference to the CISG is disputed in the case law and academic writing. In dominating view, unless the parties have expressly referred to the domestic sales law of a state, the reference to the national law of a member state either through private international law or by the choice of the parties includes the CISG.39 The CISG Advisory Council’s Opinion takes the same position.40 Comparing with this trend, the ‘dualism’, which is now dominating Chinese practice, should be rethought about. Even though the CISG is not a product of Chinese legislature’s own, once it has been incorporated into Chinese legal system, it is a part of the legal system and should be applied prior to Chinese domestic civil laws.

36

37 38 39 40

case, Chinese buyer v. Korean seller). As a similar case, CIETAC Award, 15 September 2009, (Ferrosilicon case, Swiss buyer v. Chinese seller). However, in this case, the parties reached an agreement during arbitration hearing to apply Chinese domestic law and exclude the CISG. CIETAC Award, 16 July 2010, (Iron ore case, Chinese buyer v. Indian seller). Even though the solicitor of the party whose place of business is not in a contracting state cited the CISG during the arbitration, the arbitral tribunal still applied Chinese domestic law according to the private international law of the forum, without thinking about the CISG. In addition, CIETAC Award, 13 April 2011, (Hot-rolled strip case, Hong Kong seller v. Korean buyer). There are different opinions whether the CISG applies to Hong Kong which is a part of China. In this case, the arbitral tribunal took negative position, and strictly limited the applicable law to Chinese domestic law. CIETAC Award, 22 January 2010, (Copper pipe case, American buyer v. Chinese seller). CIETAC Award, 27 September 2010, (Hollow shape steel case, Irish buyer v. Chinese seller). P. Schlechtriem & P. Butler, 2009, supra note 19, p. 15. CISG-AC Opinion No. 16, Exclusion of the CISG under Article 6, Rapporteur: Doctor Lisa Spagnolo, Monash University, Australia.

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6.3.2.1.2 A Noticeable Alteration of Choice of Law From the 67 pieces of cases, the author has found out a case where the parties agreed upon the CISG and the UNIDROIT Principles of International Commercial Contracts (hereinafter the PICC) as the applicable law for their contract.41 However, afterwards during the arbitration hearing, both the claimant and the respondent agreed to change their original agreement and choose Chinese Contract Law as the applicable law for the case. Accordingly, the Arbitral Tribunal decided that the case would be trailed under Chinese Contract Law and other relevant Chinese laws. It is difficult to know the real reason for the alteration. The author guesses that the unfamiliarity of the CISG and the PICC by both the arbitral tribunal and the solicitors might be a reason. 6.3.2.2 Impliedly Choosing the CISG by the Parties Where the parties have not reached any express agreement over the applicable law, arbitral tribunals may still find out that the parties are willing to apply the CISG to their contract from their afterwards behaviours. A typical example is that both parties’ solicitors have cited the CISG to support their opinions in the case. In this type of cases, many arbitral tribunals are willing to apply the CISG.42 However, there may be opposite situations, namely the parties had not chosen any applicable law, and the case might apply the CISG directly pursuant to Article 1(1)(a), but arbitral tribunal had found out that both parties’ solicitors had cited Chinese Contract Law to support their claims. And both sides had no objection to the application of Chinese law during the arbitration process. Accordingly, the arbitral tribunal took it proper to apply Chinese law in the case.43

6.3.3

Should China Withdraw Its Reservation of the CISG Article 1(1)(b)?

Among the 67 pieces of CIETAC arbitration awards, there are six cases the arbitral tribunals applied domestic law determined according to private international law.44 Most of these 41 CIETAC Award, 10 September 2009, (Mould case, Hong Kong buyer v. Mainland Chinese seller). 42 E.g., CIETAC Award, 3 December 2010, (PVC case, Afghan buyer v. Chinese seller). Even though Afghanistan is not a contracting state of the CISG, since the two parties cited the CISG in their written opinions, the arbitral tribunal decided to apply the CISG to the case. 43 CIETAC Award, 25 February 2008, (Beef slaughtering equipment case, Chinese buyer v. Dutch seller). In this case the arbitral tribunal went further by saying that the contract did not exclude the CISG and the CISG should also be applied. 44 CIETAC Award, 25 December 2008, (Iron ore case, Chinese buyer v. Indian seller, applied the CISG by mistake); CIETAC Award, 11 September 2009, (Copper ore case, Chinese buyer v. Philippine seller, applied the CISG by mistake); CIETAC Award, 7 December 2009, (Chrome ore case, Chinese buyer v. Pakistani seller, applied Chinese domestic law); CIETAC Award, 19 February 2010, (Lumpy chrome ore case, Chinese buyer v. Turkish seller, applied Chinese domestic law); CIETAC Award, 31 March 2010, (Hover-transport system case, Chinese buyer v. American seller, applied Chinese domestic law and the CISG); CIETAC Award, 5 August

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cases share a common character, namely one party’s place of business was in a Contracting State and the other’s was not. These cases arouse the rethinking: whether it is time for China to withdraw its reservation of the CISG Article 1(1)(b)? These days, more and more Chinese scholars advocate that China should withdraw its reservation of Article 1(1)(b),45 just like it withdrew its reservation of Article 11. Because of the above reservation, where one party’s business is in a Contracting State like China and the other’s in a non-Contracting State, if the parties have not chosen applicable law for their International Sale of Goods contract, Chinese arbitral tribunals will determine applicable law following rules of the private international law of the forum.46 Almost without exception, Chinese domestic law will be chosen as the law having the closest connection with the contract. In order to find out the reason of the reservation of the CISG Article 1(1)(b), people shall first look up the legislative history of the article. During the first committee deliberations, Mr. Kopac (Czechoslovakia) pointed out that in his country – and in some others as well – there existed special legal rules governing contracts exclusively in international trade, a fact which would create special difficulties in the application of sub-paragraph (b) – additional to those which would exist for other countries where internal and international contracts were governed by the same rules. This position had been supported by Mr. Wagner (German Democratic Republic), who continued saying that, if the sub-paragraph were not deleted, reservations on the part of Contracting States were likely.47 Chinese delegation had not shown its concrete opinion to the provision. At the beginning of the 5th Meeting, Mr. LI Chih-min (China) mentioned that his delegation found the five articles already considered basically acceptable, although it would of course suggest or support

2011, (Roasted MoS2 case, The British Virgin Islands seller v. German buyer, applied Chinese domestic law); CIETAC Award, 20 July 2011, (Sodium Tripolyphosphate case, Turkish buyer v. Chinese seller, applied Chinese domestic law). 45 Z. Chen & J. Wu, 2004, supra note 19, p. 117; F. Yang, ‘The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice’, 2006 Nordic Journal of Commercial Law, Issue 2, 2006, p. 7; F. Yang, 2008, supra note 19, pp. 307-329; W. Li, ‘Lun Zhongguo chehui duiyu Lianheguo guoji huowu xiaoshou hetong gongyue di yi tiao b xiang de baoliu [On China’s Withdraw of the Reservation of the CISG Article 1(1)(b) 论中国撤回对于《联合国国际货物销售合同公约》第1条b项的保留]’, 2012 Faxuejia [Jurist], No. 5, pp. 93-103. 46 See, e.g., CIETAC Award, 7 December 2009, (Chrome ore case, Chinese buyer v. Pakistani seller (absent)). The solicitor of the claimant cited both the Chinese Contract Law and the CISG in his Opinion submitted after the arbitration hearing. CIETAC Award, 19 February 2010, (Lumpy chrome ore case, Chinese buyer v. Turkish seller (absent)). The claimant of this case had pointed out that Chinese domestic law should be applied, at the same time reference might be made to the provisions in the CISG. CIETAC Award, 20 July 2011, (Sodium Tripolyphosphate case, Turkish buyer v. Chinese seller). 47 See J. O. Honnold, Documentary History of the Uniform Law for International Sales: The Studies, Deliberations and Decisions That Led to the 1980 United Nations Convention with Introductions and Explanations, Deventer, Kluwer Law and Taxation Publishers, 1989, pp. 458-459.

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Shiyuan Han some amendments.48 Here people obtains no concrete opinion and reason as to Article 1(1)(b). On 11 December 1986, the USA and China ratified or approved the CISG and made the CISG entered into force on 1 January 1988. It is well known that the two governments have an agreement to join the CISG together to make it enter into force. Since both of the two countries have made reservation of Article 1(1)(b) according to Article 95, people may reasonably doubt that the reservation may be a result of the agreement of the two governments.49 The point of the above Czechoslovak representative constituted a substantial reason for making reservation of Article 1(1)(b) by some countries including China. At the time the CISG became effective, by the reservation of Article 1(1)(b), China tried to ensure the Law of the P R China on Economic Contracts Involving Foreign Interest was to be applied when it was possible. However, since this special law was abolished on 1 October 1999, circumstances changed drastically. The new Chinese Contract Law, which took place of former three contract laws, is a unified contract law. It does not distinguish whether a contract is an internal contract or an international one. Comparing with the CISG, the Contract Law is general rule, and the CISG is special rule. Lex specialis derogate generali. If it is possible, it is the CISG and not the Contract Law that shall be applied to an International Sale of Goods contract. The real need to ensure the application of domestic special legal rules governing contracts exclusively in international trade, even though it had been existed in China, is now disappearing. In addition, since 1980s, China follows the way to open up to the world and reform national economic system, trying to be geared to international standards. China has joined the WTO. The system of foreign trade has been changed drastically. Now it is time for China to withdraw the last reservation of the rule of CISG.

6.3.4

Hong Kong, Macao, Taiwan and the CISG

Hong Kong, Macao and Taiwan are very important trade partners of mainland China. The three regions are not members of the CISG. It has been pointed out that, even though Chinese law is the applicable law following rules of private international law for the sale of goods contracts among the parties whose places of business are in different regions, the CISG still shall not be applied. The reason for the conclusion is that these contracts of sale of goods are not “between parties whose places of business are in different States”. However,

48 Id., p. 475. 49 This point has been given by Professor P. Winship during the CISG Basel Conference 2015 (29 and 30 January 2015) ‘35 Years CISG and Beyond’, and Professor A. Garro showed his agreement on this point during the conference.

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according to Chinese law, disputes arose from these trades are contractual disputes involving foreign interest. Chinese courts shall determine the applicable law according to Chinese private international law while trying the cases. If the parties choose the CISG as the applicable law as a result of ‘parties’ autonomy’, the choice shall be effective.50 The above problem will still exist even if China withdraws its reservation of the CISG Article 1(1)(b). In order to solve the problem, people have to think about other possible approaches. Comparing with applying any local laws of these regions, the CISG is much more neutral and more suitable for the needs of inter-regional transactions. In practice, since these cases have been labeled as ‘involving foreign interest’, the difference between ‘regions’ and ‘states’ owns only formal meaning. As a choice of legal policy, substantial considerations shall prevail. As a possible solution of the problem, people may think about for the Supreme People’s Court to enact a new Judicial Interpretation, permitting courts to apply the CISG by analogy to the inter-regional sale of goods contract.

6.4

6.4.1

Further Analysis and Comments

Improving the Citations of Legal Provisions and Reasoning in Arbitral Awards

The statistic data show that the average length of a CIETAC arbitration award is about 12,000 Chinese characters. It is just the length of a normal article published in Chinese law journals. So people may say that CIETAC arbitration award follows long style. One reason for the result may be that, the case-arbitrator ratio is a reasonable one and, as a result, there is no backlog of cases. CIETAC arbitrators normally have enough time to hear the cases and prepare arbitration awards. The CIETAC encourages its arbitrators to prepare well-reasoned awards. Correspondingly, CIETAC arbitrators are also willing to follow the wishes to the best of their ability. In a well-reasoned award, relevant legal provisions under which the case is awarded should be clearly cited. According to the data in Table 6.1, 54% awards have cited detailed legal provision. 42% awards have cited Chinese domestic laws, but only 21% awards have cited the CISG. Correspondingly, when without any concrete legal provision, the reasoning of the arbitration tribunal’s opinion will be rather limited. For those who would like to know a Chinese understanding of a special provision in the CISG, sometimes she or he might be disappointed. If we look at the practice of courts at the time being in China, things are much better. From the website ‘Judicial Opinions of China’51 of the Supreme

50 W. Li, 2012, supra note 45, pp. 93-103. 51 (accessed 9 December 2014).

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People’s Court, it is easy to find a lot of judgements made by courts all over the country. Citations of detailed legal provisions in civil judgements have become a normal practice. This should be attributed the constant efforts of the Supreme People’s Court dedicated to intensifying the formulation of civil ruling documents.52 In the common sense shared by Chinese lawyers, the quality of arbitration award is higher than that of courts’ judgements. However, focusing on the citation of legal provisions, there are still a lot that should be done for the CIETAC to improve it in the future. To understand the reason why CIETAC arbitrators seem to enjoy much more ‘freedom’ in preparing arbitration awards than judges, it will be helpful to analyze the personnel components of the CIETAC arbitrators. The group of CIETAC arbitrators is composed of retired judges, retired officers, senior solicitors or other law practitioners and law professors. There is no doubt that most of them have rich experience in law. The celebrated dictum of Holmes on the first page of his The Common Law, “The life of the law has not been logic: it has been experience”,53 makes it easy for people to consider experience as the most important thing and logic as unimportant thing. By reading these CIETAC arbitration awards, the author have been left a deep impression that, experience alone is never enough, what reliable is the experience based on good logic. As some countermeasures that may be taken, to improve complementary role while appointing arbitrators and to enhance proofreading of arbitration awards here may be suggested.

6.4.2

Considering Practices in Other Jurisdictions

While reading the CIETAC arbitration awards applying the CISG, the author has not found any consideration of practices in other jurisdictions. In order to achieve the CISG’s ultimate goal of uniformity, it is necessary to consider practices in other jurisdictions. Decisions rendered by judicial bodies of other Contracting States must be taken into account. This does not mean that foreign case law binds the courts of a given country. Rather, foreign case law has merely persuasive value, and this is, in essence, also what Article 7(1) CISG demands when it provides that “regard is to be had […] to the need to promote uniformity in its application.”54

52 Circular of the Supreme People’s Court on Intensifying the Formulation of Civil Ruling Documents (No. 145 [2006] of the Supreme People’s Court 27 June 2006); Provisions of the Supreme People’s Court on Citation of Such Normative Legal Documents as Laws and Regulations in the Judgments (Interpretation No. 14 [2009] of the Supreme People’s Court 26 October 2009); Provisions of the Supreme People’s Court on the Issuance of Judgments on the Internet by the People’s Courts (Interpretation No. 26 [2013], adopted at the 1,595th meeting of the Judicial Committee of the Supreme People’s Court on November 13, 2013). 53 O. W. Holmes, Jr., The Common Law, New York, Dover Publications, Inc., 1991, p. 1. 54 See F. Ferrari & M. Torsello, International Sales Law – CISG, St. Paul, West Academic Publishing, 2014, pp. 8-9.

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Using foreign cases or practices to help reasoning in internal cases has been said to be a useful method of gap filling. Comparatively in a CISG case, considering practices in other jurisdictions plays an important role not in gap filling as a wide understanding of interpretation, but in a narrow understanding of interpretation, the central abstract elements of which includes wording, context, purpose and legislative history. From China’s perspective, reasons of considering practice in other jurisdictions may be reformulated into the following two points. First, since a few years ago, the Supreme People’s Court carry out a guiding case system. Even though the guiding cases selected and published by the Supreme People’s Court are not like the precedents in Common Law countries, in other words, the guiding cases do not have a binding force of law on judges, they have persuasive value.55 This is the nature that a foreign case law may have for judges in China. Second, the CISG is a uniform law and a ‘lingua franca’ of international sales. Different Contracting States share the same rules. Since the CISG has been incorporated into Chinese legal system and become a part of it, the corresponding ‘guiding cases’ of the CISG in China should not be narrowed to Chinese CISG cases. In order to promote uniformity in the CISG’s application, Chinese lawyers should open the horizons to foreign CISG case laws. Language and information should not be obstacles anymore. At least, the Chinese version of the UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods is accessible from the website of the UNCITRAL.

6.4.3

How to Evaluate the Ratio of Win of Home Parties to Foreign Parties

The 1:1 theoretical ideal ratio of win of home parties to foreign parties, as suggested by Professor Magnus, may face the following challenges in reality. First, the respondent may be absent of the arbitration hearing. In the 67 CIETAC cases, with very few exceptions, the absent parties are almost always foreign parties. Absence by one party will normally increase the possibility of the other party’s win. Second, whether the foreign party has trusted a good local solicitor is another factor that may affect the result of arbitration. The obstacles of language, culture, etc. make it very important to hire a local solicitor. In the 67 CIETAC cases, Chinese parties normally had their Chinese solicitors. But foreign parties sometimes did not have a Chinese solicitor. This fact will raise the possibility of Chinese party’s win of the case. Third, the specific structure of international transaction may affect the character of the case. For example, in the 67 CIETAC cases, there are quite a lot cases involving Chinese sellers claiming defaulted prices. It is not difficult to understand if

55 Whether the ‘guiding case’ has binding force of law depends on the distribution of authority of legislature. This is an issue involving policy choice on constitutional law level and is not a question which can be decided by the Supreme People’s Court. However, ‘persuasive force’ has nothing to do with policy choice, it is a nature that every judgment or arbitration award should have.

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people think about ‘Made in China’. This type of case is normally easy to win where the goods have been delivered and no objection about quality raised. Taking into consideration of the above factors, people may understand that 1:1 is only a theoretical and ideal ratio of win. In practice, the ratio should be adjusted, even though it is difficult to say to what extent the adjustment should be made. In the author’s personal opinion, the ratio shown from the CIETAC cases is still within a reasonable scope.

6.5

Conclusion

1. In this paper, the author has used 67 CIETAC arbitration awards (2008–2011) as materials for research, try to describe the CIETAC’s experience in application of the CISG in international commercial arbitration in China and analyze relevant problems. The average length of the CIETAC arbitration award is similar to that of an article published in a law journal. Only 21% of the CIETAC arbitration awards have cited the CISG provisions. There is still a large space for CIETAC arbitration awards to improve their legal provision citation, legal reasoning and foreign CISG case law consideration. 2. The ratio of the wins by home parties to foreign parties is 1.86 to 1. This ratio, even though it has a distance to the theoretical ideal ‘one to one’, it is still within a reasonable scope if people consider the complexity of the real world. Of course, in order to achieve the uniformity in the CISG’s application, it never goes too far to be vigilant against the socalled ‘political interpretation’ of the CISG. 3. For the cases where the CISG shall be applied by virtue of Article 1(1)(a), 5/6 of them have been directly applied the CISG, but there are still 1/6 cases the arbitral tribunals have not applied the CISG directly. At least for the arbitrators involved in these 1/6 cases, it is still necessary to update their knowledge of the CISG and change relevant ideas of law. 4. Since the incorporation of the CISG into the Chinese legal system, the CISG is a kind of ‘source of law’ in China. It should be applied prior to other Chinese domestic civil laws. Chinese arbitrators and judges should have a clear idea that they are applying a part of Chinese legal system. Nothing should be an excuse for ‘discriminating’ the CISG in application (as if the CISG is only an adopted ‘child’ other than one of the Chinese legislature’s own). 5. The easy misreading of Article 142(2) of the General Principles of Civil Law must be corrected. Article 142(2) clearly affirms that an international treaty concluded or acceded to by China is a kind of ‘source of law’ in China and provides the hierarchical structure of effectiveness of different sources of civil laws. Considering its main purpose of norm, it should not be understood to provide a burden of proof for those who claim to apply international treaty to prove the different provision in it.

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6. Where the parties agree expressly to apply ‘Chinese law’ to their contract, this agreement should not be interpreted as excluding the CISG. It is time for the Chinese arbitrators to make the transition from the old conception that ‘Chinese law’ and the CISG are two things to the one that the CISG is a part of ‘Chinese law’ once it is incorporated into the Chinese legal system. It reverses heaven and earth in practice to apply Chinese domestic law first and use the CISG only to fill the gap in Chinese domestic law. 7. The basis for China to make a reservation of the CISG Article 1(1)(b) has collapsed since the coming into force of the Chinese Contract Law on 1 October 1999. It is time for China to withdraw the reservation so as to be completely in the line with the world in application of the CISG. 8. Hong Kong, Macao and Taiwan are very important trade partners of Mainland China. The three regions are not members of the CISG. However, the CISG is better to fit the inter-regional sale of goods contract than any local legal rules. The Supreme People’s Court should enact a new Judicial Interpretation, permitting courts in Mainland China to apply the CISG by analogy to the inter-regional sale of goods contract. The uniformity of the CISG’s application and interpretation is a permanent topic and worthy of continuous discussions. The CIETAC remains the bellwether of international commercial arbitration in China and has made a great contribution to the uniform application and interpretation of the CISG. The application and interpretation of the uniform law rely on people (the parties, the lawyers etc.). It is the people who turn the uniform law on paper into ‘living law’ in action. From this perspective, it will be a suggestion for the CIETAC to upgrade its arbitrators’ ability to apply the CISG correctly by professional training and to cultivate a new generation by supporting moot court commercial arbitration etc. With long-lasting persevering in such efforts, the CIETAC will definitely make greater contribution to the uniform application and interpretation of the CISG.

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Part III Extending the CISG

7

Extending the Scope of the 1980 Vienna Convention on the International Sale of Goods to Framework Distribution Contracts

María del Pilar Perales Viscasillas*

7.1

Introduction

The 1980 UN Convention on Contracts for the International Sale of Goods (hereinafter, the CISG or Vienna Convention) is one of the most successful texts in the area of commercial contracts. The merits of the CISG can be measured not only in terms of the high number and the economic weight of the countries that have ratified the Vienna Convention1 but also in terms of the quality, novelty and worldwide solutions achieved by it from a purely technical and legal perspective. However, the Vienna Convention as an international treaty has some drawbacks. First of all, as an international treaty, it may be quite difficult to amend or modify it;2 secondly, despite the wide substantive coverage of the CISG, there are important areas of the sale of goods contract left to domestic law; thirdly, the CISG only covers the International Sale of Goods contract, and thus, some other important international commercial contracts are not subject to a uniform international law regime. After the success of the CISG, several different instruments, mostly with a material or a territorial scope which is different to the CISG, have tried to offer soft law instruments. These can be applied either in conjunction with the CISG or as competing instruments to the CISG by means of voluntary inclusion in the contract. These contractual instruments are mostly based on or inspired by the CISG solutions because despite the fact that the CISG is restricted to International Sale of Goods contracts, it does so by regulating areas that belong to general contract law, such as the rules on formation of the contract, or the * 1 2

Commercial Law Professor at University Carlos III of Madrid. Of Counsel at Baker & McKenzie. This paper was written under research project of ‘Ministerio de Economía y Competitividad’ (DER2013-48401-P). The list of contracting states 83 can be found from: . Notwithstanding the above, there are some indirect tools to update an international treaty. See 2006 Recommendation regarding the interpretation of Art. II(2), and Art. VII(1), of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958); or 2005 United Nations Convention on the Use of Electronic Communications in International Contracts Art. 20.

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provision on damages. Among the most well-known and accepted instruments of this sort are the International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts (UPIC, 1994, 2004 and 2010), which might be seen as a complementary tool to the CISG to the extent that they supplement it, aid in its interpretation and even cover certain areas excluded from the CISG.3 The UPICs have a wider field of application as compared to the CISG because they cover international commercial contracts in general. One of the most recent instruments is, however, a competing one: the European Union Proposal for a Regulation on a Common European Sales Law (CESL) of 11 October 2011,4 which has been recently withdrawn and a new project should be developed probably covering B2C digital contracts,5 and whose antecedents might be found in the Draft Common Frame of Reference (DCFR, 2009) and the European Principles of Contract Law (PECL, 1995, 1999 and 2003).6 There are also several other regional initiatives such as in Africa (OHADA),7 Asia (Principles of Asia Contract Law, PACL) and Latin America (being the last two still under development).8 All these instruments have produced an intense worldwide debate on general commercial contract law, more generally on private law, on regional versus universal harmonization of the law, as well as the role of soft law instruments in regard to hard instruments. Furthermore, at the core of the discussion is the role of the CISG and its limits and drawbacks in the framework of international commercial contract law instruments.9 3

4 5

6

7 8 9

In fact, the 2004 and 2010 editions cover general contract law institutions that are not covered by the CISG: authority of agents, contracts for the benefit of third parties, set-off, limitation periods, assignment of rights and contracts, transfer of obligations, conditions, plurality of obligors and obligees, unwinding of contracts and illegality. Presently, a third edition is being drafted in order to implement the principles in the area of long-term contracts. . The decision of the European Commission to withdraw the proposal for the Common European Sales Law and to replace it by a new one has been published in the Commission Work Program for 2015 (see Annex, p. 12, Point 60, available from . See, for a critical view, P. Perales Viscasillas & R. Illescas Ortiz, ‘The Scope of the Common European Sales Law: B2B, Goods, Digital Content and Services’, Journal of International Trade Law & Policy, Vol. 11, No. 3, 2012, pp. 241-258; and I. Schwenzer, ‘The Proposed Common European Sales Law and The Convention on the International Sale of Goods’, Uniform Commercial Code Law Journal, Vol. 44, 2012, pp. 457-481. The Uniform Act on General Commercial Law by the Organization for the Harmonization of Business Law in Africa (OHADA). R. Momberg, ‘Harmonization of Contract Law in Latin America: past and present initiatives’, Uniform Law Review, 2014, Vol. 19, pp. 1-18. The idea of elaborating a ‘Global Commercial Code’ was put forward by G. Hermann, ‘Law, International Commerce and the Formulating Agencies – The Future Harmonisation and Formulating Agencies: The Role of UNCITRAL’, Paper presented at the Schmitthoff Symposium 2000. ‘Law and Trade in the 21st Century’, Centre of Commercial Law Studies, London, 1–3 June 2000. Before that, it was suggested that UNCITRAL should embark on an international convention related to the general part of contract law: M.J. Bonell, ‘Towards a Legislative Codification of the UNIDROIT Principles?’, in C.B. Andersen & U.G. Schroeter (Eds.), Sharing International Commercial Law across National Boundaries. Festschrift for Albert H Kritzer on the Occasion of his Eightieth Birthday, Wildy, Simmonds & Hill Publishing, London, 2008, p. 69; but slightly different: M.J. Bonell, ‘Do We Need A Global Commercial Code?’, Uniform Law Review, Vol. 5,

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It was not surprising that on the occasion of the last United Nations Commission on International Trade Law (UNCITRAL) Commission session in 2012,10 a proposal on possible future work by UNCITRAL in the area of international contract law was put forward by Switzerland.11 The proposal tried to initiate a debate in two areas:12 (i) whether UNCITRAL can undertake an assessment of the operation of the 1980 Convention on Contracts for the International Sale of Goods and related UNCITRAL instruments in light of practical needs of international business parties today and tomorrow, and (ii) to discuss whether further work both in these areas and in the broader context of general contract law is desirable and feasible on a global level to meet those needs.13 This proposal was well received by the Commission; however, there were several words of caution raised14 and so a decision regarding the proposal is still pending at Commission level.15

10 11 12 13

14

15

2000, p. 472. See, finally, O. Lando, ‘Principles of European Contract Law and UNIDROIT Principles: Moving from Harmonisation to Unification?’, Uniform Law Review, Vol. 8, 2003, p. 132, also in favor of an international convention by UNIDROIT. 45th session, New York, 25 June-6 July 2012. A/CN.9/758, available from . A/CN.9/758, p. 1. The areas identified in the Swiss Proposal (A/CN.9/758, note 4) are in particular: general provisions, among others: freedom of contract, freedom of form; formation of contract, among others: offer, acceptance, modification, discharge by assent, standard terms, battle of forms, electronic contracting; agency, among others: authority, disclosed/undisclosed agency, liability of the agent; validity, among others: mistake, fraud, duress, gross disparity, unfair terms, illegality; construction of contract, among others: interpretation, supplementation, practices and usages; conditions; third-party rights; performance of contract, among others: time, place, currency, and costs; remedies for breach of contract, among others: right to withhold performance, specific performance, avoidance, damages and exemptions; consequences of unwinding; set-off; assignment and delegation, among others: assignment of rights, delegation of performance of duty, transfer of contracts; limitation; joint and several obligors and obligees. A/67/17, No. 130, Report of UNCITRAL on its 45th session: “In reply, it was said that it was not evident that existing instruments were inadequate in actual practice, that the proposal seemed unclear and overly ambitious and that it could potentially overlap with existing texts, such as the Unidroit Principles of International Commercial Contracts. It was added that lacunae in existing texts, such as the United Nations Sales Convention, were a result of the impossibility of finding an agreed compromise solution and that there were significant doubts that that could be overcome in the near future. Concerns were also expressed about the implications of such a vast project on the human and financial resources available to the Commission and to States. For those reasons, it was urged that the proposed work should not be undertaken, at least not at the present time. It was added that the Commission might reconsider the matter at a future date in the light of possible developments.” A/67/17, No. 132, Report of UNCITRAL on its 45th session: “[…] it was determined that there was a prevailing view in support of requesting the Secretariat to organize symposiums and other meetings, including at the

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It seems that some of the critical remarks derive from a misunderstanding of the scope of the Swiss Proposal. The Proposal might have been perceived as an intention to create a new instrument that will modify the CISG. There is indeed no need to touch the Vienna Convention, or to modify it. A different issue is where a new instrument would be able to complement the CISG by covering areas outside the scope of application of the Vienna Convention, or to develop regulations governing the internal gaps in the Vienna Convention. At the same time, and because of the intended general nature of the future instrument, it will be applicable to other international commercial contracts as well. The Swiss Proposal has recently been endorsed by the CISG Advisory Council’s (CISGAC) Declaration No. 1: The CISG and Regional Harmonization,16 in which some of the shortfalls of regional unification as opposed to global unification were considered. The present author, who supported that declaration as a member of the CISG-AC, recently considered the idea of UNCITRAL undertaking a leading role in the area of international commercial contracts.17 However, a less ambitious project is also possible. UNCITRAL might focus its work on specific contracts such as international distribution contracts. International distribution contracts are only covered by the CISG18 to a certain extent. However, since the CISG does not cover certain important matters of these contracts, increasingly used in international trade, the uncertainty towards its application (as will be seen in this paper), or the need to adjust some of the Vienna rules to this contract, particularly in the area of remedies, as well as some of the formation of the contract provisions, makes international distribution contracts an ideal candidate to be the object of a unitary treatment in an ad hoc International Uniform Law Convention. Absent a uniform international treaty in this area, the parties might exclude the uncertainties derived from the application of the CISG to international distribution contracts by opting into the CISG as the law or rules of law applicable to the contract (opting in).19 This will eliminate or at least mitigate the doubts derived from whether or not the

16 17 18

19

regional level and within available resources, maintaining close cooperation with Unidroit, with a view to compiling further information to assist the Commission in the assessment of the desirability and feasibility of future work in the field of general contract law at a future session.” Available from . Perales Viscasillas & Illescas Ortiz, 2012, supra note 6, p. 243. In terms of the determination of the applicable law, note that even unified private international law instruments such as the Rome I Regulation can be problematic since it provides for different criteria depending on whether the contract is characterized as a sale of goods (place of the habitual residence of the seller) or as a distribution contract (place of the habitual residence of the distributor) (see Art. 4.1(a) and (f) Rome I Regulation). Inter alia, J. Perovi, ‘Selected Critical Issues Regarding the Sphere of Application of the CISG’, Belgrade Law Review, No. 3, 2011, pp. 189–190: “in order to avoid uncertain situations, the parties should, by choice of law clause, precisely solve the question of applicable law to the framework contract as well as to the individual sale contracts”. See, generally, J. Oviedo Albán, ‘Autonomía conflictual en los contratos de compraventa internacional de mercaderías’, Colección de Estudios de Derecho Privado, No. 1, Colombia, Universidad

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CISG applies, reinforcing the parties’ will that the Vienna Convention should regulate all the contractual aspects derived from an international distribution contract, including of course the sale of goods agreements concluded under the framework distribution contract. However, if the parties do not opt to have the CISG apply to their dispute, and all the other conditions for its application are met (Articles 1 and 2 of the CISG), the issue that arises is to what extent the CISG applies to international distribution contracts. The application of the Vienna Convention to international distribution contracts follows a simple formula according to the majority of scholars and case law: The CISG does not apply to the framework contract (distribution contract), but it does apply to sale of goods contracts concluded on the basis of the distribution contract.20 Of course, there has to be general agreement with the proposition that the CISG applies to sale of goods contracts. However, this author partially disagrees about the general inapplicability of the CISG to the framework distribution contracts. de la Sabana & Grupo Editorial Ibáñez, 2012, pp. 23 et seq. Of course, it could be alone or in conjunction with the UNIDROIT Principles (2010). An example of an international distribution Contract subject by the agreement of the parties to the CISG: SAP Barcelona, 14 September 2010 (JUR 387047). 20 See relying on the conservative approach to consider outside of the CISG a joint-venture agreement: UNITED STATES: U.S. Federal District Court for the Eastern District of Pennsylvania Amco Ukrservice v. American Meter Company, 29 March 2004 (CLOUT 695), following the abstract: “The agreement between an Ukrainian and US parties provided that the joint venture had the exclusive right to manufacture, install and distribute gas meters in the former Soviet Union. The US manufacturer would assemble 90 percent of the components and the joint venture would assemble the remaining 10 percent using the US manufacturer’s components. The number of components to be delivered was to be based on demand in the former Soviet Union. The joint venture subsequently submitted orders to the US manufacturer. The manufacturer shipped but subsequently stopped delivery of one order and refused to extend credit to the joint venture. This effectively terminated the joint venture. The joint venture sued the US manufacturer for breach of contract. The US manufacturer moved to dismiss the complaint because the joint venture agreement was unenforceable, inter alia, because the agreement did not set out definite prices and quantities as required by the CISG. The CISG issue before the court was whether a distributorship agreement is covered by the Convention. The court concluded that the joint venture agreement was not covered by the CISG. Citing decisions construing the CISG by US and non-US courts in support, the court concluded that the Convention does not govern distributorship agreements because these agreements provide a framework for future sales but do not lay down precise price and quantity terms. The court notes but does not resolve the difficulty of determining the relation between Arts.14 and 55 CISG. It does, however, distinguish the framework agreement from individual sales contracts concluded in accordance with that agreement: the former is not covered by the CISG, but the latter may be. In reaching its decision, the court rejected the seller’s proposed distinction between the relational or agency provisions of the agreement and the sales provisions of the agreement. The court found the distinction untenable. If adopted, the distinction would make it difficult to conclude a framework distributorship agreement because the sales provisions would be invalidated because they did not designate definite quantities and prices. The distinction would also be unjust in the case before it because the seller would be entitled to enforce the relationship provisions (e.g., buyer’s duty to promote the seller’s products) under non-CISG law while retaining the right to terminate the sales provisions at will under the CISG. In a decision of 13 April 2004 the district court denied the Ukrainian party’s motion for certification of an order for immediate interlocutory appeal. The court rejected the argument that it had ignored the effect of Art. 3(1) CISG on the ground that the agreement in dispute was not a sale or supply contract.”

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In fact, a thorough analysis of this issue is missing from relevant case law and scholars who are in favor of the majority view. In this author’s opinion, there are some reasons to hold differently from the majority view, although one has to recognize that this is an area in which the circumstances of the particular cases could be determinative of the solutions applied.

7.2

International Distribution Contracts and the Current Application of the CISG by Case Law

One of the most important features of the CISG is that it is the law applicable to the contracts governed by it, and thus, it displaces the otherwise-applicable domestic law. CISG applicability to international distribution contracts derives from the ‘automatic application’ of the Vienna Convention as an international treaty that should be applied ex-officio by courts. This automatic application is clearly derived from Article 1.1 of the CISG, which refers to the direct and indirect application of the CISG (Articles 1.1(a) and (b)). Furthermore, the predominant view in legal literature as well as in case law is that the choice of law of a contracting state of the CISG or law of the province or territory of a CISG contracting state also means the Vienna Convention will apply.21 However, in order to see whether distribution contracts are covered, an analysis of the material scope of application of the CISG is also needed as well as a consideration of the status of this issue under both case law and scholarly writings. As mentioned before, the parties might agree on the express application of the Vienna Convention to the distribution contract (opting in). However, if there is not an opting in agreement, the issue is rather complicated due to the uncertainty in case law as to whether the CISG applies to international distribution contracts. In relation to the specific CISG case law and its application to distribution contracts, case law varies. 21 See M. Bridge, ‘Choice of Law and the CISG: Opting in and Opting out’, in H.M. Flechtner, R.A. Brand & M.S. Walter (Eds.), Drafting Contracts Under CISG, Oxford University Press, Oxford, 2008, p. 78; L. Mistelis, in S. Kröll, L.A. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck, Munich, 2011, Art. 6, para. 18; I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (CISG), Oxford University Press, Oxford, 2010, Art. 6, para. 14. In case law see, inter alia: Kantonsgericht Zug, Switzerland, 11 December 2003, available at ; Cour d’appel Paris, 6 November 2001, available at ; St Paul Guardian Insurance Company and Travelers Insurance Company v. Neuromed Medical Systems & Support, GmbH, 2002 U.S. Dist. LEXIS 5096 (S.D. N.Y.), 26 March 2002, available from ; and United States 31 January 2007 Federal District Court [Minnesota] (Travelers Property Casualty Company of America et al. v. Saint-Gobain Technical Fabrics Canada Limited). See, however, a somewhat contrary conclusion: US Federal District Court of New York, 18 January 2011 (Hanwha Corporation v. Cedar Petrochemicals).

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Some cases without further distinctions or reasoning consider that distribution contracts are outside the scope of the CISG. An example is found in the case of the High Commercial Court of Serbia, decided on 22 April 2008, where it was stated in a contract between parties located in Serbia and Slovenia that: If the legal and business relationship of the parties does not arise from the contract for the international sale of goods but from a distribution contract, the CISG shall not apply. The applicable law shall be the domestic law […].22 An important number of cases and scholars rely on the proposition that the framework distribution contract is not governed by the CISG, but the CISG does govern the individual sales contracts concluded under the framework distribution contract:23 The framework contract is to be distinguished from the individual and legally independent contracts of sale concluded under it, even if the content of these contracts is partially determined by the framework contract.24 Following on from this proposition, the application of the CISG has been rejected even when the contract was entitled ‘Sales Contract’ and a distinction has been made depending

22 Available from . 23 Perovi, 2011, supra note 19, pp. 186–187: “With regard to distribution contract, one has to distinguish between the framework distribution contract on the one side, and the individual contracts of sale concluded between the supplier and the distributor on the basis of the framework contract on the other side. The framework distribution contract which regulates the long-term relationship between the parties, which is mainly related to the rights and obligations of the parties arising from the distribution relation, in prevailing opinion is not governed by the CISG. Contrary to that, the individual sales contracts which parties conclude each time when the goods are supposed to be supplied to the distributor, may fall under the CISG, if the other requirements for application are met. Consequently, the international distribution contract is generally submitted to the different legal regimes.” 24 OLG Hamm, 5 November 1997, available from . See also OLG Koblenz, 17 September 1993: “Individual sales contracts that are concluded within the ambit of a framework sales agreement are in case of doubt subject to the CISG”, splitting obligations depending on the applicable law’, available from ; Cour d’appel de Versailles, 19 February 2004 (France); Serbia, 22 April 2008, High Commercial Court, available at ; Serbia, 13 November 2007, Foreign Trade Court attached to the Serbian Chamber of Commerce, available from ; OLG Hamburg, 15 July 2010, available at ; Cour d’appel de Reims, 30 April 2013 (France), which also considers that the CISG does not apply because of the application of Art. 3.2 CISG: “Par application de ces dispositions, les contrats de distribution, conçus pour fixer les obligations globales de livraison et d’approvisionnement (emphasis added), échappent à l’application de la Convention de Vienne”. Among the scholars, see J. Thieffry, ‘La Convention de Vienne et les contrats de distribution’, Droit et Practique du Commerce Internationale, Vol. 19, No. 1, 1993, pp. 67–68, although very critical because of the artificiality of such a distinction.

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upon the obligations of the parties. For example, it has been considered, in relation to a contract between parties located in Serbia and Macedonia for the distribution of mineral water and wooden pallets, that:25 The Arbitrator finds that there is no need to apply the United Nations Convention on the International Sale of Goods (Vienna Convention) on the basis of Article 1(1)(b) of the Vienna Convention, since the agreement of the parties, even though it is entitled ‘Sales Contract’, in fact represents a distribution contract. Under Article 10 of the Contract, [Respondent] undertook the obligation not to sell the goods beyond certain regions in Macedonia, and [Claimant] had the right to cease cooperation in case [Respondent] sold any goods outside the defined regions. Furthermore, [Respondent] was obliged to follow the realization of sales on markets which were assigned to it, and to send reports to the [Claimant] on the dynamics of sales. The case law of courts and arbitral tribunals regarding the application of the Vienna Convention shows that it does not apply to distribution contracts (OLG Düsseldorf, 11 July 1996; Metropolitan Court of Budapest, 19 March 1996), except when the dispute concerns individual sales within the distribution contract (‘Benneton II’, BGH 23 July 1997), which is not the case in the present dispute. More specifically, it has been considered that the CISG will not apply to framework agreements in which there is no specification of the goods, quantity and price on the basis of Article 14.1 of the CISG.26 Therefore, CISG does not apply to framework distribution contracts because of the lack of the essential elements (Article 14.1 CISG). United States Federal District Court of Maryland, 27 July 2011: Although distribution agreements are considered contracts for the sale of goods under Maryland’s Uniform Commercial Code (“UCC”), courts have held that such agreements are not considered contracts for the sale of goods under the CISG…. Courts interpreting the CISG have concluded that the law does not extend to agreements that create a framework for the future sale of goods but fail to establish specific terms for quantity and price (Article 14.1 CISG).

25 Serbia, 13 November 2007, Foreign Trade Court attached to the Serbian Chamber of Commerce, available from . 26 But see, to the contrary considering that CISG is applicable to international agency, distribution and franchise contracts since the Convention contains general rules for commercial contracts, R. Illescas Ortiz & P. Perales Viscasillas, Derecho Mercantil Internacional, El Derecho Uniforme, Cerasa, Madrid, 2003, p. 101. To a similar extent P. Schlechtriem, in P. Schlechtriem & I. Schwenzer (Eds.), Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd edn, Oxford University Press, Oxford, 2005, Art. 1, para. 16a.

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Therefore, if the framework distribution contract were to determine or make a determination of the goods, the quantity and the price, then the CISG would govern the entire contract.27 From the analysis of cases, two distinct situations arise. The first situation is when the framework distribution contract does not specify the goods, quantity and/or the price, and when on the basis of the distribution contract, several sale of goods contracts are concluded which contain the essential elements for the conclusion of an International Sale of Goods contract. In this first scenario, the CISG applies to the latter case but not to the former. In the second situation, a single distribution contract also contains the necessary elements for the CISG to be applicable and particularly for the formation of the sale of goods contract. In these situations, mixed contracts of distribution and sale of goods ought to be covered by the Vienna Convention as well as the successive sale of goods contracts concluded on the basis of the framework agreement. In fact, in practice, there are many distribution contracts or mixed contracts of distribution and sale of goods, whereby the obligations of the parties are built following the sale of goods scheme: the seller/principal assumes the obligations related to the sale of goods, while the buyer/distributor assumes the obligation to buy them where there is a list of goods and price. In regard to the quantity, it has to be noted that the framework contract might specify the obligations of the distributor towards the quantity of the goods, that is, minimum purchases. Depending on the circumstances, those obligations are considered in broad and general terms, while other contracts impose more specific and concrete obligations in regard to the quantity of the goods. Both types of situation might be considered, in our opinion, to satisfy the requirements of the CISG (Articles 8, 9 and 14.1 of the CISG).28 27 See Schlechtriem, in Schlechtriem & Schwenzer Commentary, 2005, Art. 1, para. 16a; and Perovi, 2011, supra note 19, p. 188, although only considering the application of the CISG rules if such rules arise from the general rules of the law of obligations. See also I. Schwenzer & P. Hachem, in I. Schwenzer & E. Muñoz (Eds.), Schlechtriem & Schwenzer: Comentario sobre la Convención de las Naciones Unidas sobre los contratos de compraventa internacional de mercaderías, Vol. 1, Cizur Menor (Navarra), Tomo I. Aranzadi/Thomson, 2011, Art. 1, para. 14. See, applying the CISG to an international exclusive distribution contract in USA without further discussion: United States 17 May 1999 Federal District Court [Louisiana] (Medical Marketing v. Internazionale Medico Scientifica), available from , where it is stated that the seller did comply with the requirements in the buyer’s country. 28 Case law is very clear: United States 10 May 2002 Federal District Court [New York] (Geneva Pharmaceuticals Tech. Corp. v. Barr Labs. Inc.), available from ; and United States 21 August 2002 Federal District Court [New York] (Geneva Pharmaceuticals Tech. Corp. v. Barr Labs. Inc.), available at . See also United States 21 July 1997 Federal District Court [New York] (Helen Kaminski v. Marketing Australian Products), available from , where it is stated that: “Distributor Agreement can be characterized as a contract for the sale of goods – that is, that it contained definite terms for specified goods”.

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In this regard, we consider the recent analysis made by the Tribunale di Forli (Italy) on 6 March 2012, to be one that ought to be considered in order to evaluate the application of the CISG to international distribution contracts. Judge Cortesi held that: The relationship in existence between the parties mirrors the scheme just presented, because Olitalia had assumed the obligation of supplying its goods to that the presenting opposing party, Zinitix, was buying and re-selling in the retail and wholesale market. Therefore, even though the majority of the interpreters of the distribution contract, in its traditional scheme, cannot be considered to be governed by the Convention […] in the case at hand, since the distribution agreement took form of a supply of goods agreement as described above, there is a contractual situation that is subject to the Vienna Convention.29 As a consequence, to the extent that the distribution contract implies the sale of goods where the goods, their quantity and price satisfy CISG requirements (Articles 14 and 55 of the CISG), the entire contract should be subject to the CISG, and thus, all the contractual obligations derived from it should be analyzed under CISG rules, including the obligations regarding exclusivity.30 Furthermore, from our point of view, the above discussion misses the essential point at stake: it is not an issue of the formation of the contract since generally the framework contract has been already concluded and the problem between the parties is in relation with the breach of the contract or its termination, but it is on the scope of the application See also the Secretariat Commentary to Art. 14 CISG, available at ; And among the scholars: P. PeralesViscasillas, ‘La formación del contrato de compraventa internacional de mercancías’, Tirant lo blanch, Valencia, 1996, pp. 304 et seq. 29 Tribunale di Forli, 6 March 2012 (Italy), English translation available from . See also, Supreme Court of Italy, 20 September 2004, available from . See, applying the CISG to a ‘Sales and distribution agreement’: Arbitral Award, T – 8/08, of the Serbian Chamber of Commerce, 28 January 2009, CLOUT No. 1020, available from . Or Corte di Cassazione, 14 December 1999 (Italy), CLOUT No. 379: “Accordingly, the decision relied on the assumption that the CISG is applicable not only to sales, but also to distribution agreements, provided that these can be construed as accessory clauses to a sale agreement”. 30 See, considering exclusivity clauses under CISG: Oberlandesgericht Frankfurt a. M., 16 September 1991 (Germany), available from ; Oberlandesgericht Koblenz, 31 January 1997 (Germany), available from (obiter dicta with comments by Prof. Koch); and Handelsgericht des Kantons Aargau, 26 September 1997 (Switzerland), available from . However, when courts have concluded that the framework contract is not governed by the CISG, the same was held for the exclusivity obligations: United States Federal District Court of Maryland, 27 July 2011, available from . See, very critical comments in regard to the interpretation and application of the CISG in light of domestic rules, the so-called ‘homeward trend’ followed by some United States Courts: F. Ferrari, ‘Homeward Trend: What, Why and Why Not’, Internationales Handelsrecht, 2009, Vol. 9, No. 1, pp. 8 et seq.

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of the Vienna Convention. This conclusion is in agreement with an international and uniform interpretation of the CISG as a general principle within the Vienna Convention that helps to achieve legal certainty for distribution contracts, and it is in line with the broad field of intended application of the Vienna Convention. To apply different laws depending on whether or not the obligations are subject to a narrow view of the sale of goods contract is not in line with the objectives of the CISG – as a uniform international law instrument – and its field of application. This conclusion is without prejudice to the applicability of the law or rules of law that might be applicable to other issues that are excluded from the scope of the CISG such as competition issues.

7.3

7.3.1

Towards an Extended Application of the CISG to International Distribution Contracts

International Distribution Contracts: Modalities

As is clear from discussions in case law about the applicability of the CISG to international distribution contracts, the distribution agreements might respond to different kinds of modalities in practice. To illustrate this point and since there is no universal definition of an international distribution contract, we will just take the modalities and definitions in the Draft Common Frame of Reference: IV. E. – 5:101 (Scope and definitions):31 (1) This chapter applies to contracts (distribution contracts) under which one party, the supplier, agrees to supply the other party, the distributor, with products on a continuing basis, and the distributor agrees to purchase them, or to take and pay for them, and to supply them to others in the distributor’s name and on the distributor’s behalf. (2) An exclusive distribution contract is a distribution contract under which the supplier agrees to supply products to only one distributor within a certain territory or to a certain group of customers. (3) A selective distribution contract is a distribution contract under which the supplier agrees to supply products, either directly or indirectly, only to distributors selected on the basis of specified criteria.

31 The work of the DCFR is derived from The Principles on Agency, Franchise and Distribution Contracts. See M. Hesselink, et al., Principles of European Law, Commercial Agency, Franchise and Distribution Contracts, Sellier, Munich, 2006.

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(4) An exclusive purchasing contract is a distribution contract under which the distributor agrees to purchase, or to take and pay for, products only from the supplier or from a party designated by the supplier. The feature common to all of the descriptive contracts is the supply of goods by one party to another who buys them.32 Therefore, the distinctive characteristic is the sale of goods. At the same time, most of the definitions, but not all, add other obligations to the parties such as the exclusivity. The obligation of exclusivity can take the form of an obligation to buy the goods only from the supplier, an obligation to sell exclusively to certain distributors that meet certain requirements, or an obligation to supply to only one distributor in a territory or to supply to a certain group of customers. The exclusivity obligation is very much interrelated with the typical obligations under the sale of goods contract and it is beneficial not only for the seller but also for the buyer, because it allows the buyer to count on a sufficient and permanent provision of goods. Furthermore, if we have regard to the more general definition contained under (1) above, which ought to be considered applicable to the rest of the modalities, the character of a long-term relationship is also established. The modalities described do not refer to other obligations that might be agreed upon by the parties, such as technical assistance, industrial or intellectual rights or the obligation to follow certain instructions from the supplier. These obligations, depending on the individual cases, might imply a greater degree of integration of the distributor into the seller’s chain to the point that a new category of contracts is proposed by some scholars, the so-called ‘netting contracts’. Under the modalities described above, the issue is whether distribution contracts are covered by the CISG. Of course, we are now referring to the most difficult cases in which the framework contract does not specify the essential elements of the contract of sale to be concluded, that is, the quantity or the price. To answer this question, it is crucial to understand that formation of the contractual issues ought not to be confused with the scope of application of the CISG. In order to see whether the CISG covers the framework distribution contract or not, further analysis is needed.

32 The definitions under (1) and (4) seem also to refer to a situation in which the distributor takes and pays for the goods instead of their purchase. For the sake of clarity in this paper, we will refer to international distribution contracts in which there is a sale of goods as defined by the CISG.

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7.3.2

Extending the Scope of the 1980 Vienna Convention on the International Sale of Goods to Framework Distribution Contracts The Sale of Goods Covered under the CISG and Its Application to Framework Distribution Contracts

The definition of a contract of sale of goods is almost universal. The vast majority of national statutes contain a definition of a contract of sale that revolves around the obligations of the parties under the contract: the seller has to deliver the goods; the buyer has to pay the price for those goods.33 The seller’s obligation is thus characterized as an obligation to give (dare) as opposed to other contracts in which the obligation is an obligation to do something (facere) as occurs with work, services or construction contracts. Distinguishing a pure contract of sale from mixed contracts, such as work or services contracts, is a highly controversial issue under many domestic legal systems, particularly when the obligations of the parties can be characterized not only as giving something but also as doing something. The definition of a sales contract under the CISG is first achieved by resorting to the provisions that typically characterize the obligations of the parties under the contract: Articles 30 and 53 of the CISG.34 Article 3(1) of the CISG35 then expands upon the traditional definition of the sales contract found under various national legal systems. Article 3(1) embraces types of contracts that would otherwise not be covered by its provisions; under

33 See Art. 1445 of the Spanish Civil Code (CC) (1888): “por el contrato de compraventa uno de los contratantes se obliga a entregar una cosa determinada y el otro a pagar por ella un precio cierto, en dinero o signo que lo represente”; Art. 1582 of the French CC (1804) and Art. 1582 of the Belgium CC (1886): “La vente est une convention par laquelle l’un s’oblige à livrer une chose, et l’autre à la payer”. Similar provisions are found in Art. 1793 of the Chilean CC (2000). Also, the obligation to transfer the property of the goods forms part of the definition in some statutes. See, for example, the Sale of Goods Act 1979 of the United Kingdom: “A contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price”, and Art. 2439 Louisiana CC: “Sales is a contract whereby a person transfers ownership of a thing to another for a price in money”. Similar provision are found in Section 433 BGB (GermanCC) (1900); Art. 1323 of the Argentinean CC (1869); Art. 874 of the Portuguese CC (1966); Art. 1470 of the Italian CC (1942); Art. 737 CC of Paraguay (1987); Art. 2248 of the Mexican CC (1928); and Art. 454.1 CC of the Russian Federation (1994). 34 This is a common understanding among the scholars: F. Enderlein & D. Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publications, New York, 1992, p. 27, and case law, see, recently, Tribunale di Padova, decisions of 25 February 2004, and 11 January 2005 (Italy); and Cour de Cassation, 30 June 2004 (France), which considered that a contract for international sale of goods existed between the parties taking into account the intention of the parties in the contract whereby the parties were named seller and buyer and that all essential elements of the contract were satisfied: price, quantity and quality. All this was interpreted in light of Art. 8 of the CISG and also in light of the obligations assumed in the contract by the parties: the delivery of the goods and the taking of them, and the payment of the price. 35 Art. 3.1 of the CISG states that: “Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.” See also Art. 6 of the 1974 UN Convention on the Limitation Period in the International Sale of Goods. The Spanish version instead of following the English text follows the French and therefore, the standard used is ‘parte esencial’ instead of ‘parte sustancial’ (substantial part) as in the CISG.

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Article 3(1) of the CISG, the obligation of the seller is not characterized solely as an obligation to give something, it also includes an obligation to do something. The Vienna Convention thus considers contracts for the supply of goods to be manufactured or produced by the seller with materials provided by the seller or by the buyer, if the latter does not provide a substantial part of the materials necessary for such manufacture or production, as sales contracts (Article 3(1) of the CISG). As has been shown, the CISG goes beyond the traditional definition of the contract of sale to adopt a wider definition,36 or a new category of contract for the sale of goods.37 What is important to point out is that the CISG might well be applied in situations where the obligations of the seller are not only to deliver the goods but also to do or not to do something. Correspondingly, the CISG might also be applied where the obligations of the buyer are not only to receive the goods and pay the price,38 as happens under many distribution contracts, where together with the obligations to deliver the goods, to receive and pay for them, the buyer assumes certain other obligations such as marketing and publicizing the goods, information duties and exclusivity obligations, or the seller also assumes exclusivity obligations or information duties, for example. In other words, so-called mixed contracts that merge different kinds of party obligations might well be governed by the CISG through the application of a unitary contractual approach; that is to say, applying the Vienna Convention where the preponderant, essential or main obligations as agreed by the parties are the delivery of the goods and the payment of the purchase price (argument ex Article 3 of the CISG). As a consequence, Article 3 of the CISG is an evidence of the fact that the CISG might be also applicable to contracts where a strong relational character is present in some distributorship agreements. In fact, the CISG has established the parameters within which modern contract law should be viewed. It has overcome the classical and traditional view of the sale of goods as being limited to the obligation to deliver and to pay that is strongly tied to a pre-industrial reality, based on an agricultural economy. The CISG vindicates the primacy of the contract of sale of goods in the economic, industrial and commercial field that has now evolved to a more complex kind of transaction. In order to determine the applicability of the CISG to an international distribution contract, there is the need to study the contractual obligations agreed to by the parties. In practice, it is observed that in many distribution contracts, the parties specifically agree 36 A. Frignani, ‘Il contrato internazionale’, in F. Galgano (Ed.), Tratto di Diritto Commerciale e di diritto pubblico dell’economía, Cedam, Padova, 1999, p. 307, considers the expansive force of Art. 3 of the CISG. 37 See F. Ferrari, ‘La vendita internazionale. Applicabilità ed applicazioni della Convenzione di Vienna del 1980’, in F. Galgano (Ed.), Trattato di diritto commerciale e di diritto pubblico dell’eonomia, Vol. 21, Cedam, Padova, 1997, pp. 103 et seq. 38 CISG-AC Opinion No. 4, Contracts for the Sale of Goods to Be Manufactured or Produced and Mixed Contracts (Art. 3 CISG), Rapporteur: Professor Pilar Perales Viscasillas, Universidad Carlos III de Madrid, para. 4.4, available from .

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on the typical obligations of contracts of sale, although certain other obligations might well exist. These include exclusivity obligations, publicity, marketing, intellectual or industrial rights and obligations, information duties, confidentiality duties, cooperation duties etc. The fact that there are obligations other than the delivery of the goods and payment of the price agreed under the contract does not mean that the whole contract cannot be governed by the Vienna Convention. This is particularly the case since the CISG, although applicable to sales contracts, contains rules that are generally applicable to any other international commercial contract, such as with the interpretation, formation and remedies rules under the Vienna Convention. It is important to mention not only the model legislative role the CISG plays in domestic, regional and international initiatives but also its analogous or supplementary application to other contracts made by courts and arbitral tribunals.39 Therefore, despite the initial impression created by the mere name of the CISG as a treaty applicable to International Sale of Goods contracts, it does also cover other types of contract that are considered to be different contractual modalities under domestic laws. The Vienna Convention itself refers to installment contracts (Article 73 of the CISG),40 to contracts for work and materials that are considered sale of goods under Article 3.1 of the CISG, and to mixed contracts of sale and services (Article 3.2). Besides these, the Vienna Convention refers to several other different obligations of the parties such as those related to industrial or intellectual rights (Articles 42 and 43 of the CISG). As a consequence, it is very simplistic to state that the CISG will only apply to an isolated contract where goods are sold at a price and that it cannot be applicable to contracts where a long-term relationship between the parties is established whereby the goods are sold and where other obligations are agreed to by the parties. Therefore, from our point of view, and absent an ad hoc international treaty dealing with distribution contracts, the CISG can and must be applied to distribution contracts. Depending on domestic law, some of these contracts are considered to be separate contracts, while in other domestic legal systems, they are considered to be integrated into the sale of goods category. Even in the former case, those domestic legal systems apply either directly or by analogy to a great number of the sale of goods rules. In this regard, scholars and case law are in agreement in considering that the sale of goods concept under the CISG is to be construed autonomously, that is, without resorting

39 See, for example, STS 30 July 2012 (Spain) that applies Art. 25 CISG to determine the concept of fundamental breach of the contract in regard to an exclusivity clause included within a franchising domestic contract. 40 The inclusion of supply contracts within the field of application of CISG is not controversial, i.e., High Supreme Court New South Wales, 30 January 2012: supply contracts of bottles (China-Australia) for 4 years. It applied the CISG without further discussion.

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framework contract is built upon the obligations to sell and buy as the core obligations of the parties under the contract. Lack of a precise definition of quantity and price has no bearing upon the scope of application, and even if those elements were to be considered essential, the fact that the contract has already been concluded, and thus an indication to be bound is clear, means the lack of specificity surrounding those elements could be seen as a modification of Article 14.1 of the CISG by virtue of Article 6 of the CISG.45

7.3.3

Analysis of the Distribution Contract between the Parties

In our view, the above analysis necessarily involves analyzing the will of the parties to determine the legal nature of the contract concluded between them. A first important element will be the very name given to the contract by the parties as it initially may reveal the will of them in their legal characterization. For example, suppose as a first approximation, as sometimes happens in practice, that the parties have referred to their contract as an ‘international sale of goods with a distribution’. The very nomen given by the parties demonstrates the greater weight who wanted to give to the contract of sale. There is no indication that it is a distribution agreement or a contract of sale and distribution, but a sale with distribution. In fact, the distribution as opposed to the one-shot sale is characterized by a situation in which the resale of goods is typical, as it is well known, resale is the basis for a commercial sale. Entrepreneurs buy to resell and thus obtain a profit on resale, or buy to include the goods in the process of production. In a distribution situation, usually a greater stability in the contractual relationship between buyer and seller is observed, for its durability,46 the existence of agreements of exclusivity, which are not, however, essential in a distribution contract,47 and relative collaboration with mutual obligations between the parties, which provides the important data that it is in many situations an intuitu personae relationship.48 All the above, however, do not change the fact that distribution contracts are based on a sale, and furthermore, those characteristics are not incompatible with a sale of goods contract.

45 Perales Viscasillas, 1996, supra note 28, pp. 348 et seq. Generally, for the flexible requirements of CISG toward contract conclusion, see F. Ferrari, in S. Kröll, L.A. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck, Munich, 2011, Art. 14, paras. 24–27. 46 It is very appropriate reporting of contracts of indefinite duration, the case law of some countries, e.g. in Sweden, STS 3 November 2009, considering the particular case as a reasonable complaint within three months. See A. Rosenberg, et al., ‘International Commercial Transactions, Franchising and Distribution’, The International Lawyer, 2011, Vol. 45, pp. 200–204. 47 SAP Pontevedra, 27 February 2014 (JUR 90002). 48 C.E. Jaramillo Schloss, ‘Los contratos internacionales de distribución mercantil’, Foro de Derecho Mercantil, 2014, pp. 123–139 at p. 133.

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In distribution contracts, the obligations of marketing, distribution and development of advertising or marketing of the goods are only explained and understood in relation to the sale of the products. Therein lies the real interest of the parties to the contractual relationship, and as such, it so will have been reflected in the contract. That to increase purchases and sales, several other obligations are conveniently foreseen in the contract; again it does no blurs what is the background and nuclear importance of the contract between the parties: the sale of the goods. Therefore, in our opinion, it is important to analyze the contract to find the real intention of the parties; intent that will be examined in the light of the full contents of the contract and in light of the standard of interpretation set out in Article 8 CISG. Thus, after consideration of the covenants contained in the contract, it is evident that the parties decided to grant a preponderance importance to the obligations relating to the sale, for example, defining and developing with care obligations relating to delivery, receipt and payment of the price in the contract, it might be concluded that such obligations are the essence of the contractual relationship and that the remaining obligations are incorporated into the sale do not detract from the characterization of the contract as such sale subject, therefore, to the CISG. To this end, a relevant index may be the price structure under the contract, for example, if the price is not broken down according to different obligations of the parties but all are unified under a single price. After analyzing the contract and therefore considering the will of the parties in their clauses, the intent of the parties might be that all the obligations (development of the market, publicity etc.) ought to be dependent of the sale of goods and thus a unitary approach of the Contract as a whole as a sales Contract.

7.4

The Lack of Conformity of Goods, in Particular the Breach of the Rules Established by the State Authorities in the Relevant Market

Among the various issues raised by distribution contracts under the CISG, we have chosen to analyze the failure of the principal or grantor in relation to the requirements requested by the authorities of the country aimed at preventing the sale of an illegal product in the market. Suppose, for example, that in an exclusive distribution agreement in which the distributor has the exclusive right to sell the products of the principal (goods sold under the brand name of the principal), there is evidence that a product is being introduced by a third party in the country where the distributor has the exclusive right to resell the goods. In the example, the product is genuinely from the manufacturer. However, the difference between the (legal and illegal) goods is that the manufacturer’s product in their own country has a

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composition, labeling and different presentation than those sold in the exclusive market. In short, the manufacturer produces the goods that are sold under the same brand, but the composition of the goods varies depending on the country of destination. In these circumstances, the third party who introduces the goods in the exclusive territory places them on the market with a false label complying with the composition that is in accordance with the exclusive territory. While usually the seller cannot prevent parallel imports, the key in order to avoid the situation described is to impose obligations to the seller or manufacturer regarding distinctness of its products whether they are to be exported and so to achieve a result whereby the product being sold in the various territories is not materially or physically identical to the one sold in the country of the manufacturer. It is in these circumstances that the authorities of the relevant market imposed on the manufacturer an obligation to differentiate the product sold in their own country so it might be distinguished to the ones to be exported. In these circumstances, if the seller refuses to distinguish the products, there would be a double breach: the obligation of exclusivity and the principle of non-conformity. Compliance with the principle of non-conformity under the Vienna Convention is examined from a dual perspective: material and legal. Material compliance means that the seller is obliged to deliver the product, ensuring the quality and quantity thereof, among other factors, as set out in Article 35 CISG. Under Article 35 CISG, in our view, there is a breach if the manufacturer (seller) does not fulfill the requirements requested by the authorities of the country aimed at differentiating the products sold; potentially, it might also be a breach of Article 42 relating to legal compliance, i.e., that the goods are not subject to rights and claims of third parties related to industrial property. Not pointless to highlight two important aspects in distribution contracts that are generally present in a variety of contracts: Firstly, distribution contracts have a clear purpose aimed at marketing the manufacturer’s products in a particular country to the point that we are not talking about a possible resale in other third countries, but a contract of sale in which the parties consider essential the distribution of the goods in a specific market. Note that the Vienna Convention excludes goods bought for personal, family or household use under its scope (Article 2 a CISG), so resale is a natural condition in the type of contracts covered by the Vienna Convention including distribution contracts to which an agreement of exclusivity is added.49 Secondly, the aim of marketing products of the manufacturer also means that products sold under the brand must meet the requirements established by the authorities of the country of destination. And this rule will be the result of both the contract between the parties as well as to the application of the Vienna Convention, as we shall see.

49 The resale is basic: Schwenzer, in Schwenzer & Munoz, 2011, supra note 27, Art. 35, para. 14.

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In light of this, it is usually essential to the obligations assumed by the parties under a distribution agreement to resell the goods exclusively in a given territory, so that the goods sold under a brand must meet the conditions in the relevant market. Thus, the express agreement of the parties to the contract defining the territory of resale avoids the questions that arise in the Vienna Convention doctrine when there is no specific agreement about who should be responsible for compliance with the standards of public law and what standards are relevant, because under the kind of contracts under consideration, generally there is an express agreement whereby the seller must comply with the public law standards in the country of destination. For this reason, there is a breach if the manufacturer does not fulfill the requirements requested by the authorities of the country aimed at differentiating the products sold and, thus, breaching also the exclusivity granted to the buyer (Articles 30, 35.1 and Article 25 CISG).50 At the same time, and if we follow a sector of the doctrine that frames the sale of goods to be used in a given country agreed or known by the seller in paragraph 2 b) of Article 35 CISG, the goods must comply also with the requirements of the destination country, i.e., the goods must be fit for any particular use agreed.51 Indeed, following the proposed example, it has been noted that the seller’s products which are subject to exclusive distribution provide a composition and labeling different from the products sold in the country of the manufacturer, and hence to prevent the entry of the illegal product into the relevant market, the authorities of that country have requested that the original product clearly states that cannot be marketed in the country of resale. These conditions affect the resale of the goods and it goes without saying that relate to the fulfillment of standards of public policy in the country where the goods have to be marketed, since it is clear that the resale of the product is only possible if all of the conditions required by the authorities are met.52 Therefore, if the seller does not cooperate in preventing 50 Thus, case law has held that the breaches arising from an agreement of exclusivity should be examined under the CISG as generally being conceptualized as a fundamental breach: Oberlandesgericht Frankfurt a.M., 16 September 1991 (Germany), available from ; and Handelsgericht des Kantons Aargau, 26 September 1997, (Switzerland), available from . See also S. Kröll, in S. Kröll, L.A. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck, Munich, 2011, Art. 35, para. 91. 51 Scholars consider these standards within the scope of Art. 35 CISG. For all: Schwenzer, in I. Schwenzer & E. Muñoz (Eds.), Schlechtriem & Schwenzer: Comentario sobre la Convención de las Naciones Unidas sobre los contratos de compraventa internacional de mercaderías, Vol. 1, Cizur Menor (Navarra), Tomo I. Aranzadi/Thomson, 2011, Art. 35, para. 17, noting that if there was no express agreement to the contract, it will be the seller who must meet the standards of public law of the country of resale when he knows the destination of the goods especially if the buyer has informed of those requirements. 52 Note that labeling can be a determinant of compliance of foodstuffs under Art. 35 CISG. See Higher People’s Court of Shadong Province, 27 June 2005 (China), Norway Royal Supreme Seafoods v. Rizhao China Ocean Food Company et al. available from ; and judgment of the Cour d’Appel de Grenoble, Chambre Commerciale, 13 September 1995, available from . In the doctrine: J.A. Tobar, La compraventa internacional de mercaderías

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the illegal resale of the product in the exclusive territory, this seriously affects the authorized resale, representing a breach of contract and that of Article 35 CISG. Certainly, the ability to resell is intrinsic to the material conformity of goods so that the restriction on resale which derives from the existence of the illegal product seriously affects the core of the finality of the goods under the contract between the parties and under principle of conformity of the goods. It is an obligation that rests exclusively with the manufacturer who is therefore bound by virtue of the contract of sale and distribution in attention to the inherent obligations of cooperation and good faith (Article 7 CISG) that also derives from long-term contracts and where a close cooperation between the parties is also established. Therefore, the seller in order to comply with the principle of cooperation should take into account the commercial purpose as derived from the contract53: the resale of the goods into the exclusive territory and the business purpose of increasing market products under the relevant territory. Conversely, in compliance with the principle of cooperation, buyers must do everything possible to sell the products in the exclusive territory. Also, as part of the principle of good faith (Article 7.1 CISG) as well as the duty to mitigate under Article 77,54 it follows that the seller’s failure to distinguish the products according to their place of resale – national territory or in the exclusive territory – is also a breach of the duty to mitigate damages, since the measures should be taken to distinguish the products are not only reasonable in the circumstances but so imposed by the authorities. The purpose for which the goods were acquired is one of the fundamental aspects that have to assess to establish a breach of the seller in cases of non-compliance especially when, unlike other international sales contracts, the parties have agreed no possible change of the destination of the goods. The principle of cooperation in international commercial contracts and even more in long-term situations demands the fulfillment of additional duties that are not always contractually expressed. To explain better, the principle of cooperation leads to understand that the contract agreed between the parties is a joint project in which both parties should strive and help each other to solve and overcome any difficulties that occur in the course y la propiedad intelectual e industrial, La Ley, Madrid, 2014, pp. 532 et seq.; and A. Martínez Cañellas, ‘Problemas jurídico-privados del contrato de compraventa internacional de transgénicos’, January 2010, Indret, pp. 8 et seq. at p. 32, available from . 53 Landgerichthof Ellwangen, 21 August 1995 available from , where the court held that “the delivery of paprika with higher levels of ethylene oxide permitted by food regulations in Germany was a fundamental breach as trade relations between the two were durable, so the selling implicitly accepted that the sale was subject to the standards of the country of the buyer”; SAP Pontevedra, 27 February 2014 (JUR 90002). More detailed: Martínez Cañellas, 2010, supra note 52, pp. 8 et seq. at p. 14; and Tobar, 2014, supra note 52, pp. 154 et seq. 54 Schwenzer, in I. Schwenzer & E. Muñoz (Eds.), Schlechtriem & Schwenzer: Comentario sobre la Convención de las Naciones Unidas sobre los contratos de compraventa internacional de mercaderías, Vol. 1, Cizur Menor (Navarra), Tomo I. Aranzadi/Thomson, 2011, Art. 77, para. 1.

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María del Pilar Perales Viscasillas of the performance of the obligations.55 Who is in a better position or has better conditions or abilities should help others to enforce or exercise their duties.56 The principle of cooperation which derives from the principle of good faith under the CISG (Article 7.1) allows the principle of conformity to be met especially when it comes to products distributed under intellectual property rights whereby both parties must cooperate to protect the brand. Only to the extent that both parties cooperate, the essential purpose and object of the contract would be accomplished.57 Indeed, and now in relation to trademark protection, it should be noted that within the set of obligations probably agreed between the parties would be the development of marketing in the country of resale, i.e., advertising the products and the manufacturer brands in the agreed territory, which also requires the buyer to immediately notify the seller of any violation of the industrial property rights. Although the illegal product is a product from the manufacturer, it does not respect the conditions of food safety and labeling required in the country where they are to be resold, and thus, it involves a trademark violation, plus of the exclusivity clause, if the seller does not prevent or put the means to prevent the illegal marketing. And to this extent, it is clear that the seller will guarantee the buyer that the goods may be resold or used exclusively in the country of destination. In this sense, it is highly likely that the buyer receives complaints or claims of its own distributors, who in turn have detected the existence of the illegal product at various points throughout the territory and in various types of retail establishments. The complaints occur when there is a confluence between products in the market that can be legally sold and the illegal products. The Vienna Convention refers to the lack of legal compliance in Articles 41 and 42 CISG by which the seller is required to deliver goods free of any rights or claims of third parties (Article 41 CISG) and specifically delivery of goods free of claims or third-party rights based on industrial property or other intellectual property (Article 42 CISG),58 and this is regardless of the conditions imposed by the authorities of the country of resale. The acts of the distributor or the manufacturer should not jeopardize the functions of trademarks (distinctive product quality, quality reporting, the hallmark of commercial origin, condenser of goodwill) to the detriment of third-party trademark proprietor or licensee.59 Hence, the

55 Tobar, 2014, supra note 52, pp. 156 et seq., p. 176. 56 Tobar, 2014, supra note 52, p. 179. 57 Indeed, it was considered that certain attitudes of lack of information, and collaboration may constitute a fundamental breach under the CISG. See, e.g., Cour d’appel, Grenoble, 22 February 1995 (France), available from . Also: Tobar, 2014, supra note 52, pp. 155 et seq. 58 Note that issues of non-conformity of the goods are to be examined case by case. For all Kröll, 2011, supra note 50, Art. 35, para. 90. 59 Cf. Tobar, 2014, supra note 52, p. 550.

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refusal of the manufacturer to cooperate in the protection of the trademark is a breach of contract and the principle of conformity of the goods under the Vienna Convention. For this purpose, it is illustrative the example provided by scholars to determine the failure of the seller under Article 42 CISG, which by nature is an abstract rule, and could potentially have an impact on the so-called ‘gray market’,60 with the understanding that under Article 42 CISG, other situations and variants also can be covered.61 Article 42 CISG potentially opens the door to the liability of the seller62: Case 1 That Involves a foreign manufacturer STI trademark licenses to a domestic US firm, which then imports and distributes the trademarked goods in the United States. The question was whether such a licensee, which may have substantial businesses paid a fee for the trademark license, then may prevent the foreign manufacturer itself or a third party from importing the trademarked goods and selling them in the United States in competition with the licensee. Congress passed section 526 to protect the US licensee in this simulation. As interpreted, the rule is that the US licensee is protected so long as she 60 This happens under the domestic law of some countries where the licensee of the trademark (distributor) may prevent parallel imports through requests made to the authorities of US customs. See D. Moura Ramos, ‘Principios sobre conflictos de leyes en materia de propiedad intelectual’, Cuadernos de Derecho Transnacional, Vol. 3, No. 1, 2011, p. 12, available from : “In the US, the import of a product manufactured allowed in abroad, although marketed with a valid trademark in US territory (called graymarket good) without the consent of this, provided that, on the one hand, foreign brand and national brand belonging to the same entity or entities subject to a ‘common controlr’ (Common control) and, second, the product is physically identical to those sold in the US under the same brand.” Similarly, more precisely P.B. Cunningham, et al., ‘Addressing Parallel Import Goods under US Law’, International Trademark Association Bulletin, Vol. 62, No. 12, 2007, p. 1, available from , referring to the trademark owner or licensee of an imported product has a physical appearance or different from brand merchandise protected material can prevent parallel imports through requests made to the authorities of US Customs. Such a rule is known as ‘Lever Rule’, which was recognized by the US Court of Appeals for the District of Columbia, in the case Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993). See, more detailed Tobar, 2014, supra note 52, pp. 552 et seq., where Dr. Tobar in his comprehensive study makes special reference to the figure of the exhaustion of trademark, parallel imports and its overlapping with the principle of conformity under CISG examining this question in various jurisdictions. 61 A.M. Shinn, ‘Liabilities Under Article 42 of the UN Convention on the International Sale of Goods’, Minnesota Journal of Global Trade, No. 2, 1993, pp. 131–132, which refers to ‘leading case’ US on imports of protected goods brands: K-Mart v. Cartier, Inc., 486 US 281 (1988), whereas gray market seller (‘gray market’) of goods is liable to the purchaser on the basis of Art. 42 CISG in the case of marketing products on US soil, as we shall see in the example that exposes the author concerned and removed from the case referred. 62 Shinn, 1993, supra note 61, p. 131, specifies that the gray market “refers to trade in goods for which the owner has licensed the trademark, copyright, patent or with respect to uncertain country clubs or other geographic areas, but are traded within which those areas outside the terms of the license. To the extent that a trademark, copyright or patent owner or licensee may prevent goods from moving into a licensed area outside of the terms of the license, the seller of gray market goods may be liable to the buyer under Article 42.”

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has independently developed goodwill in the United States-through service, warranty programs, advertising or the like. A third-party buyer of US such non-licensed goods just thus would be subject to a claim by the licensee based on the trademark license; Article 42 would give the buyer an offsetting claim against the overseas seller. Hence, when the manufacturer (seller) refuses to distinguish his products,63 this might be considered as a breach of its contractual obligations as well as of the breach of the obligations under the Vienna Convention (Article 35 CISG). Moreover, it might be considered fundamental, being a fully predictable failure by the seller (Article 25 CISG). In this regard, it is noted that the distinction of products can only come from the hand of the manufacturer and must necessarily fall on the product that is the subject of illegal export for the simple reason that the fraud consists, in the example shown, in adding a false label on the product. Hence, the imposition by the authority falls directly on the seller and is configured as an obligation to be met under the contract and under the legal and material conformity principle stemmed from the Vienna Convention (Article 35 CISG).

63 Schwenzer, “Article 35”, n. 18: “If it is released to the seller in the country in which the goods are to be used (Art. 35.2 b), then the seller must not only accommodate the characteristics required for the current use of the goods in that country, but also to observe the applicable public policy.”

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Natural Gas and the CISG*

Florian Mohs

8.1

Introduction

The 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) generally provides a sensible default sales law system for the physical trade of commodities. This view has been questioned from time to time by English scholars who argue that the CISG would play no role in the commodities sector. Their view has been formed against the practice prevalent in the trade of soft commodities where the CISG is largely excluded explicitly by the standard terms and conditions promoted by the dominant trading associations, such as the Grain and Feed Trade Association (GAFTA) and the Federation of Oils, Seeds, and Fats Associations (FOSFA). In other sectors, for example, in the physical trade of energy resources as well as metals and minerals, the trading of large volumes takes place outside the environment of a trading association. I have argued elsewhere that the CISG (combined with the International Commercial Terms 2010 [INCOTERMS 2010]) legitimately plays a significant role for such trades.1 Today, I would like to address a very specific energy resource – natural gas. The questions I am going to address are ‘can the CISG be applicable to long-term gas supply agreements’ and, ‘if it can, does the CISG fit with the specifics of the physical trade in natural gas’?

8.2

Overview

In the following, a brief overview will be given of the issues that need to be considered in determining whether the CISG can be applicable to the physical trade of natural gas. – Before looking at the CISG, the specifics of the physical trade in natural gas need to be revisited.

*

1

This article is a written version of an oral presentation given by the author at the conference on ‘35 Years CISG and Beyond’ in Basel, Switzerland, on 29 January 2015. The presentation form was kept with some supplementary information as well as references to case law and legal doctrine added. All web pages were last accessed in June 2015. F. Mohs, ‘The CISG and the Commodities Trade’, in A. Büchler & M. Müller-Chen (Eds.), FS Schwenzer, Stämpfli, Bern, 2011, pp. 1285 et seq.

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– Then, the sphere of application of the CISG needs to be considered to determine whether the Convention applies to the sale of natural gas. – Assuming the CISG can be applied to the sale of natural gas, the provisions of the CISG are reviewed to see whether the default law set out in the Convention provides for sensible solutions to legal problems that may arise in a natural gas trade. This article focusses on three issues that frequently arise in practice. – First, the provisions of the CISG on non-conformity of the goods will be analyzed to see whether they provide for sensible solutions to the legal problems caused by ‘offspec’ gas, i.e., gas that does not conform to the contractual specifications as to quality. – Second, so-called ‘take or pay’ commitments are reviewed and possible legal issues arising in connection with them are discussed from the perspective of the CISG. – Third, typical price clauses contained in agreements for the supply of natural gas and the issues that have given rise to major arbitration proceedings in the recent past are being analyzed from the perspective of the CISG. In the following, the above topics will be addressed in turn.

8.3

International Trade in Natural Gas

It is generally very difficult to describe a business to which, as a legal advisor, you are naturally an outsider. The overview of the international trade in natural gas given here is based on the limited public information available, which is mostly from major corporations involved in that sector and organizations monitoring the business, such as the United Nations Conference on Trade and Development (UNCTAD).

8.3.1

Market Characteristics

In the following, the characteristics of the market for natural gas will be described in summary to see what makes it a market distinct from other commodities markets. The first apparent feature is the great distance between the production and the consumption of natural gas. However, that feature in itself does not make natural gas distinct from other commodities which also travel far from production to consumption. The second feature is the limited possibilities to store gas. Although today, gas can be stored from a technical point of view, procuring the infrastructure to store gas is capital intensive. For long-term storage, underground reservoirs are used. For short-term storage, special tanks are being used to store gas in the gaseous state or in liquid form. Also transport by ship and truck of natural gas in the form of liquefied natural gas (‘LNG’) has become

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possible, but the cost of transporting LNG is relatively high.2 However, traditionally pipelines were necessary to transport the gas from the production site to the consumers, often spanning several transit countries, for example, from a production site in Russia to Western European markets. In 2013, world export by pipeline was 710.6 billion cubic metres, while world export of natural gas by ship as LNG was 325.3 billion cubic metres.3 Already this figure shows that LNG export is making up leeway. An overview of major gas trade flows worldwide in 2013 shows that LNG export flows from Central America to North and South America as well as to Europe, from West Africa to Europe and Japan, from North Africa to Europe and Turkey, from Dubai – the biggest player in LNG – to Europe, India, Japan, Korea, and Taiwan, from Malaysia to Korea, Taiwan, and Japan, and from Australia to China and Japan.4 The physical limitations of gas as a commodity and the demand in faraway countries have led to the development of regional markets, for example, in the UK, in Continental Europe, in the US, and in Asia. There is no world market as there is for other commodities. There is also no commodity exchange that can be used to find the right price. Because of that lack of market, natural gas prices have traditionally been linked to prices of oil products with similar consumption. Finally, the natural gas market is and has been dominated by state-owned entities on the production side and also on the consumption side in the wholesale market (i.e., the national distributors of natural gas).

8.3.2

Historic Development of the European Gas Market

As mentioned before, no world market for natural gas exists. Different regional markets have developed. Speaking about the European gas market, its development shows the following characteristics. The European wholesale market is characterized by having only few major suppliers, historically Gazprom from Russia and Statoil from Norway, both state-owned entities commanding over natural monopolies. The suppliers built the pipelines and owned them. To secure the suppliers with sufficient funds to finance the infrastructure project needed for producing the gas and for transporting it to European countries, on the one hand, and to secure the consumers with sufficient supply, on the other hand, suppliers and consumers entered into long-term contracts, often lasting for decades. The consequence of such longterm agreements is a closed market. Gas supply and gas transport were bundled. 2 3 4

A. Stanič & G. Weale, ‘Changes in the European Gas Market and Price Review Arbitrations’, Journal of Energy & Natural Resources Law, Vol. 25, 2007, p. 324 at p. 325. BP Statistical Review of World Energy 2014, available online from: (last visited May 2015). Id, p. 19.

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Gas-to-gas competition started only in the 1990s. Competing pipelines were built, and a network of pipelines developed. Between 1998 and 2009, the gas trade was liberalized in Europe by regulating thirdparty access to grid, by unbundling of supply and transport, and by founding a spot market. Today, gas hubs exist. They operate mainly as a virtual trading point for transfer of ownership of gas.

8.3.3

Contractual Framework

Considering the development of the gas market, it is apparent that long-term agreements dominated the market for decades and that they are still dominating the market today. These long-term agreements between producers and industrial consumers usually provide for yearly quantities with a set minimum of gas to be delivered and off taken. Contract clauses that provide for a so-called ‘take or pay’ commitment are standard. In essence, they provide that the industrial consumers take off the yearly minimum quantity as agreed or pay for the yearly minimum irrespective of the fact that they have not taken off the yearly minimum quantity. Long-term gas supply agreements allocate the volume risk to the buyer.5 Apart from these long-term arrangements, also one-off contracts exist, pursuant to which an industrial consumer purchases a set amount of gas for a set price.

8.4

Applicability of the CISG

Looking at the requirements of the CISG for its own application, Article 1 CISG clarifies that the Convention shall apply to sale of ‘goods’. So, the very first question is whether or not natural gas qualifies as ‘goods’. The term ‘goods’ is understood to require some physicalness.6 However, the state of aggregation is indecisive. Case law does not provide clear guidance.7 5 6

7

Stanič & Weale, 2007, supra note 2, p. 324 at p. 235. I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010, Art. 1, Paras. 16 et seq.; J. Honnold & H. Flechtner, Uniform Law for International Sales under the 1980 United Nations Convention, 4th edn, Wolters Kluwer, Austin, 2009, Art. 2, Para. 56; L. Mistelis, in S. Kröll, L. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck Publishing, Munich, 2011, Art. 1, Para. 37; U. Magnus, ‘Wiener UN-Kaufrecht (CISG)’, in J. von Staudingers, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, (Revised edition), de Gruyter, Berlin, 2013, Art. 1, Paras. 42 et seq. Cf. Supreme Court of Austria (Oberster Gerichtshof), 6 February 1996, docket number 10 Ob 518/95, CISGonline 224; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Com-

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According to Article 2 CISG, certain objects of sales are excluded from the sphere of application of the Convention. Article 2(f) CISG states that “[t]his Convention does not apply to sales of electricity.” When the Convention was drafted, electricity was excluded, because it did not qualify as goods under various domestic law and the rules of the Convention were deemed unsuitable for pipeline transport.8 Historical interpretation leads to the conclusion that the sale of gas meant to be governed by the CISG: there were explicit proposals to extend the electricity exception to oil and gas, but they were rejected.9 Another historical argument is that the 1986 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods, in its Article 3, explicitly includes electricity as goods.10 With regard to gas, the Hague conference felt no need that an express statement was required.11 With regard to the increasing use of LNG globally, an interesting historical side point to be noted is that the Australian delegate to the Hague Conference stated that in Australia gas was converted into liquid on a large scale and sold in the same way as petroleum products.12 One particular problem in connection with long-term supply agreements is Article 100 CISG. According to this provision, contracts concluded prior to the entry into force of the CISG in the relevant state or states are not governed by the CISG. The relevant state or states can be the states where both parties have their respective places of business if the CISG applies by virtue of Article 1(1)(a) CISG. If the Convention does not apply by virtue of Article 1(1)(a) CISG, but by virtue of Article 1(1)(b) CISG, the relevant state is the state to which the applicable private international law rules of the forum lead. If the parties have chosen the law of a state to govern their contract, the CISG applies if it is part of the law chosen by the parties. Contracts concluded after the entry into force of the CISG in the relevant state or states are governed by the CISG. Problems may occur if the parties have amended a contract that was originally concluded before the CISG entered into force in the relevant state or states. If, for example, the price and the quantity are fixed on a yearly basis by way of contract amendment, arguably a new contract has been concluded pursuant to Article 29 CISG. Hence, the CISG could be applicable to the new/amended contract. With regard to long-term contracts regarding the supply of gas, the law applicable to the agreement could change from the year following the enactment of the CISG in the relevant state or states. merce and Industry, 19 February 2004, CISG-online 1182; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 8 February 2008, CISG-online 2102. 8 P. Winship, ‘Energy Contracts and the United Nations Sales Convention’, Texas International Law Journal, Vol. 25, 1990, pp. 365 et seq. 9 Winship, 1990, supra note 8, pp. 365 et seq.; Schwenzer & Hachem, 2010, supra note 6, Art. 2, Para. 33. 10 Available from . 11 Winship, 1990, supra note 8, at p. 378. 12 Winship, 1990, supra note 8, at p. 377.

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In conclusion, the sale of natural gas qualifies as goods under the CISG and thus can be governed by it in the same way as any other commodity, subject of course to its other own requirements for application, like the requirement that it has entered into force in the states where the parties have their respective places of business or in the state to which the applicable rules of private international law of the forum refer.

8.5

Off Spec Gas

One of the important tests to see whether the CISG is also a sensible choice for a particular type of goods is to test whether its rules on lack of conformity fit.13 Off spec gas is gas that does not conform to the contract. Often the contract will set out the specifications of the gas. If the contract is silent, Article 35 CISG applies. One of the basic requirements that applies even if the contract in question is silent is that natural gas needs to be transportable. Off spec notice requirements contained in the contracts are to be considered against the background of the default law system provided by Articles 38, 39, and 44 CISG. Remedies of the buyer are usually restricted by agreement to rejection, repair, and damages for delay. Rejection rights of the buyer are to be set out explicitly in the contract. There is no reason why quality disputes regarding natural gas could not be solved in application of the CISG. To the extent that the contract in question is silent, the CISG provides a sensible default sales law system to determine whether the gas delivered conforms to the terms of the contract and, if not, what remedies are available to the buyer.

8.6

Take or Pay Clauses

In long-term gas supply agreements, a buyer usually undertakes to pay for a minimum quantity of gas per year, irrespective of whether or not the buyer offtakes enough gas. Although the main commercial idea being always the same, the specific structure and content of such clauses may vary significantly from one contract to another. In particular, relevant for the issues discussed below, in some cases, the buyer may be allowed to make up on a missed minimum offtake in the following year (or other agreed-upon time period). All questions of contract interpretation of take or pay commitments are governed by the CISG (Articles 8 and 9 CISG). Being an issue of contract interpretation, the classification of the clause as buyer’s right to optional performance (pay instead of take) or as seller’s remedy for breach of contract (failure of buyer to offtake minimum quantity) is also gov13 See Schwenzer & Hachem, 2010, supra note 6, Art. 1, Para. 16.

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erned by the CISG. Most domestic laws seem to qualify take or pay clauses as a right to alternative performance, in particular with regard to the use of such clauses in the energy sector in general and the gas sector in particular.14 The purpose of this qualification is obvious. Qualified as the right to alternative performance, take or pay clauses are valid and enforceable under most domestic laws, while qualified as a remedy for breach of contract, take or pay clauses would fall under the mandatory bar to penalties under common law or mandatory reduction mechanisms under civil law. The arguments advanced in favour of qualifying take or pay clauses as a right to alternative performance seem legalistic. Under common law, it is argued that take or pay clauses would not allow specific performance claims while, under civil law, it is argued that take or pay clauses would not protect the performance of the contract.15 In any event, the CISG cannot bar applicable domestic law from raising validity concerns against take or pay commitments, viewing them as a penalty or liquidated damages clause or as anticompetitive (Article 4 CISG).

8.7

8.7.1

Price Clauses

Introduction

Price clauses have been the focus in recent gas arbitrations.16 Long-term gas supply agreements usually foresee clauses that provide for an automatic adjustment of the price. These price formulas are used to calculate the gas price which is usually invoiced on a monthly basis, so that the contract price fluctuates in accordance with market movements.17 Although the main commercial idea being always the same, the specific structure and content of such clauses may vary significantly from one contract to another. In addition to the automatic adaption of the contract price to the market price, longterm gas supply agreements often foresee clauses pursuant to which the parties are obliged to review the price formula and, if the price formula no longer reflects the market, to renegotiate it. If ultimately negotiations fail, such disputes regarding the adaptation of the price formula can go to arbitration.

14 P. Hachem, Agreed Sums Payable Upon Breach of an Obligation, Eleven International Publishing, Den Haag, 2011, pp. 152 et seq. 15 Hachem, 2011, supra note 14, p. 153. 16 Stanič & Weale, 2007, supra note 2, at pp. 324 et seq. 17 Stanič & Weale, 2007, supra note 2, at pp. 326 et seq.

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8.7.2

Automatic Adaption to Market Movements

In the European market, the gas prices in long-term supply agreements have for a long time been pegged to the price of competing energy sources, such as oil products (mainly gas oil, low-sulphur fuel oil), but also coal or electricity.18 Today, approximately 44% of the gas consumption in Europe is priced on a gas-on-gas competition basis, but 51% is still oil indexed. In other markets, price reference points do exist, for example, in the US the Henry Hub, in the UK the NBP, and in Japan the LNG spot.

8.7.3

Review and Renegotiation Disputes in Europe

Four major changes occurred in the European gas market that led to a series of review and renegotiation disputes. First, the demand in gas has increased, relentlessly since the 1960s and steeply since the 1990s.19 Second, the price of oil had increased from 2004 until fourth quarter of 2014.20 Third, the European market has liberalized: third-party access to the grid, the unbundling of companies that offered the import, transport, and distribution of gas, and the free entry into national gas markets.21 Fourth, the cross-Atlantic LNG trade has increased by which the price of the Henry Hub became a reference point also for some European traders.22

8.7.4

Issues of Contract Interpretation

From a legal perspective, almost all issues to be determined in connection with gas price disputes concern either questions of contract interpretation (legal assessment of the wording of the review clauses and their application to the facts that gave rise to the dispute) or factual questions that usually require expert evidence in the form of market analyses and quantitative assessments. For example, the parties may dispute the geographical or sectoral scope of the term ‘energy market of the buyer’ to allege that a changed circumstance has triggered the price review clause.23 Whether the CISG or any domestic legal system applies to the issues of contract interpretation is often not decisive to the outcome of a case, at least if the competing law allows for the interpretation of the contract in a modern and fair way as does the CISG.

18 19 20 21 22 23

Stanič & Weale, 2007, supra note 2, at p. 327. Stanič & Weale, 2007, supra note 2, at p. 330. Stanič & Weale, 2007, supra note 2, at pp. 330 et seq. Stanič & Weale, 2007, supra note 2, at pp. 331 et seq. Stanič & Weale, 2007, supra note 2, at pp. 332 et seq. Stanič & Weale, 2007, supra note 2, at pp. 334 et seq.

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If the CISG applies to a given gas supply agreement, contract interpretation is governed by the Convention itself.24 The CISG sets out a modern framework for contract interpretation. Article 8(1) CISG provides the principle of subjective interpretation.25 Although the wording of the article directly addresses communications by one party, it is unanimously held that it also applies to contracts. Accordingly, the common intent of the parties determines the content of the contract.26 If the common intent of the parties cannot be established, as is often the case in practice, an objective interpretation comes into play.27 Pursuant to Article 8(2) CISG, the contract is then to be interpreted according to the understanding that a reasonable person would have had in the same circumstances.28 Article 8(3) CISG, which applies to both a subjective interpretation under paragraph (1) as well as an objective interpretation under paragraph (2), clarifies that all circumstances need to be taken into consideration, also the negotiations between the parties, as well as the parties’ subsequent conduct.29

8.7.5

Changed Circumstances and Hardship

The contractual price review clauses are meant to provide a framework for the parties to solve a dispute regarding an unforeseeable event. In gas price disputes, the questions might arise whether the review mechanism provided for by the long-term gas supply agreement is the exclusive remedy for the parties or whether they may resort to other remedies provided by the applicable law. One of the remedies a party may resort to is the principle of clausula rebus sic stantibus. Under most domestic laws, the principle of clausula rebus sic stantibus operates as an exception to the primary principle of pacta sunt servanda. If the circumstances that the parties assumed when they concluded the contract have changed so significantly that the economics underlying the contract do not work properly any longer, the contract needs to be adjusted by agreement of the parties or, failing such an agreement, by the competent court or arbitral tribunal.

24 Schmidt-Kessel, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer: Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010, Art. 8, Paras. 1 and 3, with further references. 25 Schmidt-Kessel, 2010, supra note 24, Art. 8, Paras. 10-11, with further references; E.A. Farnsworth in C.M. Bianca & M.J. Bonell (Eds.), Commentary on the International Sales Law, Giuffrè, Milan, 1987, Art. 8, note 2.3. 26 Schmidt-Kessel, 2010, supra note 24, Art. 8, Paras. 22 et seq., with further references. 27 Schmidt-Kessel, 2010, supra note 24, Art. 8, Paras. 11, 22, 25; E.A. Farnsworth in C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law, Giuffrè, Milan, 1987, Art. 8, note 2.4. 28 Schmidt-Kessel, 2010, supra note 24, Art. 8, Para. 25. 29 Schmidt-Kessel, 2010, supra note 24, Art. 8, Para. 32; E.A. Farnsworth in C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law, Giuffrè, Milan, 1987, Art. 8, note 2.6.

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Florian Mohs In the CISG, the principle of clausula rebus sic stantibus is not explicitly regulated.30 A function similar to the principle of clausula rebus sic stantibus fulfils Article 79 CISG. According to Article 79(1) CISG [a] party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. The primary focus of Article 79 CISG is cases of force majeure, not events of hardship. This follows from the wording ‘impediment’. Nevertheless, it has been held in jurisprudence and argued in doctrine that the application of Article 79 CISG can be extended to events of hardship.31 CISG Advisory Council’s Opinion No. 7 concludes that [a] change of circumstances that could not reasonably be expected to have been taken into account, rendering performance excessively onerous (‘hardship’), may qualify as an ‘impediment’ under Article 79(1). The language of Article 79 does not expressly equate the term ‘impediment’ with an event that makes performance absolutely impossible.32 Hence, if in events of hardship, Article 79(1) CISG is applied, a rather strict standard follows, because the hardship event needs to equate an impediment.33 Arguably, the CISG fosters the performance of the contract under the agreed-upon terms given that, compared to other laws, it arguably applies a rather strict standard to challenges on the basis of hardship.

8.8

Conclusion

The CISG provides a sensible and reasonable default sales law system for trading natural gas internationally. Articles 8 and 9 CISG set out reasonable and modern standard for contract interpretation, and matters of contract interpretation have been at the centre of the price review gas disputes. 30 The UNIDROIT Principles of International Commercial Contracts provide explicitly for remedies in case of hardship, see Arts. 6.2.1 et seq. PICC. 31 See Schwenzer & Hachem, 2010, supra note 6, Paras. 30 et seq. with further references. 32 CISG-AC Opinion No. 7, Exemption of Liability for Damages under Article 79 of the CISG, Rapporteur: Professor Alejandro M. Garro, Opinion 3.1. 33 See Schwenzer & Hachem, 2010, supra note 6, Paras. 30 et seq. with further references.

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The CISG (providing the remedies) interacts well with the INCOTERMS (providing the duties), which is of special importance for one-off contracts involving the shipment of LNG. In long-term contracts, Article 79 CISG provides a rather strict standard to events of hardship, which fosters the principle of pacta sunt servanda and ensures performance under the agreed-upon terms.

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The CISG and Statute of Limitations*

Pascal Hachem The relationship of the CISG and the statute of limitation remains of great interest to both scholars and practitioners. The questions relevant in this context are academically interesting and practically of immediate consequence to the outcome of a case. Given the number and types of questions, however, the better way to summarize this topic is to acknowledge that here scholar’s heaven is practitioner’s hell. This presentation consists of four parts. At the outset, I shall make some general remarks and recall the time barriers to claims and the exercising of rights that the CISG itself establishes, although, of course, these are not statutes of limitation. In the second part, I will briefly address contractually limitation periods as are frequently found in commercial contracts focusing on their incorporation into the contract and the determination of their validity. In the third and largest part, I will turn to those questions that continue to create legal uncertainty. In particular, this concerns the question as to the law applicable to the limitation of actions and the choice of the applicable within the applicable law. In the fourth and final part, I will make some remarks on the frequently discussed issue of coordinating the statute of limitation with the notice requirement under the CISG.

9.1

General Remarks

The CISG does not establish a statute of limitations.1 None of the time barriers the CISG establishes to claims or the exercising of rights qualifies so. Nevertheless, for practitioners, it is not the classification of the time barrier that is relevant, but rather the observance of the requirements they establish. The non-observance of these requirements will axe claims or the exercising of rights thus rendering all issues of statute of limitation moot. I shall only briefly, and for the sake of completeness, recall these time barriers. I will not dive into the various disputes regarding general phrasings such as ‘reasonable time’ etc., writings on these topics are abundant.

* 1

As this contribution is based on a presentation, the colloquial style was maintained and merely basic references were added. All webpages were last accessed in July 2015. Instead of all: I. Schwenzer, ‘Art. 39, Para. 28’, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, The UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford, Oxford University Press, 2010. For details see D. Huser, The Appropriate Prescription Regime for International Sales Contracts in International Commercial Arbitration, Basel, Dr. Daniel Huser, 2014, pp. 124 et seq. and based on the drafting history pp. 131 et seq.

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The most famous and most heavily discussed time barrier the CISG establishes is the notice requirement in Articles 38–40, 43, 44 CISG. Article 39(1) CISG requires the buyer to notify the seller of any non-conformities within a reasonable time from when it ought to have discovered the non-conformity. It appears that for durable goods, a basic rule of one month is now accepted,2 for perishable goods, much shorter periods may apply. This relative period in Article 39(1) CISG is capped by a cut-off period of two years from the time of handing over of the goods to the buyer. Delivery in and of itself, for example, where it is competed by handing over the goods to the first carrier, does not trigger the period. The consequences of non-observance of the notice requirements are drastic in that according to the plain wording of Article 39(1) CISG “the buyer loses the right to rely on the lack of conformity”. Hence, it loses all remedies for non-conformities for which no notice was given to the seller. For legal defects under Articles 41 and 42 CISG, the notice requirement in Article 43 applies. The drastic consequences of the failure to give notice are only mitigated to the benefit of the buyer, if the requirements of Article 40 CISG or Article 44 CISG are met. Less prominent and less – but still significantly – harmful are the time barriers of the CISG applicable to the claim for delivery of substitute goods (Article 46(2) CISG) and the claim for repair (Article 46(3) CISG). The buyer must demand substitute delivery or repair either in conjunction with the notice of defect under Article 39 CISG or within a reasonable time thereafter. Similarly, exercising the right to avoid the contract under Articles 49(1), 64(1) and 73(2) CISG is subject to specific time barriers. These generally require the obligee to declare avoidance of the contract (Article 26 CISG) within a reasonable time following one of the events listed in the respective provisions. These are fairly detailed and would warrant separate analysis. This, however, is not within the scope of this presentation. In all of these cases, failure of the obligee to comply with the requirements the CISG itself establishes on the timeline render issues relating to the statute of limitations irrelevant as the obligee’s non-compliance may already have effectively precluded it from asserting all or at least some of its claims and rights. From a practical point of view, analysis of timerelated issues in a given case should therefore not move too hastily to the questions regarding the statute of limitations.

2

See for instance Bundesgericht, 18 May 2009, CISG-online 1900; Bundesgerichtshof, 3 November 1999, CISG-online 475; I. Schwenzer, supra note 1, Art. 39, Para. 17; S. Kröll, ‘Art. 39, Para. 86’, in S. Kröll et al. (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG) – Commentary, Munich/Oxford, C.H. Beck/Hart Publishing/Nomos, 2011; L. Marti-Schreier, ‘Art. 39, Para. 13’, in C. Brunner (Ed.), UNKaufrecht – CISG, 2nd edn, Berne, Stämpfli, 2015.

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9.2

The CISG and Statute of Limitations

Contractually Agreed Limitation Periods

As the CISG does not itself establish limitation periods, rules outside of the CISG apply. The first source to look to is the contract between the parties. The parties may have agreed on one overall limitation period applicable to all claims out of or in relation to the contract. It is quite clear that nevertheless the scope of that period may still require interpretative efforts. However, the parties may well have agreed on different limitation periods with different lengths depending on the type of breach triggering the respective claim or right. This may often be observed in contracts for the sale of software yet to be developed and programmed by the seller, or in contracts for the sale of machines with additional obligations or in contracts for the sale of entire production lines. Where the parties have established limitation periods in their contract, these may have been individually negotiated or have become part of the contract by way of incorporation of standard terms. Furthermore, in many trades, industry organizations have developed model contracts or model standard terms that contain provisions on the statute of limitations.3 These may – again – have been incorporated under the principles of incorporation of standard terms or may qualify as trade usages under Article 9(2) CISG. There is no dispute, at least there should be no dispute, that questions regarding the incorporation of contractual provisions on the statute of limitation are governed by Articles 14–24 and 29 CISG. Likewise, there can be no reasonable doubt that Articles 8 and 9 CISG govern the interpretation of the so incorporated clauses, where interpretation is necessary, for instance, where there is doubt as to the scope of a contractually agreed upon limitation period. With regard to the validity of contractually stipulated limitation periods, it is clear that by virtue of Article 4 sentence 2(a) CISG, this question is outside of the scope of the CISG. It is therefore necessary to consult the applicable (domestic or uniform) law. To determine, which law is applicable to the question of limitation of actions under conflict of laws rules is a difficult topic an in its breadth out of the scope of this presentation and even more so in this context. Suffice it to say, that there are restrictions to the parties’ freedom to establish limitation periods in their contract both at the domestic as well as at the international level. At the level of uniform law, Article 22(1), (2) of the 1974 Limitation Convention prohibits any contractual modification of the four-year period established by the Limitation Convention in Article 8 except for its extension by the obligor. Among the uniform projects, the 2010 UNIDROIT Principles of International Commercial Contracts (PICC) are more permissive than the Limitation Convention. However, Article 10.3 PICC does not allow reducing the general three-year period (Article 10.2(1) PICC) to less than one year and

3

For example, the ‘S 2012 General Conditions for the Supply of Mechanical, Electrical and Electronic Products’ prepared by the Organisme de Liaison des Industries Métalliques Européennes (Orgalime).

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does not allow extending it beyond ten years. The same provision prohibits that the maximum limitation period of ten years (Article 10.2(2) PICC) is reduced to less than four years or extended beyond 15 years. At the domestic level, for example, Article 129 of the Swiss Code of Obligations (SCO) does not allow for any modification of the general limitation period for contractual claims of ten years (Article 127), which applies to cases of non-delivery, also where the CISG applies. In commercial settings, the parties may generally modify the two-year period applicable to cases of non-conformity (Article 210 SCO). However, the Swiss Supreme Court does not allow modifications where the modification in question would disproportionately disadvantage the co-contractant.4 This restriction to freedom of contract envisages a reduction of the default period. On the other hand, the Swiss Supreme Court also does not allow extending the limitation period applicable to non-conformities beyond ten years.5 A further example here is UCC § 2-725(1) in the USA. This provision establishes a limitation period of four years, which the parties may reduce by agreement to one year (not less) but may not extend. Whether the parties may accommodate restrictions on their freedom to contractually determining the length of the limitation period by modifying the starting point or trigger for the period to run is a different question and again answered differently by legal systems. There are at least significant risks involved. Such agreements might not be regarded as tolling agreements or similar concepts, but as simple circumventions of mandatory law. For example, at the international level, Article 9(2)(b) of the 1974 Limitation Convention explicitly prohibits to state in an arbitration agreement that the limitation period will not commence before an arbitral award has been rendered.

9.3

Default Rules

If the parties have not contractually agreed on rules govern the limitation of actions and have not agreed on the statute of limitation, the second source is the applicable default law. Here, several questions arise, all of them complex and from a practitioner’s view disturbingly unsettled. In particular, determining the applicable law in itself is a difficult exercise. Furthermore, once the applicable law has been determined, that law may establish more than one limitation period thus raising the question which one to pick. Finally, there may be difficulties in coordinating the statute of limitation with the notice requirement under the CISG.

4 5

Bundesgericht, 21 September 1982, BGE 108 II 194, 196. Bundesgericht, 8 March 1973, BGE 99 II 185, 189.

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9.3.1

The CISG and Statute of Limitations

Applicable Law

9.3.1.1 Determining the Applicable Law Determining the law applicable to the limitation of actions in an international environment is one of the persistent topics in comparative law and considered one of the classic dividing lines between Civil Law and Common Law jurisdictions. Civil Law jurisdictions traditionally consider statutes of limitation as matters of substantive law.6 Consequently, courts in these jurisdictions look to the law applicable to the contract as the lex causae to determine whether an action or the exercising of a right is time barred. On the other hand, Common Law jurisdictions classify the limitation of actions on the timeline as procedural subject matters.7 Hence, courts in these jurisdictions look to the lex fori to resolve them. The debate is obviously far more complex and cannot be reported here. This dispute continues to be of relevance also in the sphere of arbitration where the same subject matter boils down to lex causae versus lex arbitri.8 There are, however, good arguments based on the differences in function between the lex arbitri and the lex fori that the classification of issues relating to the statute of limitation as procedural is not called for by the lex arbitri and that in arbitration the lex causae generally applies to these questions.9 Independent of whether the Civil Law or Common Law position is preferred, it is evident that there is a significant degree of unpredictability involved when it comes to determining the law applicable to the question of limitation of actions. It should be remembered that the outcome of this issue might also lead to quite different results in terms of the validity of contractually agreed upon limitation periods. To some extent, the parties are in a position to mitigate the legal uncertainty produced by the debate about the classification of issues relating to the statute of limitation. For instance, where the parties agree to state court litigation, the choice of the forum at the same time predicts, whether the court will apply the lex causae or the lex fori. However, experience shows that parties rarely have such conflict of laws issues on their mind when drafting forum selection clauses. A further possibility for the parties to simplify matters is the use of a choice of law clause. Yet, there remain uncertainties. Parties expect that a choice of law clause secure the application of the law chosen to all issues not within the scope of the CISG. At least in arbitration, this expectation should be respected and independent of the classification of 6

7 8 9

I. Schwenzer, P. Hachem & C. Kee, Global Sales and Contract Law, Oxford, Oxford University Press, 2012, Paras. 51.04 et seq.; D. Huser, supra note 1, p. 17; I. Schwenzer & S. Manner, ‘The Claim is Time-Bared: The Proper Limitation Regime for International Sales Contracts in International Commercial Arbitration’, Arbitration International, Vol. 23, Issue 2, 2007, p. 293, at p. 296. Id. See on this topic D. Huser, supra note 1, pp. 65 et seq. See D. Huser, supra note 1, pp. 74 et seq., 97; Schwenzer & Manner, supra note 6, p. 304.

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questions relating to the statute of limitation as substantive or procedural, the law chosen should apply also in this respect.10 However, unfortunate as it is, risk remains that a court or arbitral tribunal considers the classification of issues relating to statute of limitation independent from choice of law clauses. Even if not, a court or arbitral tribunal might interpret a choice of law clause as relating to substantive law matters only. This leads back to the problem that a court classifying issues relating to statute of limitation as procedural matters might find that the choice of law clause did not cover procedural but only substantive issues. It is furthermore conceivable, that in such circumstances, it may even be held that choosing between a substantive law rule and a procedural rule is not even possible by virtue of a choice of law clause. Nevertheless, use of a choice of law clause increases the chances that the chosen law will govern all issues not addressed by the CISG as this is the clearly communicated expectation by the parties. 9.3.1.2

Examples of Potentially Applicable Rules

9.3.1.2.1 International Level At the international level, specific uniform law on the limitation of actions exists in the form of the 1974 Limitation Convention. The Limitation Convention pre-dates the CISG by six years. However, it is generally regarded as a ‘sister convention’ to the CISG and has been modified by way of protocol in the course of the Diplomatic Conference on the CISG in Vienna in 1980 to ensure compatibility of both sets of rules.11 The Limitation Convention currently has 29 contracting states.12 Save for the USA, the leading trading nations have not (yet) become contracting states. The severe limits imposed on party autonomy in determining the length of the limitation period in Article 22(1) might be one explanation. Where applicable, Article 8 Limitation Convention provides for a limitation period of four years from the date at which the respective claim accrues. Details on the accrual are set out in Articles 9–12 Limitation Convention. The PICC 2010 may be applicable in arbitral proceedings by choice of the parties or in state court litigation where the applicable conflict of laws rules respect the choice of ‘rules of law’ and the parties have chosen the PICC. If applicable, Article 10.2(1) PICC provides for a general limitation period of years from the date of constructive knowledge of the possibility to exercise a right. This relative period is capped by a cut-off period in

10 I. Schwenzer & S. Manner, supra note 6, p. 293, at p. 304. 11 See M. Müller-Chen, ‘Introduction to Limitation Convention, Paras. 1 – 3’, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, The UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford, Oxford University Press, 2010. 12 Continuously updated list of contracting states is available from .

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Article 10.2(2) PICC of ten years from the date at which the relevant right could have been exercised. 9.3.1.2.2 Domestic Level At the domestic level, the divergences between individual legal systems are striking. Under domestic Swiss law, the – mandatory (Article 129 SCO) – limitation period for general breach of contract, which includes cases of delay, is ten years (Article 127 SCO). There are certain modifications established in the surrounding provisions, in particular when it comes to recurring performances (Article 128 SCO). On the other hand, the – permissive – limitation period for non-conformities is two years from the date of handing over of the goods to the buyer. In England, Section 5 Limitation Act 1980 provides for a period of six years from the date of the accrual of the action. In the USA, UCC § 2-725(a) establishes a limitation period of four years from the date of accrual. Details on accrual are set out in paragraph 2 of that provision. In Brazil, the general limitation period, which includes delay and hence the claim for specific performance, is ten years, while Article 445 CC establishes a period of 30 days from delivery and 180 days from delivery for hidden defects, respectively.

9.3.2

Choosing among Several Limitation Periods

9.3.2.1 General Legal systems differ with regard to the number of limitation periods they establish for actions based on contracts. For example, the Section 5 of the English Limitation Act 1980 provides for an overall period of six years for actions based on simple contract. Similarly, in the USA, UCC § 2-725 establishes an overall period of four years for ‘[a]n action for breach of any contract of sale’. In contrast, Civil Law jurisdictions typically operate with a multitude of limitation periods, distinguishing claims based on general breach of contract (typically including the claim for specific performance) and claims based specifically on non-conformity of the goods. Within both categories, further subcategories may exist establishing specific periods. For example, under domestic Swiss law, general contract law distinguishes one-off transactions from contracts with recurring performance and establishes different limitation periods. Furthermore, with regard to non-conformity, different limitation periods exist depending on whether the goods are integrated into a building or whether the contract is for foodstuffs or for cultural items. At the international level, the 1974 Limitation Convention operates with a uniform period in Article 8. On the other hand, the PICC 2010 are close to the Civil Law concept, in that they combine a relative period and a cut-off period but follow the Common Law

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approach insofar as these periods apply to all types of claims and hence are close to the idea of an overall period indiscriminate of the type of breach. 9.3.2.2 Practical Difficulties As a result of the above, once the applicable law has been determined, the question might arise, how to choose between the various limitation periods the applicable law establishes. I will give just two examples to illustrate the practical problems and potential differences in outcomes. 9.3.2.2.1 The Forklift Case Take as a first example the Swiss forklift case.13 Domestic Swiss law was applicable here, but the basic fact pattern is useful for our purposes here. The contract was for the sale of a used forklift. The contract had called for automatic transmission. When the seller delivered the forklift, it turned out that that it had a manual gear shift. Clearly, under Article 35(1) CISG, the forklift delivered did not match the contractual requirement and hence the forklifted delivered is non-conforming, thus triggering the buyer’s remedies for non-conformity. However, under domestic Swiss law, the Swiss Supreme Court held that the case was not about non-conformity but rather about non-delivery and hence about delay. The reasoning was that a forklift with manual gear shift is not a non-conforming forklift with automatic transmission but an entirely different type of forklift. In more traditional terms, the forklift delivered was not considered a peius but was considered an aliud. The practical consequences, as far as our topic here is concerned, become obvious, when looking to the applicable statute of limitation. Had the Swiss Supreme Court found this case to be about non-conformity, the (permissive) then one-year period in Article 210(1) SCO would have been applicable. However, as the Swiss Supreme Court held this case to be about non-delivery, the (mandatory) ten-year period in Article 127 SCO was applicable. For our present purposes, it follows from this case first of all, that issue of choosing between different limitation periods within the applicable law is likely to arise, where the law applicable to questions regarding the limitation of actions is the law of a traditionally structured legal system that maintains the distinction between aliud and peius.14 Second, it follows that we need to determine, whether the distinction of aliud and peius under the applicable law is of any relevance when determining which of the different limitation periods is applicable. The CISG does not recognize the distinction of aliud and peius.15 Whenever the goods do not match the requirements of the contract, Article 35(1)

13 Bundesgericht, 5 December 1995, BGE 121 III 453. 14 See for comparative analysis I. Schwenzer, P. Hachem & C. Kee, supra note 6, Paras. 31.15 et seq. 15 Instead of all: I. Schwenzer, supra note 1, Art. 35, Para. 4.

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CISG treats these cases as cases of non-conformity. The extent of the deviation is irrelevant, no matter how blatant.16 All such deviations trigger remedies for non-conformity of the goods. At the heart of the present context therefore lies the question, whether it is of any relevance for determining the relevant limitation period that the applicable domestic law would have classified the same case differently and would have treated it as a case of general breach of contract. In other words, the question is, whether domestic law gets to reassess the case to decide, which of its several limitation periods is applicable, or whether it is bound by the classification of the CISG and must apply the limitation periods applicable to the category the CISG has determined. I am firmly of the opinion that the second solution is the correct one.17 If the CISG has decided to treat the case as a case of non-conformity, domestic law must follow suit, therefore also treat the case as a case of non-conformity, and hence apply the domestic limitation periods applicable to cases of non-conformity. My inclination is to view the case as a package and the CISG’s classification of the case as the address on the package. Domestic law, much like the post office, is not allowed to reopen the package to see what is inside but is limited to forwarding it to the address indicated on the package to the limitation periods applicable to cases of non-conformity. The only discretion domestic law retains is to choose from the various limitation periods it may have established for cases of non-conformity, for example, as under domestic Swiss or domestic German law, where there is a general limitation period for cases of non-conformity and specific periods within that category for different types of goods. Consequently, in the above given example, under the CISG, the case would be treated as a case of non-conformity, and hence under the applicable law, the limitation period for cases of non-conformity is applicable. In the case of domestic Swiss law, this would be the – permissive – two-year period in Article 210(1) SCO. 9.3.2.2.2 One of the Packaging Machine Cases For the second example to illustrate practical issues in choosing among more than one limitation period, I will use the situation underlying a CISG case decided by the Swiss Supreme Court that concerned the delivery of a packaging machine.18 In that case, the contract had called for the machine to be able to fill 180 flacons per minute but the machine fell drastically short of that rate and the buyer declared avoidance of the contract based on Article 49(1)(a), 25 CISG. In the proceedings, there was dispute between the parties, whether the buyer had given notice in time under Article 39 CISG, which limitation period was applicable, and whether the buyer had exercised its right to declare the contract avoided 16 Instead of all: Id., Para. 9. 17 Same view taken by T. Murmann & M. Stucki, ‘Art. 4, Para. 21’, in C. Brunner (Ed.), UN-Kaufrecht – CISG, 2nd edn, Berne, Stämpfli, 2015. 18 Bundesgericht, 18 May 2009, CISG-online 1900.

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within the applicable limitation period. One of the crucial issues in this case was the coordination of the domestic Swiss law limitation period for cases of non-conformity with the notice requirement under the CISG. I will get back to this issue separately in a couple of moments. For our purposes here, I wish to ignore all of the disputed points and focus on the postavoidance phase. Assume, the buyer has given notice in time, assume that the domestic limitation period for claims based on the non-conformity of the goods is applicable and assume further that the buyer in this case has avoided the contract in due time. This gets us to the phase where the parties have to unwind the contract. Under the CISG, it is common ground that upon avoidance of the sales contract, the sales contract is redirected or transformed into a new contractual relationship reversing the original obligations of delivery, transfer of title and payment.19 Articles 81–84 govern this new contractual relationship, hence there is no – really no – argument to be made that domestic law applies to the unwinding of the contract based on the notion that this was not a sales contract as required by Article 1(1) CISG for the scope of the CISG. Nevertheless, in the same way as under the original sales contract, the CISG may call upon domestic law to settle certain issues, here most importantly questions of property (Article 4 sentence 2(b) CISG).20 Among them is, again, the statute of limitation applicable to the unwinding phase. The point I wish to make here is that while the domestic limitation period(s) for cases of non-conformities applies (or apply) with regard to the question, whether the buyer has exercised its right to avoid the contract in time, it does not necessarily apply to claims that arise specifically during the unwinding phase. For example, where the seller following avoidance of the contract does not repay the purchase price, the action the buyer may take is not an action based on the non-conformity of the goods, although avoidance of the contract was based on these grounds. Rather, the claim for repayment of the purchase price is a claim for performance under the new contractual relationship and hence is subject to the domestic limitation period applicable to general claims for performance, which in Civil Law jurisdictions in particular may be significantly longer than the periods for claims based on non-conformity. The same considerations apply in the converse – though less likely – case that the buyer following avoidance of the contract fails to return the goods and the seller is forced to claim performance of that obligation. Again, this claim is subject to the domestic limitation periods applicable to specific performance claims.

19 CISG-AC Opinion No. 9, Consequences of Avoidance of the Contract, Rapporteur: Professor M. Bridge, London School of Economics, Rule 1.2 speaks of a ‘modified resale of the goods to the seller’. 20 CISG-AC Opinion No. 9, Consequences of Avoidance of the Contract, Rapporteur: Professor M. Bridge, London School of Economics, Comment 3.6.

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9.4

9.4.1

The CISG and Statute of Limitations

Coordinating Domestic Limitation Periods with Notice Requirement

The Problem

In addition to the difficulties presented so far, problems remain with regard to the coordination of domestic limitation periods and the notice requirement in Article 39 CISG. The issue – but here the dispute begins – arises (or does not arise) where the domestic limitation period is shorter than the two-year cut-off period for notice in Article 39(2) CISG. This will often be the case in traditionally structured Civil Law legal systems that typically employ very short limitation periods for claims and rights based on non-conformity.21 The buyer may in these instances have notified the seller about the defects within a reasonable time under Article 39(1) CISG and before the cut-off period in Article 39(2) CISG has run out, but its claims may already be unenforceable due to the applicable domestic limitation period. Hence, while the buyer may be in perfect compliance with the CISG’s notice requirement, domestic law may have already deprived it of its claims and rights.

9.4.2

Swiss Cases as Example and Reaction by the Swiss Legislator

Although this topic has no frequent appearance in the published court decisions and arbitral awards, it had to be addressed in particular by Swiss courts, including twice the Swiss Supreme Court. Furthermore, the issue was raised and on occasion intensively discussed in unpublished arbitral proceedings and awards. In Switzerland, the Geneva Cour de Justice22 and the Commercial Court of Berne23 had to deal with situations, where the then one-year period of domestic Swiss law had already run out on the buyer when it notified the seller about the defect but not the two-year cutoff period for notice in Article 39(2) CISG. Both courts found that it was necessary to adapt the domestic Swiss limitation period but took different approaches. The Geneva Cour de Justice extended the then one-year period under domestic Swiss law to two years from handing over of the goods, thus synchronizing it with Article 39(2) CISG. On the other hand, the Commercial Court of Berne explicitly refused to adopt the Geneva solution and

21 See I. Schwenzer, P. Hachem & C. Kee, supra note 6, Paras. 51.27 et seq. 22 Cour de Justice de Genève, 10 October 1997, CISG-online 295. 23 Handelsgericht des Kantons Bern, 30 October 2001, CISG-online 956; Handelsgericht des Kantons Bern, 17 January 2002, CISG-online 956.

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Pascal Hachem rather used a tool domestic German law had specifically established for this scenario,24 namely to move the date of commencement of the limitation period to the time of notice.25 In the above-mentioned packaging machine case, the Swiss Supreme Court26 for the first time had to address the issue but explicitly left the question open. It agreed with both lower courts that in case the domestic period conflicted with the cut-off period in Article 39(2) CISG, this would violate public international law and therefore an adaptation was necessary. However, in the case before the Swiss Supreme Court, the seller had interrupted the applicable limitation period and the buyer’s claim was therefore not time barred. The Supreme Court’s statement, that in the case before it, it did not matter, whether a two-year or a ten-year period was applied, has since been interpreted differently with regard to the question, whether the Supreme Court has thereby expressed which of the two lower courts’ solutions it favors.27 In a more recent decision, the Swiss Supreme Court faced a similar situation but again remained silent on the solution.28 It should be noted that when revising the limitation periods for cases of non-conformity, thereby extending the general period in Article 210(1) SCO to two years, the Swiss parliament29 and the Swiss government30 specifically pointed out, that this extension was also warranted on the grounds that this would finally resolve the conflict of domestic Swiss law with public international law, namely the violation of Article 39(2) CISG. Similar considerations appear to have been on the German legislator’s mind, when creating the thenexisting version of § 2 VertragsG to coordinate the then six-month limitation period of the then-existing version of § 477 of the German Civil Code (GCC) with the notice requirement under Article 39 CISG. The issue became irrelevant under domestic German law when in the course of the so-called ‘modernization’ of the domestic German law of obligations, the basic limitation period for cases of non-conformity was extended to two years in the current § 438(1) No 3 GCC.

24 Before the so-called ‘modernization’ of the law of obligations, the limitation period for claims based on nonconformity was six months according to the then existing § 477 GCC. 25 In both cases, the limitation period had run out on the buyer nevertheless and hence the cases were won by the respective sellers. 26 Bundesgericht, 18 May 2009, CISG-online 1900. 27 F. Mohs & P. Hachem, ‘Verjährung von Ansprüchen des Käufers wegen Nichtlieferung und Lieferung vertragswidriger Ware aus CISG nach internem Schweizer Recht’, 12 Aktuelle Juristische Praxis, 2009, p. 1541 at p. 1548. 28 Bundesgericht, 16 July 2012, CISG-online 2371 at E. 7.5 et seq. 29 Bericht der Kommission für Rechtsfragen des Nationalrates, Bundesblatt 2011, 2889, 2892. 30 Stellungnahme des Bundesrates, Bundesblatt 2011, 3903, 3905.

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The CISG and Statute of Limitations

The State of the Discussion and My Personal View

The majority view in doctrine shares the view taken by the Swiss courts and the Swiss legislator that there may indeed be a conflict of domestic limitation periods for cases of non-conformity and the notice requirement under Article 39 CISG that may lead to a violation of public international law.31 The – significant – minority view rejects the notion that there could be any conflict of this nature.32 This view argues that Article 39(2) CISG did not intend to provide the buyer with a minimum notification period but rather intended to only protect the seller by fixing a deadline for a notice within a reasonable time under Article 39(1). Furthermore, the minority view argues that a cut-off period to a notice requirement and limitation periods to claims and rights served entirely different purposes and hence could not be in conflict with each other. As for my personal view: I share the starting point of the majority view under the following considerations. First, I think there should be no general adaptation of the domestic limitation period, but only where the buyer has complied with its duty to give notice within a reasonable time under Article 39(1), and the cut-off period in Article 39(2) CISG has not yet run out, but the domestic limitation period has already expired. Take the situation, where due to the nature of the goods and the non-conformity, the latter was only discoverable 14 months after handing over of the goods to the buyer. A few days after its discovery, the buyer notifies the seller of the non-conformity. However, when asserting its claims based on the non-conformity, these turn out to be no longer enforceable as the applicable limitation period bars all claims already 12 months after handing over of the goods. In this case, the buyer would have complied even with the strictest interpretation of ‘reasonable time’ in Article 39(1), and since 24 months had not passed at the time of this notice, it was still possible under Article 39(2) CISG for the buyer to notify under Article 39(1). If this is the situation, I think an adaptation of the domestic limitation period is necessary as otherwise domestic law would make it impossible for the buyer to comply even with Article 39(1). Note that in my view, the necessity to adapt the limitation period does not arise from Article 39(2) CISG but from the fact that Article 39(1) CISG is rendered meaningless in the described situation. On the other hand, if in the given example the buyer has discovered the non-conformity a few days after delivery and has notified the seller within another few days thereafter, an adaptation is not warranted, if the buyer commences its legal action based on non-conformity only 14 months after handing over of the goods. Here, notice under Article 39(1) CISG remains useful to the buyer, and

31 See for an overview T. Murmann & M. Stucki, supra note 17, Art. 4, Paras. 23 et seq.; F. Mohs & P. Hachem, supra note 27, p. 1546. 32 P. Schlechtriem & U.G. Schroeter, Internationales UN-Kaufrecht, 5th edn, Tübingen, Mohr Siebeck, 2013, Para. 428.

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Article 39(2) CISG is indeed not intended to give the buyer a minimum period for commencing legal action. That is truly the task of limitation periods. Second, I think adaptation of a domestic limitation period in a true case of conflict as just described is particularly warranted, because otherwise domestic legislators could use the domestic statute of limitations to ‘correct’ the structure of the notice requirement under the CISG. For example, if any domestic legislator would find Article 39 too buyer friendly, in particular the interpretation of the term ‘reasonable time’ in Article 39(1), it could make notice under Article 39(1) CISG practically meaningless using very short limitation periods. Third, to me, Article 39(2) CISG is not the reason for why adaptation may be necessary; rather, it is preserving the buyer’s possibility to usefully comply with Article 39(1) CISG that calls for adaptation. However, Article 39(2) CISG in my view determines for how long the buyer must be in a position to comply with Article 39(1). Therefore, a practically useful notice by the buyer in compliance with Article 39(1) CISG must be possible also during the second year after handing over of the goods. Fourth, if adaptation in a true case of conflict is necessary, I favor the approach taken by the Commercial Court in Berne and by the German legislator at the time, namely to move the date of commencement of the limitation period to the date of notice.

9.5

Conclusions

At the end of my presentation, I draw the following conclusions: – The CISG itself contains time barriers for claims at various points which should not be overlooked, in particular, because a number of them receive far less attention than the notice requirement. – The CISG does not contain limitation periods. – The CISG governs the incorporation and interpretation of contractually agreed limitation periods. Their validity, however, remains subject to the applicable domestic law. – The CISG determines, whether limitation periods for non-conformity or general breach of contract must be applied by the applicable domestic law. – Determining the law applicable to the limitation of actions remains a source of great legal uncertainty that can only to some extent, but should be nevertheless, mitigated by the parties in the process of contract drafting.

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Sieg Eiselen

10.1

Introduction

The Staudinger commentary on the German private law contains a volume dedicated to key issues of the private law, entitled ‘Eckpfeiler des Zivilrechts’.1 The importance with which German law considers the law relating to standard terms is evidenced by the fact that a full chapter in this volume is devoted to this topic. As yet, it is something that is partly excluded from the scope of the 1980 Vienna Convention for the International Sale of Goods (CISG).2 In 2012, a proposal was tabled by Switzerland regarding the further development of international sales by the United Nations Commission on International Trade Law (UNCITRAL). The Swiss Proposal states:3 The global aggregate volume of trade of goods has again significantly increased over the last decade. Although modern means of communication4 facilitate access to foreign law, differences in domestic law of contracts remain a burden on international trade. International endeavours such as the 1980 Convention on Contracts for the international Sale of Goods (CISG) have greatly improved the level of legal certainty for many parties to international sale of goods contracts. However, that Convention leaves important areas to applicable domestic

* 1

2

3

4

All web pages were last accessed in June 2015. M. Coester, ‘Allgemeine Geschäftsbedingungen’, in M. Martinek (Ed.), Von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen – Eckpfeiler, Berlin, Sellier-de Gruyter, 2008, p. 160. I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford, Oxford University Press, 2010, Art. 4 Para. 38; U. Magnus, in M. Martinek (Ed.), J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen Wiener UN-Kaufrecht (CISG), Berlin, Sellier-de Gruyter, 2013, Art. 4 Para. 20; M. Djordjevic, in S. Kröll, L. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), Munich, Beck, 2011, Art. 4 Para. 25. United Nations General Assembly, A/CN.9/758, UNCITRAL 45th session, New York, 25 June-6 July 2012, Possible future work in the area of international contract: Proposal by Switzerland on the possible future work by UNCITRAL in the area of international contract law. Translated as ‘Cornerstones of the Civil Law’.

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law. Over the last 30 years, numerous endeavours have been undertaken to elaborate sets of uniform contract law on a regional scale. Yet, where successful, those efforts may have made international contracting even more complex. Having said this, they have evidenced the need for harmonization and may have cast ground work for further thought. One of the areas not covered by the CISG at present and left to the vagaries of domestic law is the issue of validity.5 This area in itself covers quite a large area of the law with a number of different issues that may be raised here.6 For purposes of this paper, the focus will be on one specific area which is of great importance and may be an issue worthwhile pursuing in the further work of the UNCITRAL, namely the control or validity of unfair or unconscionable standard terms in international commercial sales contracts. This is also an issue specifically mentioned in the Swiss Proposal.7 When dealing with standard terms, there are usually two main areas of concern. Firstly, there is the issue with the inclusion of the standard terms, which is not really a validity issue but an issue of formation and therefore covered by the general principles of the CISG already.8 This was also the topic of the CISG Advisory Council Opinion Number 13.9 The second issue concerns the material validity of standard terms. The concern is variously labelled as the validity or enforceability of standard terms based on criteria such as unfairness, unconscionability and unreasonable prejudice. Although the problem is sometimes seen as a consumer problem and therefore only controlled in the context of consumer sales, some legal systems such as the German and American legal systems do not make that distinction in itself. The validity of unfair or unconscionable standard terms in commercial contracts is also subject to some judicial control in these systems. In the harmonization of international contract law, the further question then arises whether those areas that have been excised should be tackled as a whole in one instrument

5 6 7 8

9

Staudinger/Magnus, 2013, supra note 2, Art. 4 Para. 20; Schwenzer & Hachem, 2010, supra note 2, Art. 4 Paras. 30-31. See Staudinger/Magnus, 2013, supra note 2, Art. 4 Paras. 1-5; Schwenzer & Hachem, 2010, supra note 2, Art. 4 Para. 2; Djordjevic, 2011, supra note 2, Art. 4 Paras. 1-4. UN General Assembly A/CN.9/758, supra note 3, p. 2 & p. 4, n. 4. CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG, Rapporteur: Professor Sieg Eiselen, University of South Africa, Paras. 1.1-1.4; Staudinger/Magnus, 2013, supra note 2, Art. 14 Para. 40; U. Schroeter, in Schlechtriem & Schwenzer, 2010, supra note 2, Art. 14, Para. 36; F. Ferrari, in Kröll et al., 2011, supra note 2, Art. 14 Paras. 5-6. CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG, Rapporteur: Professor Sieg Eiselen, University of South Africa.

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or whether they should be introduced piecemeal as has been the case with the United Nations Electronics Convention of 2005.10

10.2

The Standard Term Problem

It is a common feature of the modern mass production economy that contracts for the manufacturing, distribution and delivery of products and services are governed by the standard terms and conditions of one of the parties.11 Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.12 The contents of the contract may be contained not only in the part specifically negotiated and agreed on by the parties but also by reference to standard terms used by one of the parties, framework contracts, standard industry contracts or a combination of the above.13 The nineteenth-century approach to the control of contract terms was based on the idea that, as a result of the freedom of contract, parties who are of full age and sound mind will only make so many concessions in a contract as a party would hope to gain from the performance of the other party.14 In the English case Printing Registering Co. v Sampson,15 the court expressed this approach as follows:16

10 United Nations Convention on the Use of Electronic Communications in International Commercial Contracts, New York, 2010 available online from . 11 L. Raiser, Das Recht der Allgemeine Geschäftsbedingungen, Hamburg, Hanseatisch, 1935, pp. 26 et seq.; M. Wolf, N. Horn & W.F. Lindacher, AGB-Gesetz, Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen, 4th edn, Munich, Beck, 1999, Einl. Para. 1; E.H. Hondius, Standaardvoorwaarden, Deventer, Kluwer, 1978, p. 123; H. Kötz, ‘Welche gesetzgeberischen Maßnahmen empfehlen sich zum Schutze des Endverbrauchers gegenüber Allgemeinen Geschäftsbedingungen und Formularverträgen?’, in H. Kötz (Ed.) Verhandlungen des fünfzigsten Deutschen Juristentages (Band I) Gutachten, Munich, 1974, Paras. A23-24; H. Heinrichs, in P. Bassenge et al. (Eds.), Palandt Bürgerliches Gesetzbuch, 74th edn, Munich, Beck, 2015, AGB Gesetz Paras. 1-3; W.D. Slawson, ‘Standard form contracts and the democratic control of lawmaking power’, 1971, Harv LR, p. 529; K. Llewellyn, ‘The standardization of commercial contracts in English and continental law’, 1939, Harv LR, p. 701; J. Basedow, in Krüger (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch Band 2 Schuldrecht Allgemeiner Teil, 5th edn, München, Beck, 2007. 12 This definition is similar to the definition in the UNIDROIT Principles of International Commercial Contracts 2010 (UNIDROIT Principles) Art. 2.1.19(2). See, generally T. Naudé, in S. Vogenauer & J. Kleinheisterkamp (Eds.), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC), Oxford, Oxford University Press, 2009, Paras. 1-5; M.J. Bonell, The UNIDROIT Principles in Practice, 2nd edn, Ardsley, Transnational, 2006, p. 148. See also Barkhuizen v Napier 2007 (5) SA, 323 (CC), Para. 135. 13 Naudé, 2009, supra note 12, Para. 4; Bonell, 2006, supra note 12, p. 148. 14 See for instance the decision in the South African cases of Wells v SA Alumenite 1927 AD 69, p. 73, Brisley v Drotsky 2002 (4) SA 1 (SCA) and the English case of Printing Registering Co. v Sampson, L.R. 19 Eq, at p. 465. Coester, 2008, supra note 1, at p. 160. 15 Printing Registering Co. v Sampson, L.R. 19 Eq, at p. 465. 16 Id.

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If there is one thing which, more than another, public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by courts of justice. The freedom of the contract in a sense guaranteed the fairness and balancing of interest of the parties.17 Accordingly, the law only needed to intervene in the most extreme of circumstances where there has been a substantial abuse.18 The rise of mass production and the modern economy also gave rise to use of standard terms which were drafted by one of the parties and aimed at being used without individual negotiation.19 Negotiation between the parties, if any, became more and more restricted to the essential terms of the transaction such as price, quality, quantity and delivery. This was an entirely sensible development, but it did force the standard terms into the background and provided an opportunity for abuse.20 For the user, it had the advantages that the user could standardise its transactions, save on transaction costs, the standardisation of operations and dealing with risk evaluation. Much of these saved costs could then also translate into lower prices, although the correlation between price and standard terms is very difficult to gauge as price is determined by so many different factors and often more important factors such as scarcity, competition and opportunity.21 Cost only determines the minimum price that producer or seller will consider. In the German literature, this is referred to as the Rationalisierungsinteresse or rationalisation interest of the business.22 In some areas, the standard terms created new legal rules for certain industries where the otherwise applicable law did not provide sufficient solutions or where the solutions have become outdated.

17 In German law, Schmidt-Rimpler coined the term ‘vertragliche Richtigkeitsgewähr’ (‘contractual guarantee of conscionability’) – see W. Schmidt-Rimpler, ‘Grundfragen einer Erneuerung des Vertragsrechts’, AcP, 1941, pp. 130 et seq. 18 Palandt, 2015, Überblick v § 305 Para. 3; T. Naudé, ‘Unfair contract terms legislation: The implications of why we need it for its formulation and application’, 2006, Stellenbosch LR, p. 366; R. Sharrock, ‘Judicial control of unfair contract terms: The implications of the Consumer Protection Act’, 2010, SA Mercantile LJ, p. 295. 19 Barkhuizen v Napier 2007 (5) SA 323 (CC), Para. 136; G.T.S. Eiselen, ‘Die Standaardbedingprobleem: Ekonomiese Magsmisbruik, Verbruikersvraagstuk of Probleem in Eie Reg?’, 1988, De Jure, Vol. 21, p. 251; Naudé, 2009, supra note 12, p. 361. 20 Raiser, 1935, supra note 11, pp. 92 et seq.; S. Eiselen, Die Beheer oor Standaardbedinge – ’n Regsveregelykende Ondersoek (Unpublished thesis Potchefstroom University 1988), pp. 16 et seq.; Palandt, 2015, Paras. 4-6; Coester, 2008, supra note 2, at pp. 160-161. 21 Coester, 2008, supra note 1, p. 160. 22 Raiser, 1935, supra note 11, pp. 19 et seq.; Kötz, 1974, supra note 11, A 23 et seq.; Coester, 2008, supra note 1, p. 160; Palandt, 2015, Überblick v § 305 Para. 3.

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Against these definite advantages of standard terms, they also brought a number of dangers and disadvantages with them.23 The first risk was that these terms could be used to displace the existing dispositive rules of the applicable law which are generally considered providing a fair balanced solution between the interests of the seller and the buyer, with rules that are one sided and are prejudiced in favour of one of the parties.24 This is achieved by shifting the risks to the other party or creating legal uncertainty, which discourages the other party from exercising whatever rights it might have.25 The other party usually does not object to the use of such one-sided or unfair terms due to a number of reasons.26 The trouble and cost of trying to renegotiate such terms is often out of proportion to the value of the transaction or the probability that a conflict situation will arise. Where there is a disparity between the bargaining positions of the parties, there is also often a laissez faire acceptance that there is little or no chance that negotiations may lead to fairer and a more balanced set of terms. Parties also often assume that, because these terms are used by this business and accepted by all its customers, the terms cannot be that bad or one sided. The terms are often also couched in technical legal terms that are not transparent to the ordinary businessperson.27 In German law, it is accepted that the usurpation of the contractual autonomy of the parties by one of the parties provides the ground for intervention by the law, be it the courts or the legislature, to control the excesses and abuses brought about by the failure of the classical contract mechanism premised on the equality of the parties.28 As indicated above, the use standard terms give rise to two different types of legal issues – firstly, whether such terms have been effectively made part of the agreement and secondly, whether such standard terms should be valid based on their material content. The first issue deals with the formation of the contract and the consensus between the parties. Often the standard terms are not presented to the other party but are simply incorporated into the contract by a mere reference in the contractual document presented to the other part. Sometimes, they are printed on the counter side of the contractual document, or in today’s world by reference to a website, or if the contract is concluded online, by using a weblink to a webpage where the terms are available.29

23 Raiser, 1935, supra note 11, pp. 91 et seq.; Coester, 2008, supra note 1, p. 161; Eiselen, 1988, supra note 20, pp. 28 et seq. 24 Raiser, 1935, supra note 11, p. 93; Coester, 2008, supra note 1, p. 161. 25 Coester, 2008, supra note 1, pp. 160-161; Palandt, 2015, Überblick v § 305 Paras. 3-4. 26 Coester, 2008, supra note 1, p. 161; L. Raiser, ‘Vertragsfreiheit heute’, 1958, JZ, p. 7; Eiselen, 1988, supra note 20, p. 103. 27 Raiser, 1958, supra note 26, pp. 7 et seq.; Coester, 2008, supra note 1, pp. 160-161. 28 Coester, 2008, supra note 1, p. 161; Palandt, 2015 Überblick v § 305 Paras. 3 et seq. 29 CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG, Rapporteur: Professor Sieg Eiselen, University of South Africa, Comments 3.1-3.5.

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It is generally recognised that the incorporation problem is governed by the CISG and not by domestic law if the CISG is applicable to the agreement.30 There is therefore no need to expand or develop the CISG as far as this issue is concerned as all the instruments necessary for dealing with this issue are already available within the confines of the CISG. The validity issue, however, falls outside the scope of the CISG as indicated above. Article 4 of the CISG states: Article 4 This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold.

10.3

Control in German Law

The standard term problem was first addressed in Germany in the works of Raiser31 and Grossman-Doerth.32 These academic writings provided the stimulus for the courts to start

30 CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG, Rapporteur: Professor Sieg Eiselen, University of South Africa, Rule 1 and Comments 1.1-1.6. See also U. Schroeter, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford, Oxford University Press, 2010, Art. 14 Paras. 32-33; U. Magnus, in Von Staudinger’s Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze Wiener UN-Kaufrecht (CISG), Berlin, Sellier-de Gruyter, 2005, Art. 14 Para. 41; F. Ferrari, in S. Kröll, L. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the Sale of Goods (CISG), Munich, Beck, 2011, Art. 14 Para. 38; Austria, 31 August 2005 Supreme Court (Tantalum case), available from ; Austria, 17 December 2003 Supreme Court (Tantalum powder case), available from ; Germany, 31 October 2001 Supreme Court (Machinery case), available from ; Germany, 26 June 2006 Appellate Court Frankfurt (Printed goods case), available from ; Italy, 21 November 2007 Tribunale [District Court] Rovereto (Takap B.V. v. Europlay S.r.l.), available from ; the Netherlands, 29 May 2007 Appellate Court ’s-Hertogenbosch (Machine case), available from ; Switzerland, 11 December 2003 District Court Zug (Plastic granulate case), available from ; United States, Travelers Property Casualty Company of America et al v Saint-Gobain Technical Fabrics Canada Ltd, United States District Court (District of Minnesota), 31 January 2007, available from . See, however, Magnus Kommentar Art. 14 Para. 42; Schwenzer & Hachem, 2010, supra note 2, Art. 4 Para. 12. 31 Raiser, 1935, supra note 11. 32 H. Grossman-Doerth, Selbstgeschaffenes Recht der Wirtschaft und staatliches Recht, Freiburg, Wagner, 1933.

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curtailing the abuse of standard terms.33 The control of standard terms in German law began with the application first of § 138 of the Bürgerliches Gesetzbuch (German Civil Code, hereinafter BGB), which deals with transactions contrary to public policy but more often with reference to the good faith requirement of § 242 by the courts.34 Over time, this part of the law became fairly complex as the courts developed the law relating to standard terms.35 Accordingly, the legislature introduced the Allgemeine Geschäftsbedingungen Gesetz (AGBG) in 1977 to consolidate this jurisprudence as well as taking into account the academic commentary.36 Finally, the provisions of the AGBG were incorporated into the BGB itself in 2002 with the Schuldrechtsmodernisierungsgesetz.37 This was partly due to the desire to incorporate this important part of the law into the BGB itself and partly due to the requirements of the European Community Council Directive 93/13/EEC.38 This Directive required legislation dealing with unfair standard terms, but only in consumer contracts. This necessitated a more nuanced approach in the German legislation to provide for greater consumer protection.39 Initially, German law made no distinction between commercial and consumer contracts when considering the validity of standard terms.40 The AGBG contained a general clause invalidating standard terms that unfairly prejudiced the other party when considering the requirements of good faith.41 As guidelines § 9(2) determined that in cases of doubt, a term should be regarded as contrary to good faith if it materially differed from the default legal position or if reaching the key objectives of the agreement were endangered by it. Besides the general clause, the AGBG also contained a black list of terms which were regarded as invalid without any discretion42 and a grey list of terms which were regarded as prima facie invalid but could be regarded as valid depending on the circumstances.43 Similarly the relevant provisions of the BGB which now deal with standard terms also contain a general clause, a black list and a grey list of terms in §§ 305-39. However, contrary

33 Coester, 2008, supra note 1, pp. 161-162; P. Schlosser, in M. Martinek (Ed.), J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch – recht der Allgemeine Geschäftsbedingungen, Berlin, Sellier-de Gruyter, 2006, Vorbem zu § 305 Paras. 1-7; J. Basedow, in W. Krüger (Ed.), Münchener Kommentar zum Bürgerlichen Gesetzbuch Band 2 Schuldrecht – Allgemeiner Teil, 6th edn, Munich, Beck, 2012, Vor § 305, Para. 8. 34 Coester, 2008, supra note 1, p. 160; Basedow, 2012, supra note 33, MüKo Vor § 305, Para. 8. 35 Basedow, 2012 supra note 33, MüKo Vor § 305, Para. 12; Coester, 2008, supra note 1, p. 162. 36 Palandt, 2015, Überblick v § 305 Para. 1; Basedow, 2012, supra note 33, MüKo, Vor § 305, Paras. 16-17. 37 Palandt, 2015. 38 Coester, 2008, supra note 1, p. 162; Staudinger/Schlosser, Vorbem zu §§ 305 ff Para. 9. 39 Staudinger/Schlosser, Vorbem zu §§ 305 ff Para. 9. 40 In general, see M. Coester, in M. Martinek (Ed.), J. von Staudinger’s Kommentar zum BGB und Nebengesetze, Munich, Beck, 1998, ‘AGBG’, § 9. 41 In general, see Staudinger/Coester, 1998, supra note 40, § 9. 42 § 11. In general, see D. Coester-Waltjen, in M. Martinek (Ed.), J. von Staudinger’s Kommentar zum BGB und Nebengesetze, Munich, Beck, 1998, ‘AGBG’, § 11. 43 § 10. In general, see Staudinger/Coester-Waltjen, 1998, supra note 42, § 10.

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to the AGBG, only the general clause applies to all contracts, whereas the two lists only apply to consumer contracts.44 § 307 of the BGB now stipulates: Section 307 Test of reasonableness of contents (1) Provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract with the user. An unreasonable disadvantage may also arise from the provision not being clear and comprehensible. (2) An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision 1. is not compatible with essential principles of the statutory provision from which it deviates, or 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardised. (3) Subsections (1) and (2) above, and sections 308 and 309 apply only to provisions in standard business terms on the basis of which arrangements derogating from legal provisions, or arrangements supplementing those legal provisions, are agreed. Other provisions may be ineffective under subsection (1) sentence 2 above, in conjunction with subsection (1) sentence 1 above. Although § 310 excludes the black and grey list from direct application to commercial contracts, they may still be used as a guideline in the evaluation of standard terms in commercial contracts.45 The German Supreme Court has even indicated that the terms in these lists provide an indication of unfair prejudice and an infringing of § 307 in commercial agreements.46 Standard terms in the German law have been under scrutiny and the object of substantive control for more than 80 years now, and there exists a substantial body of case law and academic writing on the topic. The law is very well developed and settled despite the changes brought about by the integration of the AGBG into the BGB.47 The general trends and principles contained in the AGBG and developed in the case law have not been changed significantly in most respects. The most important change has been the importance that 44 § 310. See Palandt, 2015, Paras. 1-5; Staudinger/Schlosser § 310 Paras. 1-3; Basedow, 2012, supra note 33, MüKo § 310, Paras. 2-5. 45 § 310: Scope of application “(1) Section 305 (2) and (3) and sections 308 and 309 do not apply to standard business terms which are used in contracts with an entrepreneur, a legal person under public law or a special fund under public law. Section 307 (1) and (2) nevertheless apply to these cases in sentence 1 to the extent that this leads to the ineffectiveness of the contract provisions set out in sections 308 and 309; reasonable account must be taken of the practices and customs that apply in business dealings.” See Coester, 2008, supra note 1, pp. 162, 165; Palandt, 2015, §307, Para. 28. 46 BGH XII ZR 54/05 of 27 June 2007 NJW. 47 Coester, 2008, supra note 1, p. 162.

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the guidance function of the dispositive law has now gained. This is in the process of being refined in the case law.48 The German law accordingly provides an excellent example of how substantive content control can be implemented without disrupting commerce or causing legal uncertainty.

10.4

Control in American Law

The standard term issue was also recognised at a very early stage in American law.49 Although abuse of standard terms was at first seen as an independent problem, in time it became to be regarded as part of a bigger issue, namely the abuse of bargaining power.50 This shift brought about an assessment not only of the standard terms but also of the substantive negotiated terms of the agreement. Although Llewellyn, one of the architects of the unconscionability provisions in the Uniform Commercial Code (UCC), originally supported this view,51 he later emphasised the lack of assent and the material unfairness of standard terms as the underlying justification for controlling standard terms.52 While the drafters of the UCC were still negotiating the drafting of UCC §2-302, the Common Law unconscionability doctrine was applied in two famous cases, Campbell Soup v Wentz53 and Henningsen v Bloomfield Motors54 In both cases, the fact that one of the parties occupied a much stronger bargaining position played a decisive role. Although these cases are often mentioned in other case law, it was eventually §2-302 of the UCC that provided the necessary impetus for the development of the unconscionability doctrine in American law. §2-302(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. 48 Staudinger/Coester 1998, supra note 42, Vorbem zu §§ 307-309, Paras. 8 & 9. 49 N. Isaacs, ‘The standardizing of contracts’, 1917, Yale LJ, pp. 31 et seq.; A.T. Wright, ‘Opposition to the law of business usages’, 1926, Col LR, pp. 917 et seq.; Llewellyn, 1939, supra note 11, pp. 700 et seq. 50 F. Kessler, ‘Contracts of adhesion – some thoughts on about freedom of contract’, 1943, 43, Col LR, pp. 629 & 632; A.A. Leff, ‘Unconscionability and the Code’, 1967, 115, U Pa LR, p. 504; Henningsen v Bloomfield Motors 161 A2d 69, at pp. 86-87. 51 Llewellyn, 1939, supra note 11, p. 704. 52 K. Llewellyn, The Common Law Tradition – Deciding Appeals, Boston, Little, Brown, p. 370; See also S. Deutch, Unfair Contracts: The Doctrine of Unconscionability, Lexington, Lexington Books, 1977, p. 55; J.A. Spanogle, ‘Analyzing unconscionability problems’, 1969, 117 U Pa LR, pp. 938-939; W.D. Slawson, ‘The new meaning of contract: The transformation of contracts law by standard forms’, 1984, 46, U Pitt LR, p. 33. 53 United States, Campbell Soup Co. v. Wentz, 172 F2d 80. 54 United States, Henningsen v Bloomfield Motors 161, A2d 69, at pp. 86-87.

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(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. In the accompanying comments, it is stated that:55 The principle is one of oppression and unfair surprise (CF Campbell Soup Co v Wentz, 172 F. 2d 80, 3d Cir. 1948) and not the disturbance of allocations of risks because of superior bargaining power. This particular comment muddied the waters considerably as it became uncertain whether unconscionability by itself should be sufficient or whether something more, like uneven bargaining power, was needed to trigger the application of §2-302.56 This uncertainty caused many commentators to require this something more, and this approach was also picked up by the courts.57 This additional element eventually led to the two-pronged procedural and substantive unconscionability test.58 This approach is understandable since the unconscionability control did relate not only to standard terms but also to the material terms of the agreement. Leff’s two-pronged analysis has become the accepted manner in dealing with unconscionability under §2-302. A party relying on this provision must prove both procedural unconscionability, i.e. that there are facts that indicate deficiencies in the negotiations process, and once that hurdle has been cleared, facts that indicate that the particular term or the consequences of the contract are unfair. From the case law, a number of indications have been recognised as indicating procedural unconscionability, namely:59 a. Lack of meaningful choice;60 b. Superiority of bargaining power;61

55 1952 Draft §2-302, Comment 12. This comment is in accordance with Llewellyn’s point of view in Common Law 370. See also Spanogle, 1969, supra note 52, pp. 942-943. 56 Leff, 1967, supra note 50, p. 499; L.A. Kornhauser, ‘Unconscionability in standard forms’, 64, Cal LR, 1976, p. 1158. M.N. Browne & L. Biksacky, ‘Unconscionability and the contingent assumptions of contract theory’, 2013, Michigan St LR, p. 219. 57 R.A. Hillman, ‘Debunking some myths about unconscionability; a new framework for UCC section 2-302’, 1981, 67, Cornell LR, p. 25; Leff, 1967, supra note 50, p. 504. 58 Leff, 1967, supra note 50, p. 504. 59 See United States, Altman v PNC Mortgage, 850 F Supp.2d 1057, 2012, [56]-[57]. 60 United States, Williams v Walker-Thomas Furniture, 350 F2d 445, 1965. 61 United States, Jones v Star Credit, 298 298 NYS2d 264, 1969; Martin v Joseph Harris, 767 F2d 296, 1985, 301.

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c. Contract is and adhesion contract;62 and d. Unfair surprise.63 In practice, §2-302 has not seen the strong development that its German counterpart experienced. It is especially in regard to the question of material or substantive unconscionability that the courts have failed to provide clear guidelines, instead relying on fairly vague terms such as ‘unreasonably favourable to the stronger party’,64 ‘unreasonable or unknown terms’65 and ‘a contract so unconscionable that no decent, fair-minded person would view the ensuing result without being possessed of a profound sense of injustice’66 In general, for a contract to be considered substantively unconscionable, the terms of the contract must unreasonably favour the stronger party.67 It would seem that there is considerable resistance to applying §2-302 in a commercial context. In Mitsubishi Corporation v Goldmark Plastic Compounds Inc.,68 the court states:69 [11][12][13] A commercial contract will rarely be found to be unconscionable. Stanley A. Klopp, Inc. v. John Deere Co., 510 F.Supp. 807 (E.D.Pa.1981), aff’d, 676 F.2d 688 (3d Cir.1982). This is because the doctrine of “unconscionability is to prevent oppression and unfair surprise, not to disturb the allocation of risks on the grounds of superior bargaining power.” Jim Dan, Inc., 785 F.Supp. at 1200 (citing Stanley A. Klopp, Inc., 510 F.Supp. at 810 & § 2302 comment 1). Mere unequal bargaining power between the parties is not sufficient to make a provision of a commercial contract unconscionable. Id. And absent an allegation of fraud or incompetence, the law presumes that an individual in such a setting read and understood the provisions of the contract before agreeing to its terms. Id. Although the doctrine of unconscionability has established a better defence against unfair contracts than the pre-UCC doctrines, the lack of clear guidelines for applying the actual

62 United States, Wheeler v. St. Joseph Hosp, 133 Cal. Rptr. 775, 783 (Ct. App. 1976). 63 United States, Pittsfield Weaving v Grove Textiles, 32 UCC Rep Serv 421, 1981; United States, Rozeboom v Northwestern Bell Telephone, 358 Nw2d 241 (1984); United States, Albuquerque Tire v Mountain States Telephone, 697 P2d 128, 1985. 64 United States, C&J Fertilizer v Allied Mutual Insurance, 227 NW2d 169, 1975, 180; United States, Williams v Walker-Thomas Furniture, 350 F2d 449, 1965; United States, Germantown Manufacturing v Rawlinson, 491 A2d 138, 1985. 65 United States, Communications Maintenance v Motorola, 761 F2d 1202, 1985, 1209. 66 United States, Frank’s Maintenance and Engineering v CA Roberts, 30 UCC Rep Serv 163, 1980, 175. 67 Browne & Biksacky, 2013, supra note 56, p. 225. 68 United States, Mitsubishi Corp. v. Goldmark Plastic Compounds, 446 F.Supp.2d 378 (2006). 69 Paras. [11]-[13].

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Sieg Eiselen doctrine prevents its widespread use and acceptance.70 In addition, §2-302 is rarely used outside of consumer transaction.71 Hawkland states: One remarkable pattern has emerged from the hundred cases or so that have been decided to date under Section 2-302, and this is that the doctrine of unconscionability is not a major force in transactions between business entities. Stated conversely, the doctrine has been used almost exclusively in consumer transactions. The reasons for this phenomenon are plain. For the most part, unconscionability has to do with taking advantage of ignorant people by imposing surprise results or harsh and oppressive terms on them. Often this happens because the consumer has no “meaningful choice.” Posner gave a clear indication that the sentiment of the time is clearly against the use of the doctrine in favour of corporations72 [F]or future reference we remind Northrup and companies like it that the defense of unconscionability was not invented to protect multi-billion dollar corporations against mistakes committed by their employees, and indeed has rarely succeeded outside the area of consumer contracts. Although the doctrine of unconscionability in the American law is clearly less developed than its German counterpart, it is important to note that in principle the doctrine is available in both commercial and consumer transactions. The application of the doctrine to deal with standard terms is somewhat impeded by the fact that it is used not only in the context of unfair standard terms but also to determine the fairness of material and negotiated terms of the agreement.

10.5

Conclusion

The Swiss proposal challenges all of us, whether we agree with it or not, to consider whether those areas of international sales law which are not yet covered by the CISG should be reinvestigated and dealt with in a new instrument to be drafted by the UNCITRAL. It may be too much of a task to deal with this all at once which may impede the progress of any

70 Browne & Biksacky, 2013, supra note 56, p. 225. 71 F.J. Mootz, ‘After the battle of forms; commercial contracting in the electronic age’, 2008, 4, I/S J L Pol Info Soc, p. 271, at p. 303; J.J. White & R.S. Summers, U.C.C. § 4-9, 4th edn, Rochester, Thomson Reuters, 1995, § 4-9, at p. 237; W.D. Hawkland, Uniform Commercial Code Series Rochester, Thomson Reuters, § 2-302:6. 72 United States, Northrup Corp. v. Litronic, Ltd., 29 F.3d 1173, 1179-80 (7th Cir. 1994).

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such endeavour. In my view, it would be more productive to identify key areas which are significant and where progress is required in harmonizing the law. The brief comparative survey of the German and American law shows that there are at least two major legal systems where the control of unfair standard terms in commercial contracts is provided for in the law. As the American experience proves, any attempt to provide for control over the fairness of standard terms may prove controversial and against the tide of the time. The uncertainties that a general clause such as § 2-302 of the UCC or § 307 of the BGB may introduce may receive substantial opposition especially from common law quarters. The German experience, however, shows that it is entirely possible to introduce such controls without disrupting commerce provided that the terms are clear and there are sufficient guidelines. The control of unfair standard terms in international sales contracts may well be one of the areas that the UNCITRAL can consider taking up in their future work.

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11

CISG and the Default Interest Rate in Arbitration

Jan Ramberg

11.1

Filling the Gap in the CISG Article 78

As the United Nations Convention on Contracts for the International Sale of Goods (CISG) Article 78 does not set forth any interest rate, an applicable law would normally have to be chosen according to choice of law principles. It is true that the CISG is based on the general principle that a party affected by a breach should be fully compensated – and no more – but it is difficult to avoid choice of law on the basis of CISG Article 7(2). The very purpose of an interest rate is to base compensation on a stereotype method of compensation. It is therefore difficult to fill the gap in CISG Article 78 by a right of compensation in the form of damages. However, the party affected by a breach may ask for compensation in the form of damages when full compensation cannot be awarded by default interest.

11.2

The Variety of Options

Case law shows a considerable variety in choosing the applicable interest rate. The following choices have been made: i. the law of the country of the creditor’s place of business, ii. the law of the country of the debtor’s place of business (particularly with focus on his gain by keeping the money; cf. CISG Article 84(1) and CISG Advisory Opinion 9), iii. the law applicable in the country of the currency of payment (particularly when the law in the country of the creditor or the debtor applies the same rate irrespective of the currency), iv. the law in the country of jurisdiction (lex fori or lex arbitri), v. the rate following from an implied custom of the trade (CISG Article 9), vi. the rate corresponding to the actual costs for a loan taken by the creditor (CISG Article 74 or Article 75), vii. the market rate for loans in the currency of payment (CISG Article 76) or viii. the rate according to general principles expressed in the UNIDROIT Principles of International Commercial Contracts (UPICC) Article 7.4.9(2) reading:

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The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place, the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.

11.3

Opinion 14 of the CISG Advisory Council

Although Opinion 14 of the CISG Advisory Council hopefully will provide appropriate guidance when suggesting the law in the creditor’s place of business, there will be cases where the creditor becomes over- or undercompensated. In the latter case, he may be compensated by damages according to CISG Article 74 – or possibly Articles 75-76 – but overcompensation of the creditor to the detriment of the debtor may be difficult to solve.

11.4

The Dilemma of Overcompensation

When the law of the creditor’s place of business provides for an interest rate without distinguishing between different currencies of payment, the risk for such overcompensation is apparent. I have been involved as arbitrator in a case where Swedish law was chosen and, as a consequence, the arbitrators had to apply the interest rate according to the Swedish Interest Act (at that time the discount rate +8%) on an amount to be paid on a currency where the market rate was considerably less than the Swedish discount rate. It was argued that we should avoid applying the rate according to the Swedish Interest Act by applying Section 36 of the Contracts Act on unreasonable contract terms. Needless to say, we found it impossible to do so. The parties had chosen Swedish law, and we could not avoid applying it. However, if no such choice had been made, we would have looked for a more appropriate rule.

11.5

Choice of an ‘Appropriate Rule of Law’

When the parties have not chosen the law, several important arbitration rules (e.g. ICC Rules, LCIA Rules and SCC Rules) permit the arbitrators to choose an appropriate rule of law. As the Rules have more or less the same wording, it may be sufficient to cite Article 22(1) of the 2010 Rules of the Arbitration Institute of the Stockholm Chamber of Commerce:

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The Arbitral Tribunal shall decide the merits of the dispute on the basis of the law(s) or rules of law agreed upon by the parties. In the absence of such agreement, the Arbitral Tribunal shall apply the law or rules of law which it considers to be most appropriate. While a court of law may find it difficult not to apply choice of law rules, arbitrators are free to bypass such choice and directly apply whatever rule they find ‘appropriate’. As evidenced by Opinion 14 of the CISG Advisory Council, determining the interest rate according to the law of the country of the creditor’s place of business is generally appropriate but, if it is not, arbitrators may prefer to apply either the law in the country of the currency of payment or general principles such as evidenced by UPICC Article 7.4.9(2).

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Part IV CISG, State Action and Regionalisation

12

Do We Really Need Special Provisions for Business-to-Consumer Sales?*

Yeşim M. Atamer

12.1

The Question

This paper aims at questioning generally whether, and if so to what extent, there is really a need to introduce special legal provisions in regard to business-to-consumer (B2C) sales contracts. In other words, the purpose of this contribution is to find out if the buyer in a B2C contract needs to be protected more than a buyer in a business-to-business (B2B) contract. In order to answer this question, some legal systems designed to be applied only to B2B or to B2C sales contracts are compared below. The legal orders are chosen among those drafted to be applied in different countries aiming at law unification. For B2B sales contracts, the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) seems to serve this purpose well. Its scope of application comprises only B2B sales, and it has a broad application throughout the world.1 For B2C sales contracts, the European Union (EU) law with its long history of consumer protection dating back into the 1970s2 seems to be a good candidate for an analysis. The 1999/44/EC Directive of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees (Consumer Sales Directive)3 is meanwhile implemented in all 28 Member States and can serve as a starting point for comparison. Some recent decisions of the European Court of Justice seeking for a uniform interpretation of this Directive are keeping the sales contract in the centre of discussions. EU law is further very suitable for a comparison given that in addition to the Consumer Sales Directive, an ambitious project was launched in 2011 drafting a Regulation on a Common European Sales Law4 which covers provisions designed to regulate cross-border

* 1 2 3 4

All web pages were last accessed in July 2015. As of July 2015, there are 83 contracting states to the CISG (). Cf. on the history of consumer protection in the European Union, S. Weatherill, EU Consumer Law and Policy, 2nd edn, Edward Elgar, Cheltenham, 2013, pp. 5 et seq. OJ 1999, L 171/12. Provisions of the draft Regulation will be cited as, e.g. Art. 1 Regulation, provisions of the Annex I on Common European Sales Law as, e.g. Art. 1 CESL.

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YeŞim M. Atamer B2B as well as B2C sales contracts.5 In its grounds and objectives for this project, the European Commission had stated that: The overall objective of the proposal is to improve the establishment and the functioning of the internal market by facilitating the expansion of cross-border trade for business and cross-border purchases for consumers. This objective can be achieved by making available a selfstanding uniform set of contract law rules including provisions to protect consumers, the Common European Sales Law, which is to be considered as a second contract law regime within the national law of each Member State. Even though the CESL will not come into force in its current form, the EU Commission has announced that a ‘modified proposal in order to fully unleash the potential of e-commerce in the Digital Single Market’ is in the pipeline.6 Be that as it may, the CESL is still an important comparative legal text that was prepared for 28 EU Member States in order to regulate cross-border sales. Besides, the CESL is by its coverage broader than the Consumer Sales Directive and includes provisions on contract formation, interpretation, obligations and remedies of the parties to a sales contract, damages, interest, restitution and prescription, which makes it more yielding for a comparison. Below, it will be evaluated together with the Sales Directive. Finally, in addition to these two sets of law unification projects, the national sales law provisions and jurisprudence of some countries will be taken into consideration given that examples from case law might facilitate a better understanding of the arguments raised.

12.2

Definition of a Consumer

Before discussing how much protection consumers need in a sales contract, the definition of ‘consumer’ should be given. According to Article 1(2)(a) of the Consumer Sales Directive, a consumer ‘shall mean any natural person who, in the contracts covered by this Directive, is acting for purposes which are not related to his trade, business or profession’. In fact, consumer contracts are defined very homogenously throughout EU legislation.7 The CISG 5

6 7

COM(2011) 635 final, Brussels, 11 October 2011. Cf. for a detailed and comparative analysis of the CESL G. Dannemann & S. Vogenauer (Eds.), The Common European Sales Law in Context, Interactions with English and German Law, Oxford University Press, Oxford, 2013; R. Schulze (Ed.), Common European Sales Law (CESL), Nomos Verlag, Baden-Baden, 2012; See also the special issue of the Common Market Law Review, Vol. 50, 2013, special issue 1/2 on the CESL. . Cf. Art. 2 Draft Regulation; Art. 2(1), Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC

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is also not far from this description even though it prefers to circumscribe it the other way round: sales contracts concerning goods bought for personal, family or household use are not covered by the Convention.8 In practice, it is often unproblematic to determine when a consumer sales contract is existent. However, dual-purpose contracts can cause difficulties regarding subsumption. Recently, the EU Consumer Rights Directive9 has taken over the definition of the European Court of Justice10 and characterized these types of contracts in its recitals as follows: […] in the case of dual purpose contracts, where the contract is concluded for purposes partly within and partly outside the person’s trade and the trade purpose is so limited as not to be predominant in the overall context of the contract, that person should also be considered as a consumer.11 This approach seems to be suitable to be applied as a general principle.12 Another problematic issue is the burden of proof. That is, the need to decide which of the parties has to prove that a consumer or business sales is concluded. Neither the CISG nor the EU legislation offers a clear-cut answer to this problem. Therefore, the general rule will apply and the party alleging the existence of a consumer sales contract and the application of special protective rules will have to prove that the goods were destined to be used personally. However, the threshold for such proof is not going to be high if, for example, one laptop is bought and delivered at the home of the buyer. These facts indicate already a consumer sales contract. Now, it will be the seller’s turn to prove, as stated, for example in Article 2(a) CISG, that she13 ‘at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought’ for personal, family or household use. Vice versa, if the buyer orders ten laptops to be delivered at its law office, a proof of this being a consumer sales contract can hardly be brought.

8

9 10 11 12

13

of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council, OJ 2011, L 304/64. I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010, Art. 2, Paras. 4 et seq. Cf. supra note 7. Judgement of 2 January 2005 in Case 464/01 Johann Gruber v. BayWa AG, [2005] ECR I, 441. Directive 2011/83/EU, No. 17. Cf. also on the issue H. W. Micklitz & N. Reich, The Commission Proposal for a “Regulation on a Common European Sales Law (CESL)” – Too Broad or Not Broad Enough?, EUI Working Paper LAW 2012/04, Florence, pp. 12-13. The European Parliament in its ‘European Parliament legislative resolution of 26 February 2014 on the Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law’ suggested to adopt this definition also for the CESL, cf. Amendment No. 32. In order to balance the use of gender in this contribution, the seller is referred to in the feminine form (she, her) and the buyer/consumer in the masculine form (he, his).

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YeŞim M. Atamer 12.3

Non-Sales-Specific Protection of the Buyer/Consumer in the CESL

Looking at the Draft Regulation on CESL, one can immediately notice three major blocks devoted to the protection of consumers in sales contracts, which are in fact not particularly sales specific: Chapter 2 on pre-contractual information, Chapter 4 on the right of withdrawal and Chapter 8 on unfair contract terms. Below it will be very shortly discussed why such protection is granted: – Pre-contractual information requirements: The problem of information asymmetry in consumer contracts is a well-known phenomenon.14 Especially, certain contract conclusion methods like distance or so-called doorstep contracts are typical examples creating such asymmetry situations. In a doorstep situation (off-premises contract), a consumer is in a position where he cannot bargain freely and has no chance to compare the offered goods with other goods in the market. In a distance contract, he cannot evaluate the goods as good as he would when shopping in business premises since he is only served a picture of them. Mandatory information requirements try to balance this lack of information. CESL Chapter 2, Articles 13-22 are addressing this problem by providing a long list of information for off-premises and distance sales contract. Most of these requirements are parallel to those stipulated already in the 2011 Consumer Rights Directive.15 – Right to withdraw from the contract in 14 days: Even though information asymmetries can sometimes be bridged by mandatory information duties,16 the two means of contract formation (on distance or at the doorstep) have also an inherent moment of exogenous or endogenous distortion of consumer preferences.17 For distance sales, the 2011 Consumer Rights Directive states that “the consumer is not able to see the goods before concluding the contract, [therefore] he should have a right of withdrawal”.18 This rather suggests a problem of information. However, with distance contracts, it is also an endogenous problem. Internal, psychological effects play a role given that the inhibition

14 S. Grundmann, W. Kerber & S. Weatherill (Eds.), Party Autonomy and the Role of Information in the Internal Market, de Gruyter, Berlin, 2001; G. Howells, A. Janssen & R. Schulze (Eds.), Information Rights and Obligations, A Challenge for Party Autonomy and Transactional Fairness, Ashgate, Aldershot, 2005; H. Fleischer, Informationsasymmetrie im Vertragsrecht: eine rechtsvergleichende und interdisziplinäre Abhandlung zur Reichweite und Grenzen vertragsschlußbezogener Aufklärungspflichten, C.H. Beck, München, 2001. 15 Cf. supra note 7. 16 However, confer for a very critical appraisal of information duties O. Ben-Shahar & E. Schneider, More Than You Wanted to Know, The Failure of Mandated Disclosure, Princeton University Press, Princeton, 2013. 17 See, in detail, H. Eidenmüller, ‘Why Withdrawal Rights?’, European Review of Contract Law, No. 1, 2011, pp. 1-24, who is critical in regard of a mandatory withdrawal right in case of distance contracts. Parallel also G. Wagner, ‘Mandatory Contract Law: Functions and Principles in Light of the Proposal for a Directive on Consumer Rights’, in A. Ogus & W. H. van Boom (Eds.), Juxtaposing Autonomy and Paternalism in Private Law, Hart Publishing, Oxford, 2011, pp. 9-42 at pp. 26-27. 18 Recitals Para. 37.

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threshold as to contracting is much lower in comparison to shopping in business premises. On Internet, one can conclude sales contracts 24/7 without even the need of leaving home or workplace. Under the influence of never-ending advertisements to shop, the consumer needs a cooling-off period in which he can freely get away from contracts concluded under such circumstances. In case of doorstep contracts, the distortion of consumers’ contract decision is much more evident. Exogenous factors like ‘surprise, time pressure, psychological entrapment, the inability to easily terminate contract negotiations, and other manipulative tactics’19 might all contribute to a contract conclusion which the consumer will regret minutes later. The right to withdraw from the contract under such circumstances gives the consumer exactly that option that he was not granted at the door: not to be bound by any contract.20 – Control of unfair contract terms: Finally, the CESL gives protection to consumers whenever the terms of the sales contract have not been individually negotiated and they are unfair. This is the case if the terms introduced by the seller cause a significant imbalance in the parties’ rights and obligations to the detriment of the consumer and contrary to the good faith principle (Article 83 CESL).21 A list of contract terms which are considered to be always unfair (‘black list’, Article 84 CESL), and a list with terms which are only presumed to be unfair (‘grey list’, Article 85 CESL) is provided too. In case of the latter, the party using standard terms can still prove that the challenged provision is fair in the context of the whole contract. Any unfair term is not binding on the consumer while the rest of the contract remains valid (Article 79 CESL). The need to protect against standard contract terms is mainly also an issue of information asymmetry. As Schäfer and Leyens put it very clearly: The cost of acquiring information regarding the contents of standard terms routinely exceeds the anticipated gain. It is therefore rational to ignore the clause contents. As a consequence of this rational ignorance also a competition among issuers for the best terms will fail. The users of standard terms will rather engage in a competition for the most unfair terms (race to the bottom).22

19 Eidenmüller, 2011, supra note 17, pp. 1-24 at p. 14. 20 The right to withdraw was already granted with the first Directive on doorstep contracts in 1985 and the Directive on distance contracts in 1997. Both directives were repealed with the 2011 Consumer Contracts Directive, see supra note 7. 21 Cf. also Art. 3 of the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ 1993, L95/29. 22 H. B. Schäfer & P. Leyens, ‘Judicial Control of Standard Terms and European Private Law’, in P. Larouche & F. Chirico (Eds.), Economic Analysis of the DCFR, Sellier European Law Publishers, Munich, 2010, pp. 97 et seq. at p. 118.

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YeŞim M. Atamer To give an example: for a consumer who buys a vacuum cleaner, it will never be worthwhile to seek for better standard terms given that maybe 1 in 10.000 cleaners will be defective. The possibility of the standard terms being applied is so low that it is economically not rational for a consumer to seek for a vacuum cleaner of the same qualities for better terms. Due to this rational ignorance on the side of the consumers, standard terms never become a parameter in competition, and the result is, in the words of Akerlof, a ‘market for lemons’.23 Another control mechanism has to intervene. This mechanism is the collective action mechanism introduced already by the Directive 93/13 on unfair contract terms. Consumer organizations and the like are vested with rights to sue against the user of unfair standard contract terms in order to prevent the continued application of these terms in consumer contracts.24 Now, looking at these major areas of consumer protection in the CESL, two statements can be made: – First, these parts of the CESL are based to a great extent on the existent EU Directives on consumer rights of 201125 and on unfair contract terms of 1993.26 – Second, none of these problem areas are specific to a sales contract. In fact, the protection provided in the relevant directives is for all contract types, not only for sales contracts. Contract conclusions on distance or off-premises are means of marketing and can be practiced for all kinds of contracts. Parallel to that, employment of standard contract terms is also not a sales contract-specific phenomenon – all consumer contracts where non-negotiated terms are used need to be controlled. Therefore, as an intermediary result, it can be stated that some major areas of protection granted to the consumer/buyer in the CESL are not regarding problems related particularly to a sales contract.27

12.4

Sales-Specific Protection of the Buyer/Consumer in the CESL

In this section, selected topics from the CESL and the Consumer Sales Directive will be examined in order to ascertain when specifically the buyer/consumer in a sales contract is protected more than in a B2B sales contract. The comparison will be made with the

23 G. Akerlof, ‘The Market for “Lemons”: Qualitative Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, Vol. 84, 1970, pp. 488 et seq.; cf. also Wagner, 2011, supra note 17, pp. 9-42 at p. 29. 24 N. Reich et al., European Consumer Law, 2nd edn, Intersentia, Cambridge, 2014, p. 378 et seq. 25 See supra note 7. 26 See supra note 20. 27 Cf. also Micklitz & Reich, 2012, supra note 12, p. 30.

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CISG provisions and those of the CESL on B2B sales. Under each heading, it will also be discussed whether the protection granted is really needed or not.

12.4.1

Definition of Lack of Conformity

The lack of conformity definition of Article 2 Consumer Sales Directive and Articles 99100 CESL, which are applicable to B2C as well as B2B sales, are mainly paralleling Article 35 CISG on conformity of the goods.28 The goods must comply with the description given by the seller and possess the same qualities and characteristics as other sample goods (a), be fit for the purpose which the consumer requires them and which was made known to the seller at the time of purchase (b); be fit for the purpose for which goods of the same type are used (c), and show the same quality and performance, which are normal in goods of the same type which consumers can reasonably expect. This will also take into account the nature of the goods and any public statements made about the specific characteristics of the goods by the producer, seller or in their advertising (d). Other than the Sales Directive, Article 102 CESL also defines third-party rights or claims regarding the goods as a source of non-conformity. Articles 41-42 CISG are obviously the main source of inspiration. These provisions find application to B2B as well as B2C contracts. Differences regarding the concept of lack of conformity can only be seen in the following areas: – Public statements/advertisement: For B2C contracts, the Consumer Sales Directive stipulates that all public statements, including advertisements, made by the seller or the producer regarding the goods will be considered when defining what the ‘normal’ quality of the goods is (Article 2(2)d). Article 69 CESL broadens this approach to B2B contracts to an extent that all public statements and advertising originating from the seller are deemed to be part of the contractual consensus, unless proven otherwise (Article 69/I). That means public statements or advertisement of the producer is not binding for the B2B seller; however, advertisement or statements generating from himself are binding even if they were not directed to the specific buyer. Just like in the Sales Directive, the CESL accepts for B2C sales that also statements by the producer or other links of the chain are binding on the seller, unless he proves that he did not know and could not be expected to have known of it (Article 69/III).29 When looking into CISG literature, one can see that public statements or advertisement of the seller 28 Cf., e.g. A. von Vogel, Verbrauchervertragsrecht und allgemeines Vertragsrecht, De Gruyter, Berlin, 2006, pp. 211 et seq. 29 Where the other party is a consumer, then for the purposes of paragraph 1, a public statement made by or on behalf of a producer or other person in earlier links of the chain of transactions leading to the contract is regarded as being made by the trader unless the trader, at the time of conclusion of the contract, did not know and could not be expected to have known of it.

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YeŞim M. Atamer are deemed to be relevant in defining the contractual quality of the goods.30 However, statements of the producer are mostly not discussed. But is this really the correct way of approaching the issue, given that the buyer in a B2B contract just like in a B2C contract almost never will be in a situation to know by whom the advertisement or public statement was made – by the seller or the producer? The negotiation phase of the parties has to be interpreted in light of Article 8 CISG anyhow. That means, if the buyer as a reasonable person was entitled to understand, for example, that an advertisement made in a professional journal was generated by the seller, or at least known to the seller, the legally relevant description of the goods in this ad should be assumed to be part of the contract also in a B2B sales. Obviously, the seller will have the chance to prove that he neither knew nor was in a position to know about the advertisement being made in the buyer’s country. In international sales contracts, a proof like this can be brought easier given that advertisements may vary from country to country. But a general exclusion of liability for statements made by a person in earlier links of the business chain should not be the case for B2B contracts. In fact, this is also the approach of Article IV.A.-2:303 DCFR, where such statements are binding for the seller irrespective of who the buyer is. This is certainly the better approach.31 – Incorrect installation of the goods due to seller, or shortcomings of the installation instruction: The so-called IKEA clause was already introduced into the 1999 Consumer Sales Directive (Article 2(5)).32 According to this rule even if a non-conformity arises after delivery of the goods, the seller is liable if this non-conformity can be traced back to an incorrect installation of the goods by the seller or his auxiliaries or to a mistake in the installation instruction. Article 101 CESL takes over the same idea, however, again only limited to consumer. But one can see no reason why in a B2B sales contract, the value judgement should be different. In fact, looking at the CISG commentaries, one can see that the seller is held liable for all types of shortcomings of the installation manual and that the goods are considered as being not fit for the ordinary purpose in such case.33 The installation of the sold goods by the seller does also not hinder the application of the CISG provisions (Article 3 CISG) and can cause a non-conformity

30 Cf., e.g. Schwenzer & Hachem, in Schwenzer, 2010, supra note 8, Art. 35 CISG, Para. 7; S. Kröll, in S. Kröll, L. A. Mistelis & M. P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG), C.H. Beck, Munich, 2011, Art. 35 CISG, Para. 39. 31 For comparative information on the issue, see Notes to Art. IV.A.-2:303 DCFR in C. von Bar & E. Clive (Eds.), Principles, Definitions and Model Rules of European Private Law – DCFR, Full Edition, Vol. 2, Sellier European Law Publishers, Munich, 2009, p. 1297. In favour of a broader application also I. Schwenzer, P. Hachem & C. Kee, Global Sales and Contract Law, Oxford University Press, Oxford, 2012, Paras. 31.48 et seq. 32 Reich et al., 2014, supra note 24, p. 176. 33 Schwenzer & Hachem, in Schwenzer, 2010, supra note 8, Art. 35 CISG, Para. 14; Kröll, in Kröll et al., 2011, supra note 30, Art. 35, Para. 102.

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according to Article 35 CISG if it is not carried out correctly, just like in a B2C contract.34 Therefore, the distinction made in the CESL between B2B and B2C sales in the matter does not seem to be justified. – Knowledge of buyer of non-conformity: According to Article 35(3) of the CISG and Article 2(3) of the Consumer Sales Directive, the seller is not liable for any non-conformity if at the time of the conclusion of the contract, the buyer knew or could not have been unaware of such lack of conformity (or ‘the consumer was aware, or could not reasonably be unaware of the lack of conformity’). That means for B2B as well as B2C contracts, the burden of proof is on the seller. If she proves that the reasonable buyer could have been aware of the lack of conformity, she will not be held liable for this non-conformity. Articles 99(3) and 102(4) of the CESL, however, diverge from this approach and seek in case of B2C sales proof of actual knowledge about the lack of conformity. For B2B contracts, the old rule still applies (Article 104) and the ‘could not have been unaware’ formula is used. However, one cannot see the reason for this differentiation given that proof of actual knowledge is very difficult, and in most of the rules of evidence of national laws, the proof of constructive knowledge is accepted.35 In fact, it sets also correct incentives for the buyer given that he is in a relatively good position to ascertain blatant defects of the goods when concluding the sales agreement.36 Even though the same can sometimes be said for the seller, the general principle which can be deduced from Article 122/VI CESL (same: Article 40 CISG) that the seller ‘is not entitled to rely on this article if the lack of conformity relates to facts of which the seller knew or could be expected to have known and which the seller did not disclose to the buyer’ can be generalized and be applied also here.37 If the lack of conformity is manifestly evident at contract conclusion and should have been so also for the seller, the protection of the buyer will be preferred and he will be granted his rights for non-conformity under the sales contract.

12.4.2

Examination and Notification Duty

One of the major differences between B2B and B2C sales is probably the requirement of the commercial buyer to examine the goods (Article 38 CISG), whereas a similar duty is not existent for the consumer in the EU legislation.38 Even though there are still some

34 Schwenzer & Hachem, in Schwenzer, 2010, supra note 8, Art. 3 CISG, Para. 13. 35 Schwenzer, Hachem & Kee, 2012, supra note 31, Para. 31.158. 36 S. Grundmann, ‘Verbraucherrecht, Unternehmensrecht, Privatrecht – warum sind sich UN-Kaufrecht und EU-Kaufrechts-Richtlinie so ähnlich?’, Archiv für die civilistische Praxis, Vol. 202, 2002, pp. 40-71 at p. 48. 37 Schwenzer, in Schwenzer, 2010, supra note 8, Art. 35 CISG, Para. 38. 38 For comparative information on the issue, see Notes to Art. IV.A.-4:301 DCFR, pp. 1350-1351; Schwenzer, Hachem & Kee, 2012, supra note 31, Chapter 34.

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YeŞim M. Atamer jurisdictions in Europe, like the Swiss Code of Obligations which does not differ between B2C and B2B contracts in regard to the examination duty (Article 201), the EU Member States have given up such duty for B2C contracts with the 1999 Consumer Sales Directive. The only duty which partially remains is the notification duty. Article 5 of the Sales Directive allows that “[the] Member States may provide that […] the consumer must inform the seller of the lack of conformity within a period of two months from the date on which [s]he detected such lack of conformity”. This provision has led to a fragmented picture in Europe.39 For example, Estonia, Hungary, Italy, the Netherlands,40 Poland, Portugal, Romania, Spain and Sweden have introduced such notification period, whereas in Germany, France and the UK, no such duty is existent in B2C sales. According to Article 106/III (b) CESL, ‘the requirements of examination and notification set out in Section 7 of this Chapter do not apply’ if the buyer is a consumer. That means CESL goes further than the Directive and forgoes also the notification duty for B2C contracts. It is obvious that here we have an important dissimilarity between B2B and B2C contracts. In the trade business, the seller has to know as quickly as possible whether the delivered goods are non-conforming so that he can offer cure, or at least budget for the financial risks involved. Given that both parties are professionals, an examination and notice duty does not burden the buyer too much, but rather gives him also the chance to mitigate any losses that might be encountered due to this non-conformity. The consequences of a failure to give timely notice are harsh: the buyer loses all of his remedies under Article 45 CISG.41 However, Article 40 CISG brings the two systems at least a bit closer. For a commercial seller, who either as the producer or as the seller has the capacity and knowledge to examine the goods herself, it would be contradictory to allow for an exemption given that she could have found out about the non-conformity herself. In fact, Article 40 states expressly that if the seller knew or could not have been unaware of the lack of conformity, she cannot rely on Articles 38-39. Under such circumstances, the buyer will retain all his remedies. But still, the examination and notification duty of the commercial buyer remains certainly as one of the major differences between the two contracts.

39 Cf. Commission Non-paper on a comparison between 27 mandatory consumer protection provisions in the Common European Sales Law proposal and national laws: . 40 Cf. Opinion of Advocate General Sharpston delivered on 27 November 2014 in Case 497/13, Froukje Faber v Autobedrijf Hazet Ochten BV discussing among others the conformity of the notification period provided for in the Dutch Civil Code. 41 One CISG-specific exception is Art. 44: “Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with Article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice.”

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12.4.3

Do We Really Need Special Provisions for Business-to-Consumer Sales?

Burden of Proof Regarding the Non-Conformity

In B2B as well as B2C sales contracts, the time for assessing a non-conformity is generally the time when the risk passes to the buyer.42 In principle, if the buyer has accepted the goods, he will have to prove that any non-conformity arising later than this moment already existed at the time of passage of risk. However, Article 5(3) Sales Directive has introduced a rebuttable presumption in favour of consumers.43 Any non-conformity in B2C contracts which becomes apparent in the first 6 months is presumed to have existed already at the moment when risk has passed to the consumer. The same approach was taken over by Article 105/II CESL. This presumption does not apply if it is incompatible with the nature of the goods or the nature of the lack of conformity. Obviously, in B2B contracts, such presumption is not valid, and the buyer has to prove that the goods were really defective at the time of delivery, and these defects were not ascertainable despite the examination.

12.4.4

Remedies of the Buyer

The types of remedies granted in the different sets of rules on sales are to a great extent identical. According to Article 3 Sales Directive, the buyer/consumer may ask for performance which includes specific performance, repair or replacement of the goods. Or he can choose to terminate the contract or to reduce the price. Article 45 CISG and Article 106 CESL give the buyer exactly the same rights. However, both give the buyer in addition the right to ask for damages beside these remedies. The Sales Directive had left the issue of damages to national laws. Finally, a right to withhold is granted expressly in Article 106/I (b) CESL referring to Article 113 CESL. Even though the CISG does not grant such right particularly, this is deduced as a general principle from the Convention.44 All in all, the four elective rights of the buyer plus damages and the right to withhold are remedies which are suitable for the needs of B2B as well as B2C contracts. No difference is existent.

12.4.5

Hierarchy between the Remedies

One of the major questions of sales law is whether the four remedies of the buyer should be granted in a hierarchy or as equal options. We see that different sets of rules favour different solutions. In regard to B2B contracts, the approach in the CESL and CISG is

42 Cf. for different systems Schwenzer, Hachem & Kee, 2012, supra note 31, Paras. 31-165 et seq. 43 Reich et al., 2014, supra note 24, p. 177. 44 Schwenzer & Hachem, in Schwenzer, 2010, supra note 8, Art. 7 CISG, Para. 40; Viscasillas, in Kröll et al., 2011, supra note 30, Art. 7 CISG, Para. 58.

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YeŞim M. Atamer parallel: those remedies keeping the contract alive are favoured. In principle, the seller has a ‘right to cure’, which means that she can block the remedies of the buyer in case she can cure the non-performance without unreasonable delay, and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement of expenses advanced by him (Article 48 CISG; Article 109 CESL).45 The Consumer Sales Directive does not grant the seller such right; however, there is a two-tier system where the consumer has to first ask for performance (repair or replacement), and only if this claim is not appropriate, or cannot be completed within a reasonable time and without any significant inconvenience to the consumer, he may make use of his rights to rescind or to reduce the price.46 Exceptionally, if replacement or repair is impossible or disproportionately expensive, the seller might reject the claim, and the consumer would have to use one of his second tier rights immediately. In fact, the right to cure of the seller and a two-tier system of remedies are pretty much mirror imaging the same idea. In case there is a right to cure, and the seller makes use of it, the contract will be kept alive. It is the buyer who has to prove that using this right would burden him with unreasonable inconveniences, and therefore, he should have the right to rescind or to reduce. In case of a two-tier system, the seller has no right to cure, but she can prove that the claim of the consumer cannot be performed or is disproportionately expensive. If such prove is brought, again the buyer has to make use of his right to rescind or to reduce the contract price. That means the debate is more about the burden of proof. Either way the major aim is to keep the contract alive if possible. Now, looking at the CESL text, one can see that this approach was not followed at all for B2C contracts. According to Article 106 CESL, the consumer is free to decide which remedy to make use of. He may, for example, directly resort to his right to rescind any time within the limitation period.47 Neither the two-tire system is applicable nor the seller has a right to cure in B2C contracts (Article 106/III, a). Whether this is the correct way to protect consumers is very doubtful given that the cost of an immediate termination will be reflected on all consumers via pricing.48 As put forward by Lehmann, the seller will have to assume the full risk of goods, which could have been repaired or replaced, now being 45 In detail A. Leukart, The Seller’s Right to Cure, with Special Reference to Standard Terms and the CISG, Helbing Lichtenhahn, Basel, 2013, pp. 67 et seq. 46 Cf. Reich et al., 2014, supra note 24, p. 180. 47 According to Art. 179 CESL, the general period of prescription is two years after the buyer became or could be expected to have become aware of the non-conformity and a maximum of ten years after delivery. 48 Critical M. Lehmann, ‘Vom geduldigen Lamm zum Pascha: Die Rechte des Verbraucher-Käufers nach dem Entwurf eines Gemeinsamen Europäischen Kaufrechts’, in M. Schmidt-Kessel, S. Leible & L. Tichy, Perspectiven des Verbrauchsgüterkaufs, Mohr Siebeck, Tübingen, 2015, pp. 105-124 at p. 117 et seq.; H. Eidenmüller et al, ‘The Proposal for a Regulation on a Common European Sales Law: Deficits of the Most Recent Textual Layer of European Contract Law’, The Edinburgh Law Review, Vol. 16.3, 2012, pp. 301-357 at p. 334 et seq.; O. Bar-Gill & O. Ben-Shahar, ‘Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law’, Common Market Law Review, Vol. 50, 2013, pp. 109-126 at p. 112.

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piled up in her store, given that there will be only a limited market for these ‘used’ goods. And in her B2B contract with the producer, she will often not be able to make use of a right to rescind and to pass the risk on to the producer.49 The adverse effects for the seller are even more visible in case the goods were prepared according to the qualifications of the buyer/consumer.50 Also under such circumstances, the value judgement of the CESL does not change: The consumer can rescind despite the possibility to cure the non-conformity. In fact, as is stressed by Eidenmüller et al., it is a contradiction in itself to give the seller the right to reject a claim for repair because ‘the burden or expense of performance would be disproportionate to the benefit that the buyer would obtain’ (Article 110/III (b)), however, not to grant a parallel defence in case the consumer makes use of its right to rescind.51 To treat B2C contracts, different than B2B contracts in this matter does not convince. The only reasonable differentiation could be in regard of the burden of proof. Giving the seller a right to cure would put the burden of proving that performance in the specific case is not reasonable on the buyer.52 However, in consumer contracts, it seems to be much easier for the seller to prove that a claim for specific performance cannot be fulfilled, or is disproportionate. A two-tier system where the consumer has to first make use of its rights to repair or replacement, and the corresponding possibility of the seller to sometimes block this claim would therefore balance the interests of the parties best. This is exactly the system of the 1999 Consumer Sales Directive and should be maintained.

12.4.6

Pre-Requisites of a Right to Terminate?

Parallel to the discussion above, all three sets of rules try to limit the right of termination to unimportant non-conformities. Whereas in the Sales Directive, the threshold is the ‘minor lack of conformity’ (Article 3(6) Sales Directive), the CESL asks for the lack of conformity not to be ‘insignificant’ (Article 114/II CESL). At first sight, the CISG has a much higher threshold given that it requires the breach to be ‘fundamental’ (Article 49 CISG). However, looking into the CISG doctrine on fundamental breach, one can discern several criteria which can also be relevant for B2C sales contracts.53 Often the decision on

49 Lehmann, 2015, supra note 48, p. 122; G. Wagner, ‘Termination and Cure under the Common European Sales Law: Consumer Protection Misunderstood’, Common Market Law Review, Vol. 50, 2013, pp. 147-168 (157). 50 Wagner, 2013, supra note 49, p. 166. 51 Eidenmüller et al., 2012, supra note 48, pp. 336-337. 52 Müller-Chen, in Schwenzer, 2010, supra note 8, Art. 48 CISG, Para. 13. 53 Cf. on these criteria Huber, in Kröll et al., 2011, supra note 30, Art. 49 CISG, Paras. 12 et seq.; Schroeter & Hachem, in Schwenzer, 2010, supra note 8, Art. 25 CISG, Para. 44 et seq.

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YeŞim M. Atamer fundamentality will go hand in hand with the question whether the non-conformity can be cured. As put forward above, the right to cure of the seller on one side, and the buyer’s first tier remedies aiming at performance on the other side signal already that a discussion on the significance of the non-conformity has to take into account whether a cure is possible. In principle, if repair or replacement is possible without any inconveniences for the consumer and within a reasonable time, the non-conformity has to be defined as an insignificant one. However, even if cure cannot be effected in such way, or is anyway impossible right from the beginning, still the non-conformity will not automatically be qualified as a significant one allowing for rescission. Although this issue was not expressly discussed by the European Court of Justice (ECJ), a case decided in October 2013 supports the foregoing argument. According to the facts, Ms Duarte Hueros had purchased a car with a sliding roof for an amount of EUR 14.320 from Autociba. Ms Duarte Hueros returned the vehicle to Autociba because, when it rained, water leaked in through the roof into the car interior. After a number of unsuccessful attempts to repair it, Ms Duarte Hueros requested that the vehicle be replaced. Following Autociba’s refusal to replace it, Ms Duarte Hueros brought an action before the Court of First Instance seeking rescission of the contract of sale.54 However, the Spanish Court decided that the non-conformity was insignificant, and the consumer therefore could not terminate the contract. The debate was focusing on the issue whether the Court of First Instance could grant an appropriate price reduction of its own motion even if the consumer brought proceedings which were limited to seeking rescission of that contract. This was accepted by the ECJ since otherwise the consumer would have no remedy left against the seller, and this would undermine the protection granted by the Directive. But the ECJ did not question at all the conclusion of the Court of First Instance that non-conformity remains insignificant even though it cannot be remedied.55 As already put forward above, economical arguments indicate that easy termination comes at a price which has to be paid by consumers. It seems therefore appropriate to grant also consumers this right with caution. All the circumstances of the case should be evaluated, especially the loss the seller would encounter if the non-conforming goods would be returned and the benefits of the consumer of having 100% conforming goods 54 ECJ, Soledad Duarte Hueros v Autociba SA, Automóviles Citroën España SA, 3 October 2013 (C-32/12). 55 Cf. also a Swiss High Court decision of 2013, where a whirlpool which was on display and was bought from a showroom for private use but caused several different electrical problems. The buyer wanted to terminate the contract; however, the High Court stated that a fundamental breach, and therefore rescission would only be accepted if there were a risk of an electric shock. As long as this risk is not existent, and given that a removal would be too costly, the court found that a reduction in price is absolutely sufficient to protect the consumer. BGE, 4A_252/2013, 2 October 2013: “La résolution doit en principe être admise lorsque la chose manque d’une qualité essentielle ou se révèle inutilisable; en présence de plusieurs défauts, il faut tenir compte de leur cumul. Il faut aussi prendre en considération les intérêts en présence et le comportement des cocontractants. Les inconvénients que la résolution entraîne pour le vendeur doivent être proportionnés aux avantages que l’acheteur peut en attendre”.

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should be weighed against each other.56 Otherwise, there would be no check against any opportunistic behaviour of the consumer.57 One should not forget that the consumer is still protected with the reduction of the sales price and an additional damages claim. These remedies will mostly make up for any non-conformity which is not fundamental. It is not argued here that the value judgement in B2B and B2C contracts should be absolutely overlapping. For example, the criteria whether the non-conforming goods can still be used commercially (‘reasonable use test’)58 can obviously not be relevant in case of consumer contracts. That means that the threshold for a termination in B2B sales will remain higher than in B2C contracts. However, a very lenient approach for B2C sales like in the CESL should be rejected.59

12.4.7

Cost of Repair and Replacement

According to Article 3(2) of the Sales Directive ‘in the case of a lack of conformity, the consumer shall be entitled to have the goods brought into conformity free of charge by repair or replacement’. A parallel provision can be found in Article 110(2) CESL. Even though Article 46 CISG does not state this requirement expressly it is undebated in CISG literature and case law that the costs of repair and replacement have to be carried by the seller.60 What exactly is meant by ‘free of charge’ is explained in Article 3(4) of the Sales Directive: “The terms ‘free of charge’ in paragraphs 2 and 3 refer to the necessary costs incurred to bring the goods into conformity, particularly the cost of postage, labour and materials”. In the joined cases, Gebr. Weber GmbH v. Jürgen Wittmer and Ingrid Putz v. Medianess Electronics GmbH, the question was whether this term also includes costs of removing the goods not in conformity and installing replacement goods.61 The ECJ held that even though this was not expressly stated in Article 3(4), the enumeration in the provision was not exclusive since the term ‘particularly’ was used. The Court rejected especially the argument that this interpretation would be inequitable in regard to nonconformity of goods that do not result from the fault of the seller. 56 57 58 59

Grundmann, 2002, supra note 36, p. 51; Wagner, 2013, supra note 49, p. 158. Cf. on the issue Wagner, 2013, supra note 49, p. 164. Müller-Chen, in Schwenzer, 2010, supra note 8, Art. 25 CISG, Paras. 52-53. Parallel Wagner, 2013, supra note 49, p. 167. In favour also of a strict interpretation of § 323 (5) BGB for B2C contracts, see W. Ernst, in J. Säcker & R. Rixecker (Eds.), Münchener Kommentar zum BGB, 6th edn, C.H. Beck, München, 2012, BGB § 323, Para. 243e. 60 Huber, in Kröll et al., 2011, supra note 30, Art. 46 CISG, Paras. 40 and 52; U. Magnus, in J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Sellier – de Gruyter, Berlin, 2013, Art. 46 CISG, Para. 29; Oberlandesgericht Hamm (Germany) 9 June 1995 (window elements), CISG-Online 146. 61 Judgement of 16 June 2011 in Joined Cases 65/09 Gebr. Weber GmbH v Jürgen Wittmer and Case 87/09 Ingrid Putz v Medianess Electronics GmbH, [2011] ECR I, p. 5257.

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YeŞim M. Atamer Accordingly, in a situation where neither party to the contract is at fault, it is justified to make the seller bear the cost of removing the goods not in conformity and installing the replacement goods, since those additional costs, first, would have been avoided if the seller had at the outset correctly performed his contractual obligations and, second, are now necessary to bring the goods into conformity (Para. 57). In the author’s view, this argument is perfectly well also valid for B2B sales contract. One major discrepancy of the CESL is in regard to the performance claim and its relation to exemption. According to Article 106(4) CESL, “[i]f the seller’s non-performance is excused, the buyer may resort to any of the remedies referred to in paragraph 1 except requiring performance and damages”. This provision reflects Article 8:101(2) of the Principles of European Contract Law (PECL) and Article III. – 3:101(2) of the Draft Common Frame of Reference (DCFR). However, as already discussed by this author elsewhere,62 this approach seems to disregard that the question whether a specific performance claim is given or not has nothing in common with the question if the seller is excused or not. The existence of a performance claim is independent from the fact of whether non-performance can be imputed to the seller or not. Even if an unforeseeable and insurmountable impediment has caused the non-conformity of the goods, the buyer can still make use of his supplementary performance claims like repair or replacement. Both claims are in principle only excluded if it would be unlawful or impossible to perform, or performance would impose costs on the seller that would be disproportionate (Article 111 CESL). As clearly stated in the ECJ decision above, the liability of the seller is not fault based. Even an impediment beyond control cannot rescue him from repairing or replacing the goods. If for example, the goods sent to the consumer were detained at customs clearance because of a state intervention triggered by an outbreak of an epidemic, and the goods would become non-conforming during that period, the consumer would still have a right to ask for performance. The approach of Article 79(5) CISG is absolutely preferable: ‘Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention’, which means that performance claims live on even if the seller is excused. B2B as well as B2C contracts show no difference in this regard.

62 Cf. on this in detail Y. M. Atamer, ‘Grenzen des Erfüllungsanspruchs im System des Leistungsstörungsrechts der PICC, PECL und des DCFR im Vergleich zum CISG – Probleme und Änderungsvorschläge’, in S. Grundmann et al. (Eds.), Festschrift Hopt, Unternehmen, Markt und Verantwortung, de Gruyter, Berlin, 2010, p. 3 et seq.

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12.4.8

Do We Really Need Special Provisions for Business-to-Consumer Sales?

Passing of Risk

The 1999 Consumer Sales Directive included no special provision on passing of risk on the buyer/consumer. The time for ascertaining non-conformity was the time the goods were delivered. And in the Recitals, it was stated expressly that “[…] the references to the time of delivery do not imply that Member States have to change their rules on the passing of the risk”. The issue was left to the Member States. However, the 2011 Directive on Consumer Rights has introduced in Article 20 a very clear-cut provision: In contracts where the trader dispatches the goods to the consumer, the risk of loss of or damage to the goods shall pass to the consumer when he or a third party indicated by the consumer and other than the carrier has acquired the physical possession of the goods. Article 142 CESL has adopted the same approach.63 The major difference to B2B sales contracts is obvious, it is the physical possession of the goods which counts. Handing them over to the first independent carrier for transmission to the buyer in accordance with the contract of sale is not sufficient as it would be under Article 67(1) of the CISG. That means for consumer sales, it is stipulated by law that the contract is always a destination contract. The risk, the goods would be subject to during transportation, is burdened on the seller in order to protect the consumer. However, even without a special provision, the same risk distribution could have been easily also inferred from Article 145/II CESL given that it includes an exception regarding sales where the seller is bound to hand the goods over at a ‘particular place’ (parallel also Article 67(1) CISG). Under such circumstances, risk passes only if the goods are delivered at that very place. That means, that the matter is more one of interpretation. For consumer contracts, the inclusion of a particular place of delivery has to be always interpreted as the stipulation of a destination contract. The reason for protecting consumers here is that a trader selling goods on distance is in a much better position than the consumer to control as well as to insure the risk involved with the journey.64 First of all, she can assess correctly the risk of transporting, e.g. a laptop, given that she probably has a longstanding experience, and presumably can also assess the risk involved with the different transport companies on the market. This risk premium can be calculated easily and a suitable insurance contract can be concluded to a much better price (cheapest insurer) than a consumer could ever get for a single transport contract. 63 Cf. Zoll & Watson, in Schulze Commentary CESL, Art. 142, Para. 3. 64 Cf., e.g. the explanations of the German law reform regarding passing of risk in B2C contracts: Begründung Regierungsentwurf, Bundestag Drucksache 14/6040, p. 244, available from .

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YeŞim M. Atamer The bargaining position of the trader with thousands of transport contracts is certainly better than any consumer shopping in the Internet and concluding a transport contract every now and then.

12.4.9

Is There a Need to Draft B2C Sales Law Provisions as Mandatory?

The last difference between B2B and B2C sales contracts to be addressed here is the tendency in EU law to draft all consumer-related provisions as mandatory. The consumer cannot forgo any of his rights granted in the Sales Directive (Article 7), or in the relevant provisions of the CESL. Bar-Gill and Ben-Shahar count eighty-one articles in the CESL which are bestowed a mandatory status.65 However, is there really a need for mandatory rules as long as a judicial control of standard contract terms is guaranteed?66 The safety-net provided by this control seems to be sufficient to protect the consumer in case he could not bargain freely and had to accept unfair terms. The crucial factor is the bargaining factor. According to Article 3(1) of the Unfair Contract Terms Directive of 1993, a contractual term is unfair if it ‘has not been individually negotiated’ and in addition ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’. That means, if the parties have individually negotiated the whole or at least some parts of the contract, this part is not going to be subject to judicial assessment on fairness. Such negotiation has to be proven by the seller (Article 3(2)). Now, if a consumer had for once the chance to bargain and get a better price in exchange for giving up, for example a right to avoid the contract why should the law intervene? Why should the remedial scheme be imposed on a consumer who would knowingly like to dispense with it. Whether or not there was really a bargaining situation, the courts will control anyhow. In fact, a contradiction in the CESL shows also that this relation has been disregarded completely. The ‘black list’ of standard terms in Article 84 CESL defines as its first two unfair terms, standard contract terms (a) limiting or excluding liability for death or personal injury and (b) limiting or excluding liability for any harm caused deliberately or as a result of gross negligence. That means, that in principle, a limitation of liability for property damage and pure economic loss caused as a result of ordinary negligence is possible even in standard contract terms. Obviously, the judge will have discretion to decide if under the special circumstances of the case, such clause is still unfair and has to be invalidated. However, the freedom given to the parties is taken away again in Article 108 CESL, which 65 Bar-Gill & Ben-Shahar, 2013, supra note 48, pp. 109-126 at p. 112. 66 Parallel Wagner, 2011, supra note 17, pp. 9-42 at p. 34, cf. p. 35 for an example from the German market for used cars where an exclusion of liability for hidden defects was common.

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states that in B2C contracts, the parties may not derogate from the chapter on buyer’s remedies, which also includes the damages claim. That means even an exclusion of liability for pure economic loss in case of minor negligence is forbidden under Article 108. It remains open which of these provisions would prevail.67

12.5

Conclusion

The heading of an article of Stefan Grundmann from 2002 is in fact very telling: ‘Consumer Law, Business Law, Private Law – Why are the UN-Sales Law and the EU-Sales Directive So Similar?’ Already then, the author had underlined that there are not many consumerspecific rules in the Consumer Sales Directive of 1999 and that this Directive has to be seen as part of a broader European Private Law applicable to B2B as well as B2C transactions.68 In fact, the short overview above shows that the rules designed specifically for B2C sales contracts are really very rare. It is true that an examination and notification duty is not suitable for B2C contracts. A differentiation in this regard is correct. It makes also sense to accept for B2C sales contracts that the risk during transport is always on the seller given that the seller is the cheapest insurer. The change in burden of proof for the 6 months after delivery of the goods to the consumer is a good way to set an incentive for consumers to apply to courts. However, courts were already very lenient before the introduction of this rule and did not set the standard of proof very high.69 But in all other areas, one can see that either the protection granted should not be specific to B2C contracts (like for advertisement or installation manuals), or that the protection given to the consumer is too excessive (like the right to rescind without first seeking performance, or the stipulation of mandatory rules). One should not forget that in the EU, the dichotomy of B2B and B2C sales is due to competence problems, and the EU has only competence to regulate the latter. But that does not necessarily mean that these two types of sales contracts really need to be also handled differently. Even though this article does not aim at discussing how far the ‘cost’ of consumer protection has to be taken into consideration when drafting codes, this discussion can certainly not be neglected.70 If it is true 67 See also the critique in Eidenmüller et al., 2012, supra note 48, pp. 341-342. 68 Grundmann, 2002, supra note 36, pp. 40-71 at p. 56 et seq. Parallel also von Vogel, 2006, supra note 28, p. 223. 69 Cf. A. Schwartze, ‘Die zukünftige Sachmängelgewährleistung in Europa – Die Verbrauchsgüterkauf-Richtline vor ihrer Umsetzung’, Zeitschrift für Europäisches Privatrecht, 2000, pp. 544-574 at p. 560. 70 Cf. on the issue: Bar-Gill & Ben-Shahar, 2013, supra note 48, pp. 109-126 at pp. 113 et seq.; H. Eidenmüller, ‘What Can Be Wrong with an Option? An Optional Common European Sales Law as a Regulatory Tool’, Common Market Law Review, Vol. 50, 2013, pp. 69-84 at p. 72; Wagner, 2011, supra note 17, pp. 9-42 at p. 31; but also R. Craswell, ‘Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships’, Stanford Law Review, Vol. 43, 1991, p. 361.

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YeŞim M. Atamer that the cost of a protective norm is reflected via pricing on the consumer and the net benefit of the rule for the consumer is less than what he has to pay now more for the goods than the means of protection get even more questionable. Sales law is certainly an area of law unification where it would be worth to follow up this question.

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Application of the CISG to International Government Procurement of Goods

Cesar Pereira

13.1

Introduction

The United Nations Convention on the International Sale of Goods (CISG) originates from efforts of UNCITRAL – United Nations Commission for the International Trade Law. This UN commission is generally charged with recording information and disseminating knowledge regarding the CISG. It is interesting to realize that the same commission develops an entirely separate body of rules and recommendations concerning government procurement. This takes the form of a model law, not a convention for a uniform law such as the CISG. The obvious difference is that while the CISG becomes national uniform law when it is signed and ratified, the UNCITRAL Model Law on Public Procurement is only a reference for national legislators. Nonetheless, such model law is widely acknowledged as an important tool in shaping many countries’ regulation of government purchases.1 Some states have gone beyond the mere adoption of the model law as guidance and have joined the Government Procurement Agreement (GPA) under the World Trade Organization (WTO) framework. This is an international convention that creates harmonized rules based on common principles of fairness and probity. It also ensures national treatment to foreign bidders from contracting states. The original GPA was revised in 2011 and the revision entered into force in April 2014. Prior to its future accession, each prospective new member is required to negotiate with all the others to define coverage and legislative harmonization. Many governments also rely on funding from international financial agencies such as the IRDB – International Reconstruction and Development Bank (World Bank) – or any of the other various similar institutions. While they make funding available, such institutions also ensure that the expenditure of such funds by the recipient government does not discriminate against nationals of other member states and complies with certain minimum 1

For several aspects of international public procurement, including the UNCITRAL Model Law and the GPA/WTO, see S. Arrowsmith, J. Linarelli Jr. & D. Wallace, Regulating Public Procurement. National and International Perspectives, 2000, Kluwer Law International; S. Arrowsmith & M. Troybus (Eds.), Public Procurement. The Continuing Revolution, 2003, Kluwer Law International; P. Trepte. Regulating Procurement, 2004, Oxford University Press.

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fairness and efficiency standards. This is achieved through the mandatory application in many cases of certain guidelines issued by the financial agencies themselves. International government procurement has therefore been the subject of attention by governments, international organizations, and potential suppliers in a variety of forms and angles. The most attention is directed to the harmonization of rules and the avoidance of nationality-based discrimination. The purposes are to ensure access to a global marketplace and give international suppliers a minimum level of foreseeability in the applicable rules. The CISG has similar purposes from a contractual standpoint. It aims to provide legal uniformity as an instrument to facilitate and foster international commercial transactions. It is somewhat surprising that such international instruments or institutions do not explicitly adopt more often (or rather hardly ever adopt) the CISG as a tool for international harmonization.2 Some of the possible reasons for this omission are discussed below. This paper additionally aims at examining certain effects of the CISG on government contracts. It also intends to shed light on the potential benefits of the CISG and to discuss the rights of individual suppliers when the CISG is affirmatively adopted or not effectively excluded or derogated in international government purchases.

13.2

Sphere of Application

Articles 1-3 CISG generally define the Convention’s sphere of application. Article 1(1) provides that “[t]his Convention applies to contracts of sale between parties whose places of business are in different States” when both states are CISG contracting states or when the conflict of law rules lead to the application of the laws of a contracting state. Article 1(3) complements this provision and commands that “[…] nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention”. The exclusions in Article 2 and the clarifications in Article 3 further define the scope of application of the CISG. The provision concerning the irrelevance of the civil or commercial character of the parties or the contract is especially interpreted to mean that the CISG governs any international sales – or, conversely, purchases – of goods, regardless of the nature of the parties or the contract. Government entities are active in international sales, mostly as buyers but potentially also as sellers.3 Therefore, the CISG sphere of application comprises contracts 2

3

See UNCITRAL, Guide to Enactment of the UNCITRAL Model Law on Public Procurement, available from , pp. 61-62, last accessed 20 June 2015. The commentary to Article 3 of the Model Law does not address the CISG as a possible international commitment with impact on public procurement. In many countries, government entities may be involved in the international supply of goods, especially commodities such as metals or oil and gas. The commercial or administrative nature of such transactions

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entered into by national governments at central or sub-central levels. It also comprises contracts subject either to private or to public law in states that acknowledge such distinction.

13.3

Sphere of Application in Government Purchases

The international interpretation of the CISG assumes generally that the CISG is fully applicable to contracts to which states are parties. This encompasses government departments or agencies, such as those responsible for defense purchases, and any type of government-owned or government-controlled corporations found in many jurisdictions. The relevant state entity can be a purchaser or a seller; oil and gas contracts can easily involve government entities as sellers, for instance. Some of the main international commentators of the CISG have examined this topic and are in favor of the potential application of the Convention to government contracts.4 U. Schroeter advances a persuasive explanation about the context of international purchases in which a supplier is selected through a tender process: The CISG furthermore also applies to international sales contracts concluded with a seller which has been selected by way of a call for tender (invitation to tender, call for bids). This form of contract initiation is frequently employed for purchases by private companies, but occurs particularly often in cases in which the buyer is either a government authority (public procurement) or a private company acting in order to fulfill a contract with a government. Domestic laws which govern call for tender often impose certain rules designed to guarantee the fair selection of the successful tenderer (e.g. principle of nondiscrimination, preference for the tender which offers the lowest price or is the ‘economically most advantageous’). Within the EU, such rules are often based on EU Procurement Directives, which in particular seek to protect foreign tenders (sellers).

4

is a matter governed by domestic law. However, they all fall under the general scope of application of the CISG. P. Schlechtriem, ‘Unification of the Law for the International Sale of Goods’, in German National Reports (Private Law and Civil Procedure) XIIth International Congress of Comparative Law, Baden-Baden, Nomos, 1987, pp. 126-127, available from ; I. Schwenzer, ‘Introduction’, in I. Schwenzer, (Ed.), Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, 2010, p. 8 (“Classifying a public body’s procurement contracts as ‘matters subject to public law’ could curtail or exclude the application of the CISG or its individual rules almost at will”). J. Honnold & H. M. Flechtner, Uniform Law for International Sales under the 1980 United Nations Convention, 4th edn, Wolters Kluwer, 2009, pp. 180-183.

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Since domestic laws in this field primarily aim at regulating the phase leading up to the selection of the successful tenderer, the contract can subsequently be concluded in accordance with Articles 14-24 without resulting in any conflict between the two sets of rules. The tenders accordingly constitute offers under Article 14(1), among which the successful tender is accepted by way of the award decision which at the same time constitutes the acceptance under Article 18(1). Domestic provisions declaring null and void such contracts which have been concluded in violation of public procurement information duties or time periods can be applied to CISG contracts by virtue of Article 4, sentence 2(a). If, on the contrary, the domestic law on (public or private) calls for tender provides for remedies which are incompatible with the Convention’s rules – as, e.g. claims for damages for failure to enter into a contract in situations in which the offer was freely revocable under the CISG – such remedies are preempted by the Convention.5 These remarks explain in part why one cannot find internationally a large number of cases applying or discussing the CISG in matters involving government entities.6 In many national laws, unlike in most Latin American countries and in the United States,7 the specific regulation of government procurement focuses only on the selection of the contractor, not on the formation of the contract or the subsequent contract administration (rights and obligations of the parties). This restriction is also true in multinational systems such as the EU Directives, the UNCITRAL Model Law and the GPA/WTO. In addition, larger or more complex purchases are often made through local vendors or with suppliers with places of business in the country of the purchasing government. In Brazil, to use this country as an example, in order to supply goods under a contract that requires substantial activities in Brazil – such as assembly, commissioning and post-sale support – a foreign company must be previously ‘authorized to operate in Brazil’ (Article 1.134 of the Brazilian Civil Code).

5 6

7

U. Schroeter, ‘Introduction to Arts. 14-24’, in Schwenzer, 2010, supra note 4, pp. 244-245. Regarding this topic under Brazilian law, see M. Kurcgant, ‘Os contratos administrativos e a Convenção de Viena sobre venda e compra internacional de mercadorias’, Fórum de Contratação e Gestão Pública, Belo Horizonte, ano 13, n. 152, pp. 54-64, 2014; and C. A. G. Pereira, ‘Aplicação da CISG a licitações e contratos administrativos de compra internacional de mercadorias’, in I. Schwenzer, C. A. G. Pereira & L. Tripodi (Eds.), A CISG e o Brasil, 2015, Marcial Pons, pp. 161-176. For Brazil as a reference for similar regulations in Latin America, see M. Justen Filho & C. A. G. Pereira, (Eds.), Infrastructure Law of Brazil, 3rd edn, 2012, Forum, Belo Horizonte. For the US government procurement regulation concerning contract formation and administration, see J. Cibinic Jr., R. C. Nash Jr. & J. F. Nagle, Administration of Government Contracts, 4th edn, Wolters Kluwer, 2006; J. Cibinic Jr., R. C. Nash Jr. & C. R. Yukins, Formation of Government Contracts, 4th edn, Wolters Kluwer, 2011; S. W. Feldman, Government Contract Guidebook, 4th edn, Thomson Reuters Westlaw, 2013; W. N. Keyes, Government Contracts under the Federal Acquisition Regulation, 3rd edn, Thomson West, 2003, with 2014/2015 supplement issued in October 2014.

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This may eliminate the international character of the sale and make the CISG inapplicable unless (a) the vendor is able to obtain such authorization regardless of not having a local basis (place of business) in Brazil or (b) the seller’s relevant place of business, as defined by Article 10(a) CISG, is outside Brazil. The acknowledgment that government contracts are in the sphere of application of the CISG is just a starting point for understanding the problems regarding international government purchases. The CISG is primarily a body of dispositive rules, which can be excluded or derogated by the will of the parties and applied only in the absence of contrary agreement, with only a few exceptions. Nonetheless, this acknowledgment is an essential element to ensure clarity regarding the rules governing such transactions, especially in view of the CISG rules of which the parties cannot voluntarily contract out of or around. There are significantly fewer reported court and arbitral decisions dealing with government contracts and the CISG than the economic significance of such marketplaces would suggest. International experts estimate a country’s government procurement market at around 10-15% of the country’s GNP (Gross National Product). Many of the world’s largest economies take part in the GPA/WTO, which among other things ensures access to a substantial portion of each country’s government procurement marketplace. In addition, in many large economies such as China and certain countries in Latin America and the Middle East, a significant part of the economy’s transactions involves government-controlled companies subject to government procurement regulations. There is a constant interplay between government procurement rules and the law governing international transactions, namely the CISG. The existing international case law often upholds the premise that government contracts are generally within the CISG’s sphere of application. An outstanding precedent is the US case, Hilaturas, which was resolved in 2008.8 It dealt with the supply of goods to the Iraqi government by a Spanish supplier under the Oil for Food program. The case was ruled in favor of the Iraqi government with grounds on the CISG. Another similar case is ETECSA (Empresas de Telecomunicaciones de Cuba S.A.), involving the purchase by a Cuban mixed-capital company – controlled and partly owned by the government – of cell phones supplied by a South-African vendor. The case was heard by Sala de lo Económico del Tribunal Supremo Popular in Havana, Cuba, on 16 June 2008.9 A third case discussing the CISG involving government entities is Agropodderzhka Trade House LLC v. Sozh State Farm Complex, heard by the Economic Court of the Gomel Region of Belarus on 6 March 2003.10 8

Hilaturas Miel, S.L. v. Republic of Iraq, 573 F. Supp. 2d 781 (S.D.N.Y. 2008), CISG Online 1777. CISG Online, available from , last accessed on 29 June 2015. The case is also reported by Schroeter, supra note 5, p. 244, n. 192. 9 Available from , last accessed on 21 June 2014. 10 CLOUT (Case Law on UNCITRAL Texts) case 496.

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Other cases often mentioned by scholars illustrate ordinary situations involving international government transactions and their relation with the CISG. In the Russian submarine case, the Russian government sold a decommissioned submarine to a foreign party as scrap material. The decision applied the exclusion of Article 2(e) CISG to conclude that the sale of a ship or vessel was not covered by the CISG and that the good at issue was still a ship even if considered inactive by the seller.11 In a case in which the state of Slovenia purchased weapons from an Austrian supplier, a private local Slovenian company intermediated the transaction, but the negotiations were conducted by the then recently formed government (in 1993).12 The Diversitel case dealt with a subcontract for the purpose of finally supplying certain pieces of equipment to the Canada Department of Defense. The delay in performance by a vendor located in California was considered a fundamental breach because it prevented the Canadian buyer Diversitel from timely performing its supply contract with the Canadian government.13 Lastly, many governments and procuring agencies already acknowledge the application and relevance of the CISG with regard to government purchases. In a classic work on the US Federal Acquisitions Regulation (FAR), W.N. Keyes discusses the CISG as part of the rules applicable to international purchases (‘international acquisitions’ in the book’s terminology).14 In 2005, G. Bell reported that the Singapore government had started to define the CISG as applicable law in its international contracts.15 In an unpublished paper dated 2013, D. Hanson mentions the New Zealand practice, which takes into consideration the manual prepared for the New Zealand government as guidance for foreign bidders. This material expressly mentions the CISG as part of the system of rules governing such purchases,16 and the New Zealand government includes this reference in its explanation of

11 Russia 18 December 1998 Maritime Commission Arbitration proceeding 1/1998, available from , last accessed on 21 June 2014. 12 Austria 24 February 1999 Appellate Court Graz (Military weapons case), available from , last accessed on 21 June 2014. 13 Ontario Supreme Court of Justice, Diversitel Communications Inc. v. Glacier Bay Inc., available from , last accessed on 21 June 2014. This case is reported by Schroeter, supra note 5, p. 244, n. 193. 14 W. N. Keyes, Government Contracts under the Federal Acquisition Regulation, 3rd edn, Thomson West, 2003, with 2014/2015 supplement issued in October 2014, pp. 566-569. 15 G. Bell. Why Singapore should withdraw its reservation to the United Nations Convention on Contracts for the International Sale of Goods (CISG). (2005) 9 SYBIL 55–73. Note 36: “A happy exception is now found in the standard procurement contract terms of the Government of Singapore which, in most cases, no longer excludes the CISG. The standard choice of law clause now reads: ‘This Contract shall be deemed to be made in Singapore and shall be subject to, governed by and interpreted in accordance with the Laws of the Republic of Singapore for every purpose.’” See Contract and Purchasing Procedures, issued by the Government of Singapore, available online from . 16 Available from , last accessed on 21 June 2014.

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rules relating to international tender procedures.17 In their March 2013 revision, the World Bank standard tender rules for the purchase of goods recommended the adoption, as applicable law, of the purchasing country’s law, without making reference to any exclusion of the CISG.18 This brief review of scholarly writings and case law leads to the conclusion that international purchases made by government entities are comprised in the CISG abstract sphere of application. This conclusion is a starting point for a detailed discussion of the many problems arising from the interplay between the CISG and the domestic and international regulation of government procurement. The CISG is generally applicable to international sales regardless of whether government entities are involved. A lex specialis argument to favor domestic government procurement law over the CISG is not persuasive. If the government procurement law may be considered special because it deals with public sales whether domestic or international, the CISG is equally special because it deals with international sales whether public or private. The CISG prevails with regard to international sales because it is chronologically more recent and mainly because it is the outcome of an international treaty. The full application of the CISG, excluded or derogated only in accordance with its own Article 6, corresponds to a commitment made by each contracting state toward each and all the others. Government contracts are also not excluded by Article 2 CISG. Article 2(b) CISG excludes sales made through ‘auctions’. In many countries, such as in Brazil, reverse auctions or procurement auctions are one of the most commonly used procurement methods. In addition, government agencies often sell in auctions goods that are no longer in use or that have been apprehended in criminal actions. One could object to the applicability of the CISG by assuming that no sale or purchase made through an auction of any kind would be covered by the Convention. However, this argument has been examined and rejected by commentators given the limited purpose of the Article 2(b) CISG exclusion.19 The same goes for framework agreements or IQID (indefinite quantity, indefinite delivery) contracts: they are covered by the CISG when governments are involved in the same way and with the same restrictions as when the parties are private.

17 Available from , last accessed on 21 June 2014. It should be acknowledged that in spite of such clear reference to the CISG, I was unable to find any instance from New Zealand in which the CISG has been used to resolve disputes regarding government purchases. 18 Available from last accessed on 29 June 2015. 19 Schwenzer & Hachem comment Art. 2(b) CISG and explain that “[…] a contract ‘awarded’ to the highest bidder in a public (international) procurement bid can very well be governed by the CISG”, in I. Schwenzer, (Ed.), Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, 2010, p. 56.

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Finally, the Article 2(a) CISG exclusion does not extend to international purchases made by governments. Although a government entity will not ordinarily purchase the goods for resale or as inputs for industrial activities, it does not generally meet the requirements for treatment as a consumer (purchaser for personal, family or household use) under the CISG.20 In addition, the exclusion of Article 2(a) CISG is not dependent on the concept of consumer transactions given by each country’s own domestic consumer law.21 Even if a government entity can be protected as a consumer under its own law and for certain specific purposes,22 it does not follow that its international purchases or sales will be excluded as consumer transactions under Article 2(a) CISG.23

13.4

Application of the CISG to Govern Its Own Exclusion or Derogation

Government contracts for the international purchase or sale of goods are within the CISG’s sphere of application. In strict legal terms, the main and most immediate consequence of this conclusion is that the CISG’s secondary rules24 (rules of structure or competence – the ones dealing with interpretation of contracts and construction of the parties’ conduct) will always apply. These are the CISG rules that govern the Convention’s own exclusion or derogation. In most situations, the CISG allows the parties to agree on the exclusion or derogation of its provisions. Therefore, the CISG will only govern a certain transaction between a seller and a buyer if the parties have not effectively excluded its application. The CISG is the legal source of the validity and effectiveness of the parties’ actions that exclude or derogate the CISG’s own provisions. Such actions are interpreted within the framework of the CISG, including the principle of uniform international application (Article 7 CISG). 20 See Schwenzer & Hachem, supra note 19, p. 49-55. 21 For the relationship between the CISG and domestic consumer law, see A. C. Beneti, ‘A Convenção de Viena sobre Compra e Venda Internacional de Mercadorias (CISG) e a questão ‘do Direito do Consumidor’, in I. Schwenzer, C. A. G. Pereira & L. Tripodi (Eds.), A CISG e o Brasil, 2015, Marcial Pons, pp. 93-107. 22 M. Justen Filho shows that government contracts are not covered by consumer protection law, only by government procurement law and the provisions of the solicitation and the contract. Consumer law could only apply in exceptional circumstances of a purchase of goods or services directly in the marketplace (Comentários à Lei de Licitações e Contratos Administrativos, 16th edn, 2014, RT Thomson Reuters, p. 1081). The Brazilian Superior Court of Justice ruled in 2010 that consumer law is not generally applicable to government contracts. It will only apply in exceptional circumstances when the government entity is the weaker party in the contract due to specific circumstances of the contract at hand (STJ, 2a. T, RMS 31.073, Rel. Min. Eliana Calmon, j. 26.8.2010). 23 For the CISG prevalence over domestic consumer protection law, see Schwenzer & Hachem, supra note 4, p. 55. 24 The reference is to H. L. A. Hart’s classification of rules in its Concept of Law: primary rules govern conduct; secondary rules govern the enactment, modification, interpretation, application and enforcement of primary rules.

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This guideline will require attention to international commentary and case law from the parties and the domestic decision maker. Otherwise, domestic views concerning the power to exclude or derogate may undermine the application of uniform law and the CISG’s international character. This concern is especially true in jurisdictions where government entities are considered to have certain extraordinary prerogatives in government contracts, in affiliation with the French notion of administrative contract (marché public and contrat administratif). The introduction of the CISG in a certain national context creates normative restrictions to the exercise of government prerogatives. The structural provisions contained in Articles 6-9 will generally govern the extent to which the parties – typically a government entity and a private supplier – will have excluded or derogated from the CISG. It is at least debatable if such government extraordinary prerogatives can apply in an international context, and, if so, how economically efficient they would be. The main structural provisions (secondary rules) of the CISG are those dealing with exclusion or derogation (Article 6), interpretation and related principles such as uniformity and internationality (Article 7), broad admissibility of evidence and guidelines for the qualification of a party’s conduct (Article 8) and uses and practices as source of duties (Article 9). Even if the government entity deliberately opts to exclude or derogate certain provisions of the CISG, as allowed by Article 6 CISG, this option will be recognized, construed and given legal significance in accordance with the CISG provisions. As I. Schwenzer and P. Hachem put it, “The formation and interpretation of the exclusion of the CISG is subject to the rules of the Convention, as the CISG determines its sphere of application autonomously”.25 In a later work, P. Hachem further explains this issue as follows: Where the CISG is objectively applicable, its rules on the formation of contracts must also govern the question of whether an agreement on the exclusion of the Convention has been formed. This notion appears to be undisputed. However, the exclusion of the CISG is typically part of a choice of law clause which at the same time designates the law the parties intend to apply instead of the Convention. The prevalent rule in private international law is that it is the law designated by the parties which governs the formation of the positive choice of law, that is the choice of the law that is intended to apply to the contract. It seems to me that while clearly it is the role of the CISG to decide whether the parties managed to opt out of it, it is just as clearly not the role of the CISG to decide whether the parties also successfully opted into the chosen law.26 25 Supra note 4, p. 104. 26 P. Hachem, ‘Applicability of the CISG – Articles 1 and 6’, in I. Schwenzer, Y. Atamer & P. Butler, Current Issues in the CISG and Arbitration, 2014, Eleven, pp. 37-38. Hachem concludes that “one may interpret an exclusion of the CISG to have been made under the caveat that the choice of law option must, at the same

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13.5

Relationship between the CISG and Domestic Government Procurement Law

Governments in general usually adopt in their government contracts a reference to their domestic public procurement laws and regulations. They also tend to use detailed contracts to describe in great detail the rights and obligations of each party. Article 6 CISG governs the relationship between such choices and the CISG general provisions. The reference to domestic law and detailed contractual provisions amount to an exclusion or derogation as the case may be. We will return to this topic later in this paper. International commentary highlights that the two main points of contact between the CISG and any domestic government procurement law are the issues of validity (Article 4 CISG) and freedom of form (Articles 11, 12 and 13 CISG). Validity is generally excluded from the scope of the CISG, and it is closely related to issues of agency – or, in administrative law terminology, competence and mandate of the procuring agency or official. Freedom of form could, in theory, lead to oral agreements between a government agency and its suppliers. Article 4 excludes validity from the CISG’s sphere of application. Therefore, the selection method for determining the contractor or supplier is normally considered to be outside the scope of the CISG. In countries where domestic procurement law does not govern the content of the contract, only the selection of the contractor, the application of the CISG to international government purchases should be commonplace. The same reasoning explains the situation of agent-principal relationship – or competence of the procuring agency and respective officials. Domestic administrative law will define who is the competent official to act on behalf of the government. This definition is outside the CISG and has no bearing in the application of the CISG. This is why commentators strongly stress that the identification of true agency or competence issues must be strict. An undue confusion between issues of competence and form can lead to an improper expansion of the field that is excluded from the CISG’s sphere of application. On the other hand, the freedom of form enshrined in Article 11 is generally seen as a point of potential conflict with domestic government procurement regulation. Domestic procurement laws generally require government contracts to be done in writing. J. Honnold points out scholars adopt one of two possible interpretations about the interplay between Articles 4 and 11 CISG with regard to government contracts required to be done in writing by domestic law.27 time, be successful”. In systems such as Brazilian conflict of laws rules, according to which parties are arguably not allowed to freely choose the applicable law (except in arbitration, as per Law 9.307, of 1996), the chosen law may be incorporated into the contract as a contractual derogation of the CISG under Article 6 CISG, not as the applicable law resulting from the exclusion of the CISG. 27 Honnold & Flechtner, 2009, supra note 4, pp. 181-183.

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One line of thinking considers that the freedom of form (Article 11 CISG) is overridden by the domestic law requirement since this is an issue of validity, and Article 4 CISG excludes validity from the sphere of application of the CISG. However, this will take place only if the written form requirements under domestic law are justifiable and not merely a formality. The other view considers that Article 11 CISG is an exception admitted by Article 4 CISG. This latter provision defines that “[…] except as otherwise expressly provided in this Convention, [the CISG] is not concerned with: (a) the validity […]”. By providing that “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form”, Article 11 CISG is an exception to Article 4 CISG. Therefore, it provides for freedom of form even when domestic law requires written form for government contracts. In this view, the domestic form requirement is superseded by the CISG freedom of form. It is not a matter of validity under Article 4 because Article 11 is an exception to Article 4 and places this issue under the coverage of the CISG.

13.6

Domestic Government Procurement Law as Derogation of the CISG (Article 6)

In general, a government contract will be done in writing and contain reference to the applicable domestic law. It will also contain as contractual clauses many or most of the applicable legal provisions regarding each party’s obligations and the consequences of their breach. Such references and clauses should be construed as contractual exclusions or derogations of the CISG in accordance with Article 6 CISG. It follows that the criteria laid out by the CISG for the interpretation of the exclusion or derogation will apply to determine the effectiveness and the extent of the derogation of the CISG by the domestic government procurement law or by the contractual provisions. International scholarship and case law set forth requirements for such interpretation, such as (i) the need of clear intent to exclude or derogate, so that the CISG will remain applicable in the absence of an unambiguous choice to avoid such application28 and (ii) the application of the CISG rules on the formation and interpretation of contracts for the construction of the agreement to exclude or derogate, including Articles 8 and 9 CISG. As pointed out below in this paper, the standards of proof for the exclusion of the CISG in unilaterally 28 For the need for a clear and unambiguous exclusion, see Forestal Guarani, SA v Daros International, Inc. (CISG-online 1779), Easom Automation Systems, Inc v Thyssenkrupp Fabco, Corp (CISG-online 1601), Cedar Petrochemicals, Inc v Dongbu Hannong Chemichal Co, Ltd (CISG-online 1509), Property Casualty Company of America et al v Saint-Gobain Technical Fabrics Canada Limited (CISG-online 1435), TeeVee Toons, Inc et al v Gerhard Schubert GmbH (CISG-online 1272) and Ajax Tool Works, Inc v Can-Eng Manufacturing Ltd (CISG-online 772).

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drafted government contracts may be higher due to the constitutional protection of the counterparty’s trust and legitimate expectations or, when such protection is not available, due to the contra proferentem doctrine. The incorporation of government procurement law into the contract may cause the contract to be governed by the CISG with most of its substantive provisions derogated by domestic public procurement law. This solution may be undesirable but is acceptable under Article 6 CISG. There is only a difference in degree between the derogation of only one provision of the CISG and the derogation of most of its provisions. If the incorporation by reference of the contrary conditions of the domestic public procurement law renders inapplicable all but one provision of the CISG (e.g. Article 11 about freedom of form), this will still be important and useful for the party invoking the CISG for its protection. One point that is particularly relevant is again the freedom of form under Article 11 CISG. Even if the original contract is generally done in writing, as this is the international practice in government contracts, there can arguably be amendments made with freedom of form. If the parties have not either expressly or by incorporation excluded oral amendments, these will be valid in accordance with Article 11 CISG. In the US government procurement practice, scholars and case law adopt the idea of constructive changes as opposed to formal changes to the contract. The former are inferred from conduct rather than from formal agreements.29 Equivalent concepts exist in other jurisdictions. It is generally common for contractors in disputes with procuring agencies to use letters exchanged between the parties or other actions attributable to the government entity as grounds to establish constructive changes. If not excluded, Article 11 CISG will apply in such situations to give the nature of a binding agreement to such actions intended to modify the original contract even if they do not take the form of written agreements.

13.7

Possible Violation of the Bidders’ Right to Equal Treatment

In accordance with Article 1 CISG, the Convention will only apply to contracts between parties with places of business in different states. Internationality is one of the requirements for the CISG to apply. In a certain tender process initiated by a national procuring agency of a contracting state, and assuming that the conflict of laws rules lead to the application of such state’s law (Article 1(1)(b) CISG), the CISG will apply if the contract is awarded to an international supplier. However, there may be international and domestic bidders. This will lead to a situation in which each bidder may be subject to a different set of substantive rules depending on whether it is domestic or international.

29 See S. W. Feldman, Government Contract Guidebook, 4th edn, Thomson Reuters Westlaw, 2013, esp., pp. 532-535 (formal changes) and pp. 535-545 (constructive changes).

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A principle that is internationally accepted in government procurement is the equal treatment of the bidders. All national systems that follow international standards avoid discriminatory provisions that submit bidders to different treatments without reasonable justifications. Many countries adopt benefits for small and medium enterprises (SME), create preferences for locally made goods or services (‘buy national’) or use public procurement as a public policy tool (green procurement, for instance). However, these benefits must follow certain requirements and above all must not merely result from arbitrary discrimination against certain bidders, products or services. A question that must be addressed is whether equal treatment is violated when a procuring agency tenders out a contract that may be subject to the CISG or to domestic law depending on who the winning bidder is. Putting it in another way is the government entity required to have tenders only with international suppliers (subject to the CISG) or only with domestic suppliers to avoid this possible breach to equal treatment? In the situation described above, there is no breach to equal treatment and no requirement for a separate tender process for each category of supplier. The difference in applicable law (CISG or domestic law) simply reflects a factual difference between the suppliers. Being located in different countries, they are subject to a variety of different burdens and are benefitted by a variety of different advantages. The bidder will be allowed to choose whether to take part in the tender as an international company or to set up a place of business in the procuring country. This organization is not different from any other tax or corporate arrangements. The bidder is responsible for the consequences of its choice. This leads to the application of Article 10(a) CISG, which deals with parties that have more than one place of business. The rule provides for the criteria to determine which place of business is material and decisive to the contract.30 The application of different rules for the contract depending on the relevant place of business of the winning bidder is possible and lawful. It leads to no invalidity or defect of the tender process. However, it is convenient that the rules are substantially the same to allow for a better comparison between the various bids. In the international practice, it is widely acknowledged that the CISG has been serving as inspiration for the reform of the domestic law on the purchase and sale of goods.31 This effect has started to take place in Brazil as well. At the time of writing of this paper, a bill pending discussion in Congress for the enactment of a new Commercial Code has formally received amendment requests 30 See Schwenzer & Hachem, supra note 19, pp. 199-202. P. Hachem in a later work mentions that the preferable view “operates on a case-by-case basis and relies on the domicile of the place of business which has the strongest influence on the contractual relationship. The strongest influence will typically be exerted by the place of business where customer complaints are ultimately handled, not merely filed, and in particular where the decisions on the next steps to take in handling disputes, including legal measures, are made”. See Hachem, 2014, supra note 26, p. 34. 31 I. Schwenzer, ‘Introduction’, in Schwenzer, 2010, supra note 4, p. 10.

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Cesar Pereira to include rules similar to the CISG to apply to domestic sales.32 If this bill passes, the rules for international and domestic sales will be substantially similar. International scholarship mentions a variety of other examples of national law being influenced by the CISG. Rules such as the Brazilian Commercial Code are not directly applicable to government contracts, only as principles of contract law that are incorporated by domestic law. Nonetheless, a government entity should draft the contract in a way that will reduce the difference between parties that are subject to the CISG and others that may be subject to domestic law. Uniformity may lead to important gains for the procuring agency. The government can create uniformity by adopting contractually agreed-upon rules that are substantially the same for domestic and international suppliers. This will reduce the possible and otherwise lawful discrepancy between the different sets of rules to which each potential party may be subject.

13.8

Need for Clarity in Government Contracts

The CISG as default applicable law will combine with domestic procurement law and specific contractual provisions, since the latter will be incorporated as Article 6 derogations of the CISG. This combination will establish the rules ultimately applicable to a certain government contract. This arrangement is valid but highly inconvenient. The procuring government agency should have a clear definition in its contracts of the points in which the CISG provisions will be replaced with domestic law or contractual provisions. The ambiguities or uncertainties must be resolved in favor of the application of the CISG due to the international commitments the Convention is designed to carry out. In addition to being required by the CISG as a condition for the effectiveness of any exclusion or derogation, clarity in the adoption of the CISG is part of any contracting state’s commitment upon joining the CISG system. In the international context, the accession of any country to the CISG community creates in the international counterparties the legitimate expectation that their contracts with the other country’s nationals will be governed by the CISG. This expectation must not be frustrated, especially by the government agencies themselves. Therefore, they should avoid using ambiguous contractual language and (or) creating an uncertainty in the international suppliers as to what law and other conditions will apply. The consequence of these premises is that the general criteria for recognition of an effective exclusion or derogation will apply. Scholars and case law have extensively developed such criteria. In general, both explicit and implied agreements are admitted to exclude or derogate. For instance, whilst case law does not consider a choice of ‘Brazilian law’ as 32 The bill is styled PL 1.572. Amendment 59 creates a domestic system that reproduces many of the CISG provisions.

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an exclusion of the CISG (since the Convention is part of that law), a choice of ‘Brazilian Civil Code’ may amount to an exclusion under Article 6 CISG if it reflects the intent of the parties to adopt an entirely different system of rules rather than the CISG.33 Such reasoning may not be immediately applicable to government contracts, in which a higher standard of clarity is required for an exclusion to take place. International suppliers to a state entity may expect their contracts to be in principle governed by the uniform law adopted by the state. By adopting the CISG, a state makes a promise to its potential international suppliers – or buyers, when the state is a seller – that the uniform law will be applicable. This promise does not make it impossible for the state to exclude or derogate from the CISG under Article 6. However, it sets a higher standard of proof for the intent to exclude. The situation involves a legitimate expectation covered by the protection of trust. Protection of trust is generally acknowledged as a derivation of widely accepted public law principles.34 Such protected trust entitles the counterparties in a government contract for the international sale of goods to expect the CISG to apply unless clearly and expressly excluded. This is a matter of validity of the exclusion based on domestic public law standards, which are incorporated by Article 4 CISG. The same conclusion can be reached from a contra proferentem perspective, provided that the relevant government entity in a given transaction unilaterally defines the terms of its contract under public law. This goes beyond the notion that in doubt, the application of the CISG should be favored. It requires the contract to be interpreted in any case in favor of the application of the CISG unless the opposite clearly arises from the language of the contract. In a legal system in which no protection of trust is available and in which government contracts are negotiated without any prevalence of the government position, – i.e. in which the fundamental terms are not unilaterally set by the procuring agency – a higher standard of proof for exclusion or derogation will not exist. Conversely, in systems that recognize such higher standard of transparency applicable to government action, an exclusion of the CISG in a government contract must be express and explicit, and the usual standards for exclusion by implication will not apply. The CISG will then apply given that the contract will be in its sphere of application.

33 See Hachem, Schwenzer, supra note 19, pp. 114-116, esp. p. 115: “It seems common ground that the reference to a set of non-unified domestic sales provisions sufficiently indicates an intention to derogate from the entire Convention – e.g. ‘this contract is governed by the provisions of the German Civil Code (BGB)’. Such reference may, however, fail to effect a derogation from the entire CISG where the set of rules designated is only applicable to ‘merchants’ as defined by the domestic set of rules envisaged and this requirement is not fulfilled by both parties.” 34 P. Reynolds, Legitimate Expectations and the Protection of Trust in Public Officials (8 October, 2010). Public Law, Vol. 2011, p. 330, 2011. Available from SSRN: .

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13.9

Role of Bid Protests and Challenges

Most domestic procurement regulations provide for mechanisms for bidders to interfere in the drafting of the solicitation or the contractual documents. Although this varies from country to country, the potential bidders are generally allowed to object to conditions in the solicitation documents or to challenge-specific decisions by the procuring agency. Depending on each domestic system, such challenges may be escalated to higher ranks within the government or ultimately be taken to courts. The phase after the advertisement of the tender and the actual bidding session is the adequate period for this form of participation. This is the appropriate drafting stage in which the procuring agency will finalize the solicitation and make all necessary decisions that will guide the entire process. If a bidder considers that the provisions concerning the application law are not sufficient, it should exercise its right to protest in order to request the application of the CISG or of part of its rules to the contract at issue.

13.10 Advantages for the Procuring Agency in Applying the CISG Another angle to explore is how convenient or economically efficient it may be for the procuring agency to opt to keep the CISG as applicable law on the formation and content of the international sale contract, refraining from excluding or derogating its rules. Any country that joins the CISG is in a way affirming the virtues of the Convention. This does not entail a duty to apply the CISG provisions. However, it does require the decision to exclude or derogate to be reasonable and grounded on sound legal reasons. Otherwise, a country’s own government will be denying the conditions to fulfill the international expectations with regard to such country’s disposition in adopting the uniform legislation. There are important advantages in the total or partial adoption of the CISG to govern the international purchases made by government entities.35 As pointed out above, countries such as Singapore and New Zealand expressly ensure in their public procurement guidelines the application of the CISG in these cases. The World Bank standard contract form also does not exclude the CISG. First of all, there are the CISG provisions that give reassurance to the international supplier and facilitate transactions. Its rules result from extensive discussion and the reconciliation of different legal systems. Three important examples are (i) the duty to inspect

35 For a comprehensive overview of why parties should apply or exclude the CISG, albeit not specifically focused on government contracts, see L. Spagnolo, CISG Exclusion and Legal Efficiency, Wolters Kluwer, 2014, especially pp. 78-100 (substantive advantages and disadvantages of the CISG) and pp. 101-148 (non-substantive advantages and disadvantages).

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the goods and to give notice of non-conformity within a reasonable period (Articles 38 and 39 CISG), (ii) the provision that a party is liable only for damages that the party ‘foresaw or ought to have foreseen at the time of the conclusion of the contract’ (Article 74 CISG) and (iii) the duty to mitigate one’s losses as a requisite for full recovery (Article 77 CISG). The derogation of these or other rules will cause contractual insecurity and may discourage responsible suppliers from bidding on a certain procuring agency’s tender processes. In addition, there is the issue of subcontracting. In many situations, a party supplying international goods to a government agency will have subcontracts that are subject to the CISG. When the government agency can foresee that this is the case, it is especially important that the CISG applies also to the contract between the government agency (ultimate buyer) and the immediate supplier. This will make it easier for the supplier to manage its contractual relationships with its own subcontractors. One of the cases mentioned above relating to the CISG in government transactions is Diversitel. The case involved an international sale in the defense sector for the ulterior purpose of supplying the item to Canada’s Ministry of Defense. Even if the CISG does not directly apply to the supply contract, its provisions can inspire a contractual arrangement that is similar to the subcontract. In Diversitel, for instance, the immediate contractor was Canadian and, therefore, not subject to the CISG; the Convention applied primarily to the subcontract. These advantages reflect mainly on the price to be paid. Although there are no specific statistics about this issue, one may infer that an increase in the assurances given to the international bidder will result in reduction of price. International banks or development agencies also play a role in this matter by analyzing and approving contracts for the use of funds that are donated or loaned. Another of the most well-known cases involving the CISG in government contracts involves a Spanish supplier and the Iraq government within the program Oil for Food, with international funding. A government procuring agency must not take the easy road of simply excluding directly or indirectly the application of the CISG. Either because of the international commitment the CISG embodies or due to the many advantages of the uniform law, the government agency is obligated to examine specifically the CISG and decide in a rational manner, with stated reasons, about its full application or possible derogation.

13.11 Conclusion The CISG sphere of application under Articles 1-3 CISG generally encompasses contracts entered into by government agencies or entities. When a government agency or entity from a CISG contracting state makes an international purchase (or, more rarely, a sale),

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the CISG will apply unless the relevant contract excludes or derogates the CISG in accordance with Article 6 CISG or one of the exclusions of Articles 2 or 3 CISG is in place. The effectiveness and scope of any exclusion or derogation will be assessed and construed according to Articles 7-9 CISG. The constitutional protection of the private counterparty’s trust or legitimate expectations may lead to a higher standard of proof for the exclusion of the CISG. A contractual reference to a state’s domestic government procurement law will primarily not be interpreted as an agreed-upon exclusion of the CISG, but rather only as a derogation of the contrary CISG provisions based on Article 6 CISG. In most national systems, the main areas of potential conflict between the CISG and international government procurement regulation are the issues of agency (Article 4 CISG) and freedom of form (Article 11 CISG). However, contract administration issues may be relevant in states in which government procurement legislation comprises not only the selection of the contractor but also the formation and content of the contract, such as in most Latin American countries and the United States. Government transparency and effectiveness require clarity in the exclusion of the CISG. The lack of clear exclusion will allow a private contractor to rely on the CISG provisions that have not been derogated by contractual provisions or by incorporation of the domestic government procurement regulation into the contract. Government agencies and entities must weigh the benefits of adopting the CISG. Bidders and interested third parties, such as citizens in systems that recognize the citizen’s standing to challenge bidding procedures, have a role under national legislations to participate in the effective adoption of the CISG by submitting protests and challenges. These tools give the bidders the means to influence the final language of the contract with regard to the application or derogation of the CISG. The CISG interferes directly with any government’s international purchases. No government entity in a CISG contracting state may ignore the uniform law. Governments and international bidders must be aware of this legislation and its impact on their international transactions. The application or possible derogation of the CISG in each specific case must be clearly discussed and decided in a rational manner. Domestic laws generally provide the tools for each government’s agencies to make informed decisions and for bidders to directly interfere in the process of creating the solicitation for tenders. These tools comprise the ability to cause the procuring agency to reflect and decide on the application of the CISG based on rational reasons. In countries in which the accession to the CISG is relatively recent, the foreseeable inertia of government agencies to adjust to the CISG may be generally overcome by the active, careful and attentive conduct of the suppliers that potentially take part in the government’s procurement proceedings.

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OHADA and CISG: Alternatives or Complementary Instruments?

Jean Alain Penda Matipe*

14.1

Introduction

Sub-Sahara Africa’s (SSA) economic potential is booming. According to a recent projection by the World Trade Organization (WTO), African countries, along with the BRICs (Brazil, Russia, India and China), are becoming major players in global trade.1 As a result, today’s global trade includes not only activities between rich and developing countries but also among developing countries. This important shift is in part the result of legal integration efforts, through the process of unifying trade rules. This global trend has been embraced on the African continent, where seventeen Central and West African countries, in their struggle to boost domestic trade, intra-African trade, inter-regional trade, direct foreign investment and international trade, have established the Organization for the Harmonization in Africa of Business Laws (OHADA, from the organization’s French title).2 More sophisticated than any previous legal integration adopted in Africa,3 the OHADA framework relates exclusively to business law and resides both inside and above the existing national systems. Even if the OHADA’s original focus had been to encourage foreign investment, the uniformity of text and interpretation also facilitates south-south trade and even purely domestic transactions.4

*

1

2

3 4

The author is deeply grateful to Claire Moore Dickerson, Prof. of Law, and Sen. J.B. Breaux, Chair Emerita, Tulane University Law School (United States) for editing this work. All web pages were last accessed in June 2015. See V.Thorstensen & I.T. Oliveira, ‘BRICS in the World Trade Organization: Comparative Trade Policies Brazil, Russia, India, China and South Africa’, in V. Thorstensen & I.T. Machado Oliveira (Eds.), Ipea, CCGI (FGV) and SAIIA, translated for the South African Institute of International Affairs (saiia) by Language Inc., 2014, p. 50, available from . J.A. Penda Matipé, ‘Legal Integration in Colonial and Immediate Post-Colonial Sub-Saharan Africa’, in C. Moore Dickerson (Ed.), Unified Business Laws For Africa, Common Law Perspectives on OHADA, iedp, London, 2012, p. 22. C. Moore Dickerson, ‘Harmonizing Business Laws in Africa: OHADA Calls the Tune’, Columbia Journal of Transnational Law, Vol. 44, No. 1, 2005, p. 39, at p. 59. Participation of developing countries in world trade: Overview of major trends and underlying factors, WT/COMTD/W/15, 16 August 1996, Committee on Trade and Development, note by the WTO Secretariat, available from .

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The OHADA has inspired similar integration efforts across SSA. The East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA) are examples of legal integration unifying trade rules in eastern and southern Africa.5 However, even if the OHADA’s core concept of unified laws and institutional structures has been imitated throughout the continent, it remains a unique regional effort, harmonizing and unifying sales laws at both domestic and supranational levels.6 For its part, the United Nations Convention on Contracts for the International Sale of Goods (CISG), set up by the United Nations Commission on International Trade Law (UNCITRAL), is the first successful effort to harmonize sales law on a worldwide scale.7 It is one of the leading tools that shape the current global trends. It provides modern, uniform and fair rules for contracts for the international sale of goods. Available in six official languages,8 the CISG has gained an international recognition where nine out of ten leading trade nations are member states.9 But this international recognition has not extended to Africa,10 where only eleven countries out of the eighty-three are CISG’s member states and only four out of the seventeen are the OHADA member states.11 The common goal for both the OHADA and the CISG is to unify the international sales law. However, the former focuses on the regional level and the latter on ‘universal’ or worldwide unification. Based on that primary distinction, this article will briefly introduce these instruments, then discuss how they can best coexist and even cooperate, as each seeks to expand its reputational and geographic reach.

5 6 7

Id., pp. 22-27. Id., p. 22. L.G. Catellani, ‘Promoting the Adoption of the United Nations Convention on Contracts for the International Sale of Goods (CISG)’, 13 Vindobona Journal of International Commercial Law and Arbitration, 2009, p. 241; as on 1 April 2015, eighty-three states have ratified the convention to date, which represent three thirds of world trade. An updated status is available from . 8 The text of the CISG was finalized and approved in the six official languages of the United Nations at the United Nations Conference on Contracts for the International Sale of Goods, held in 1980, in Vienna. The offical languages are Arabic, Chinese, French English, Russian and Spanish and available from . 9 This is the Group of Ten (economic) or G-10 which includes Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. However, only the United Kingdom is not a CISG member state. 10 The African CISG member states are Benin, Burundi, Congo (Republic of), Egypt, Gabon, Guinea, Lesotho, Liberia, Mauritania, Uganda and Zambia, available from . 11 The OHADA member states are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, the Comoros, Congo (Republic of), Congo (Democratic Republic of), Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea Bissau, Guinea, Mali, Niger, Senegal and Togo. See OHADA Web site at or . However, only Benin, Gabon, Guinea and Congo (Republic of) are contracting states of the CISG.

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OHADA and CISG: Alternatives or Complementary Instruments?

The OHADA

14.1.1.1 The Path to the OHADA The path to the OHADA’s integrated legal system was complex. Since their independence, Sub-Saharan countries had suffered serious economic instability, mirrored and even accentuated by similar instability in their judicial systems. These hardships were a consequence of military coups, humanitarian crises and sometimes even a glut in primary goods. Eager to confront domestic and regional challenges, a handful of Central and West African countries conducted an investigation.12 The investigation revealed a low investment rate, a low level of trade, heterogeneity of business-related legislation and an untrained judiciary. These countries recognized that this reality was a major obstacle to trade and economic growth.13 The states parties to the discussion agreed to implement sophisticated uniform laws favorable to economic development, including foreign investment into the region. It was not only the texts of the law that needed to be uniform but also their interpretation; both would depend on transparency and contribute to certainty.14 To ensure a successful implementation, the reforms were designed to include an entire structure, including several institutions to attend to a multiplicity of needs, from legal education for all legal professionals, to a legislature balanced among the member states and conducive to responsive legislation, to an independent and informed judiciary.15 For that reason, the OHADA, unlike the CISG, is a supranational organizational regime. 14.1.1.1.1 The OHADA Treaty The OHADA was established by a treaty signed in 1993 and today has seventeen SSA countries as contracting parties.16 The mechanism put in place to ensure the efficacy of this system includes institutional organs that constitute the organization17 and statutory instruments known as ‘Uniform Acts’.18 This is the legal framework that governs commercial activities and business transactions in the region, under a common goal, namely, to foster economic development and enhance the investment climate in each of the member states and within the region.19 The mutual reinforcement between the structures and the uniform laws, all for the purpose of stimulating a common regional market, is a unique feature of the OHADA. 12 13 14 15 16 17 18 19

K. Mbaye, ‘L’histoire et les objectifs de l’OHADA’, Petites Affiches, No. 205, 2004, p. 4. Id. See K. Mbayé, ‘Avant Propos du numéro spécial OHADA’, Revue Penant, No. 827, 2000, p. 125. See K. Mbayé, ‘L’histoire et les objectifs de l’OHADA’, Petites Affiches, No. 205, 2004, pp. 4-7. See OHADA member state, supra note 4. OHADA Treaty, Art. 3. OHADA Treaty, Art. 5. OHADA Treaty, Art. 1.

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14.1.1.1.2 The OHADA’s Structure Organization: Judicial Security Pursuant to its Treaty, the five OHADA institutions are as follows: 1. The Conference of Heads of State and of Government. The OHADA’s highest institution and political body, it rules on any question relating to the OHADA Treaty.20 2. The Council of Ministers. The OHADA’s legislative body composed of representatives of the OHADA’s states party. It adopts statutes called Uniform Acts.21 3. The Permanent Secretariat. The OHADA’s executive body, it assists the Council of Ministers and coordinates the preparation for and monitoring of adoption of the Uniform Acts.22 4. The Common Court of Justice and Arbitration (CCJA). The OHADA’s judicial body, its principal role for purposes of this article is to act as a supreme court and advisory organ that ensures the uniform application and interpretation of the uniform laws across member states.23 5. The Regional Professional School of Magistrates. The OHADA’s training center for lawyers, judges and other legal professionals, concerning the OHADA. It is also a regional center for research in business law.24 The first three of these institutions create the backdrop against which the CCJA and national courts operate in the OHADA context, while the last two contribute directly to judicial security. The CCJA is the front line in the battle for judicial security: in its most typical role, it hears appeals on matters relating to the Uniform Acts.25 These appeals are brought by lawyers from an OHADA member state, where the dispute was first heard before the regular, national judicial system. The Regional Professional School contributes to judicial security by enhancing the knowledge and sophistication of the bench and bar.26 The OHADA Statutes: Legal Security Pursuant to the Treaty, nine Uniform Acts have been enacted covering a broad spectrum of business laws that can be organized in three categories. The first are those covering commercial operations. The second are those related to the setting up and registration of commercial companies and economic interest groups. The last category deals with the settling of contractual and other business disputes that may arise within the OHADA

20 21 22 23 24 25 26

OHADA Treaty, Art. 27(1). OHADA Treaty, Arts. 4, 27(2). OHADA Treaty, Art. 40. OHADA Treaty, Art. 14. OHADA Treaty, Art. 41. OHADA Treaty, Art. 15. See Moore Dickerson, 2005, supra note 3, pp. 57-58.

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zone.27 The Uniform Act relevant for this article is from the first grouping: the General Commercial Law (UAGCL).28 14.1.1.2 The OHADA: A Regional and Domestic Commercial Law The OHADA is both a regional and a national legal framework. As a regional law, the OHADA’s long-term goal is to achieve a uniform knowledge about and application of the Uniform Acts. Further, because the Uniform Acts also are the domestic law, identical in each OHADA country, lawyers and business people within one OHADA member state not only benefit from the judicial and legal security within that state’s borders, but they automatically know the OHADA law for all OHADA states. The institutions described above, and in particular the Council of Ministers and the CCJA, harmonize – unify – both the texts and the application of the law throughout the region. Within the OHADA’s territory, there typically exist layers of business laws: customary laws, each country’s domestic laws, originally dating to before independence, and now there are the OHADA Uniform Acts, including the UAGCL. On the domestic level, and thus on the regional level as well, the OHADA strives to reduce this complex legal pluralism through pre-emption. Pursuant to an advisory opinion of the CCJA,29 requested by Côte d’Ivoire, it is now clear that, upon their entry into force, the Uniform Acts supersede any previous national legislation or regulatory provision that has the same purpose as the Uniform Acts and also any provision that conflicts with or is identical to these.30 Concerning the UAGCL,31 it is worth emphasizing that the Act expressly provides that former ordinary law rules will be applied if the UAGCL is silent about a substantive part of the law or does not provide a solution in the Uniform Act.32 The words ‘ordinary law’ refer to the French civil law as applicable in civil law jurisdictions33 or the Sale of Goods

27 General Commercial Law (EIF: 1998); Securities (EIF: 1998 and R-EIF: 15 Feb 2011); Commercial Companies and Economic interest groups (EIF: 1998 and R-EIF: 5 May 2014); Accounting Law (EIF: 1998); Debt collection procedures, EIF: April 1998; Arbitration and bankruptcy (EIF: 1999); Transportation of Goods by Road (EIF: 2004); Cooperative companies (EIF: 2010). 28 The revised version of the UAGCL entered into force on 15 February 2011. 29 See ‘Interpretation of the OHADA Treaty Art. 10’, which states that Uniform Acts are directly applicable and overriding in the contracting states notwithstanding any conflict they may give rise to in respect of previous or subsequent enactment of municipal laws. 30 See Advisory Opinion No. 001/2001/EP/30, April 2001. 31 This Uniform Act consists of several books including the ‘Status of Traders and Enterpriser’ (Book I); ‘National File’ (Book III), ‘Regional File’ (Book IV), ‘Digitalisation of the Trade and Personal Property Credit Register, the National File, and the Regional File’ (Book V), ‘Professional Leases and Businesses’ (Book VI), ‘Commercial Middleman’ (Book VII) and ‘Commercial Sale’ (Book VIII). 32 UAGCL Art. 205; UAGCL replaces former French commercial law in 1998; Adopted on 17 April 1997 and enforced by derogation on 1 January 1998. More specifically, Book (V) dealing with commercial sales. 33 See OHADA member state, supra note 4.

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Act and the received common law rules of contract law as applicable in the English jurisdictions of Cameroon.34

14.1.2

The OHADA’s UAGCL and the CISG

The sales law in the UAGCL is largely based on the CISG. However, there are differences easily identifiable in practice. 14.1.2.1 The UAGCL and the CISG: Scope and Territorial Rivalry The UAGCL and the CISG differ in some aspects insofar as the scope and sphere of the application are concerned: the UAGCL for instance is limited to sales contracts between professional traders (‘commerçants’);35 in contrast, although the CISG does not cover consumer goods, it does include sales contracts with non-traders such as members of learned professions, as well as traders. It follows that the CISG applies to a wider range of transactions than does the UAGCL. The geographic limitation on the application of the UAGCL contains notable differences with the CISG. The territorial coexistence between the UAGCL and the CISG is not absolutely clear in every respect, although much is fairly straightforward. For instance, consider a sales contract where the parties’ places of business are located in two different countries, one a member of the OHADA and the CISG and the other a member of the CISG but not the OHADA. In that case, the CISG would apply. If the OHADA country were not a member of the CISG, normal conflicts principles would apply. If the parties’ places of business are again located in two different countries, one a member of the OHADA and the other this time a non-member of the CISG, normal conflicts principles will apply to determine which country’s internal law is applicable. The OHADA country’s internal law would normally be the CISG if the OHADA country were also a member of the CISG, and otherwise would be the UAGCL.36 The situation is more nuanced when the parties’ places of business are located in two different countries, both of which have adhered to the OHADA, and at least one of which is a member of the CISG. Under these circumstances, the CISG will likely prevail if both are members of the CISG, or if only one has but conflicts principles impose the law of the

34 Cameroon is a bilingual and bijural nation. The former Southern Cameroons inherited from Britain the ‘Sale of Goods Act 1893’ along with the English law, doctrines of equity and statutes of general application and the former West Cameroon from France the ‘1804 French Civil Code’, the ‘1806 Civil Procedure Code’ and the ‘1807 Law of Commercial Companies’ and that of the Commercial Code. 35 UAGCL Arts. 2, 234, 235. 36 OHADA Treaty, Art. 10; F. Ferrari, ‘Universal and Regional Sales Law: Can They Coexist?’ Uniform Law Review, Vol. 8, Issue 3, 2003, p. 177, at p. 178; J. Issa-Sayegh, ‘La vente commerciale en droit OHADA: apports et emprunts’, European Journal of Law Reform, Vol. 13, Issue 3-4, 2011, p. 344, at p. 346.

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OHADA-CISG member: the OHADA countries have made no reservation to the CISG and no declaration under the CISG Article 94. Further, and although the OHADA is based on an international agreement for purposes of the CISG Article 90, the OHADA Uniform Acts, including the UAGCL, are almost certainly not an ‘international agreement’ for purposes of that CISG article, so the CISG would prevail. The pro-CISG outcome would change, however, and the OHADA’s regional laws would apply to this transaction, if the OHADA countries have made a declaration under the CISG Article 94 – a declaration that can be made ‘at any time’.37 From this description of the territorial rivalries, it appears that the CISG gives a reasonable opportunity for a domestic and regional law such as the UAGCL to protect its space from CISG pre-emption. Even within contracting states of the CISG, there is room for regional unification,38 to operate without danger of conflict with the CISG – so long as the CISG member states have effected an Article 94 declaration. To the extent of this CISG flexibility, the CISG and the UAGCL can evolve to complement each other. 14.1.2.1.1 The UAGCL and the CISG: Substantive Differences Despite the efforts of both the UAGCL and the CISG to reflect modern concepts, there are detailed differences between the two. Those differences, of course, are the reason why it is important to understand the interplay of the UAGCL and the CISG. The rules related to the formation of the contract are largely the same in the two instruments. However, unlike the CISG, the UAGCL has a point related to the payment of the price, whereby the price stated in the contract of sale is presumed free from other charges, like taxes.39 We can infer that the UAGCL provides therefore more predictability for the seller to receive the price of the goods sold and thus provides more certainty in application of a contract of sales. The UAGCL rules relating to examination and notice provisions are quite similar to those of the CISG. Both regimes impose an obligation on the buyer to examine the goods and to give notice to the seller of any non-conformity. A buyer who does not comply with this duty loses all remedies relating to the non-conformity.40 However, there is one striking difference between the two laws. The CISG protects the buyer who has a reasonable excuse for its failure to give the required notice, by giving it the opportunity to reduce the price of the goods if they are non-conforming to the contract or to claim damages except for loss of profit.41 The UAGCL fails to protect a buyer who

37 CISG, Art. 94; see Ferrari, 2003, supra note 36, Issue 1/3, p. 178, at pp. 179-180; Issa-Sayegh, 2011, supra note 36, p. 346. 38 See Ferrari, 2003, supra note 36, p. 180. 39 UAGCL, Art. 263. 40 UAGCL, Arts. 258, 259; CISG, Art. 39(1). 41 CISG, Art. 44.

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does not provide a timely notice, even if it has a reasonable excuse. Thus, under the UAGCL, even a buyer with a reasonable excuse for not giving timely notice will lose all remedies and will have to pay the full purchase price for non-conforming goods.42 Furthermore, the CISG allows the buyer to give notice of non-conformity during a period of up to two years from the date on which the goods were actually handed over to the buyer,43 while the UAGCL limits this period to one year.44 The remedies for breach of breach contract in the two instruments are roughly the same. Under both, for instance, avoidance of the contract requires as a general rule that the breach of contract be fundamental. However, there are notable differences in the procedure and mechanism used to remedy the aggrieved party. What amounts to fundamental breach in the UAGCL is left to the appreciation of the judge, upon the request of one of the parties, whereas the CISG clearly defines when a breach is deemed fundamental.45 This is a striking difference as the definition of fundamental breach based on discretion may vary from case to case and thus create uncertainty, a climate less desirable and less favorable for both domestic and regional traders.46 Both instruments allow unilateral termination of the contract by mere declaration. However, the UAGCL differs from the CISG by making it clear that unless a reasonable warning was given to the defaulting party, any consequence resulting from a unilateral termination remains on the party declaring it, even if the court later confirms the breach to have been fundamental.47 Given the sophisticated procedure under the UAGCL, even a serious breach may not be fundamental, reducing the certainty, and therefore the security, of a contract of sale.48 Finally, the duty to mitigate damages is covered in the UAGCL only in the case of fundamental breach,49 while the CISG applies the duty more broadly.50 14.1.2.1.2 The UAGCL Trend towards the CISG There have been a few significant changes in the revised version of the UAGCL, adopted in 2011. Although, as we have just seen, there remain important differences between the

42 I. Schwenzer, ‘Regional and Global Unification of Sales Law’, European Journal of Law Reform, Vol. 13, Issue 3-4, 2011, p. 375. 43 CISG, Art. 39(2). 44 UAGCL, Art. 259. 45 CISG, Art. 25; UAGCL, Art. 281. 46 See Schwenzer, 2011, supra note 42, p. 376. 47 UAGCL, Arts. 281(3), 284. 48 See Schwenzer, 2011, supra note 42, p. 376. 49 UAGCL, Art. 266; CISG, Art. 77. 50 CISG, Art. 77.

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UAGCL and CISG, these 2011 changes represent a general shift of the UAGCL towards the terms of the CISG.51 One example is the specification of the price, without which a contract could not be enforceable,52 a position that has not been retained in the revised UAGCL. The doctrine of the pretium certum which used price as compulsory element in the formation of the contract derives from French law.53 The new approach adopted by the UAGCL is quite similar to the CISG.54 The same trend is evident concerning the rule relating to breach of contract. The notion of ‘fundamental breach’ in the CISG was referred to as ‘essential breach’ under the previous UAGCL, leading sometimes to confusion. Today, the word ‘essential’ has been updated for a more neutral phrasing, closer to the CISG ‘fundamental breach’. Another revision in the same provision is important. One exception to the principle of fundamental breach in the former UAGCL was that such a breach would not occur if the contracting party proves that what would otherwise be a breach was due to an act of a third party or to circumstances beyond the party’s control.55 The newly revised UAGCL is now more similar to the CISG as that exception has not been retained on determining when a breach of contract is deemed fundamental.56 Instead, the UAGCL now follows the CISG and places the issue of third-party interference or general lack of control in the context of liability for damages, rather than definition of breach.57 Concerning the rule related to the non-conformity of the goods, the well-known French principle of vice-caché approach used to determine the non-conformity of the good has been abandoned,58 taking away this point of difference between the CISG and UAGCL. The revised UAGCL joins the CISG by providing for two methods to calculate damages. The first calculation of damages is according to a cover transaction,59 and the second calculation is according to the market price.60 The latter, much more consistent with the realities of sale of commodities, was not an option under the initial UAGCL.61 All these changes demonstrate how the UAGCL is becoming increasingly similar to the CISG, thereby reducing as a practical matter the potential for conflict between the two.

51 L. Yondo Black, ‘Les enjeux de la réforme: une volonté de favoriser la création des entreprises, les échanges commerciaux et la confiancedans law zone OHADA’, Droit et Patrimoine, No. 201, 2011, n. 23, at n. 46 (noting the influence of the CISG on the drafters of the 2011 revisions to the UAGCL). 52 Old UAGCL, Art. 235; UAGCL, Art. 263; CISG Arts. 14, 55. 53 CISG, Art. 90; Issa-Sayegh, 2011, supra note 36, p. 346. 54 CISG, Arts. 14, 55. 55 Old UAGCL, Art. 248. 56 Old UAGCL, Art. 248; UAGCL, Art. 281; CISG, Art. 25. 57 UAGCL, Art. 294; CISG, Art.79. 58 Old UAGCL, Art. 231; UAGCL, Art. 260. 59 CISG, Art. 75; Old UAGCL, Art. 265; UAGCL, Art. 292. 60 CISG, Art. 76; UAGCL, Art. 292. 61 Old UAGCL, Art. 265.

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The fact that the UAGCL is moving towards the CISG also suggests that the drafters of the former recognize the effectiveness of the latter. 14.1.2.2 Can Regional and Universal Unification of Sales Law Be Reconciled? Even though the SSA countries, including the OHADA countries, have not acceded in important numbers to the CISG, OHADA’s revisions of the UAGCL evidence an attempt to reconcile with the CISG by reducing the differences between the two regimes. If this trend continues, the OHADA’s regional law, which is the domestic law of its member states, could ultimately become the same as the CISG’s universal law. Implicitly, of course, the OHADA, by its imitation, is also recognizing the modernizing impulse of the CISG. At the same time, the OHADA’s Permanent Secretariat could encourage its four members that currently are also members of the CISG to make a CISG Article 94 declaration. The declaration would stipulate that the UAGCL will apply even when parties to transactions are in different OHADA member states, at least one of which has also adopted the CISG. Further, the Secretariat would urge any OHADA member state subsequently considering joining the CISG to make the CISG Article 94 declaration at the time of signature. The goal is to preserve the evolution of the OHADA’s regional system, while recognizing that imposing the CISG on transactions among parties in different OHADA member states will complicate a legal environment that already is multilayered. Remember that the UAGCL is a domestic law as well as a regional law. Legal professionals within the OHADA region already need to be aware of customary law and, for those aspects of sales law not covered by the UAGCL, the ‘original law’. After a CISG Article 94 declaration, the only other sales law these professionals need to apply is the UAGCL itself, and this not only for transactions within a particular OHADA member state but also for transactions among parties established in different OHADA member states. If the CISG is imposed on intra-OHADA transactions, first, as just noted, an extra layer of law has been added for transactions involving a party from at least one of the four countries that adhere to both the OHADA and the CISG. Second, the OHADA’s goal to unify applied law within its territory will have been thwarted. A transaction entirely within any OHADA member state will be governed by the UAGCL, as will a transaction between parties in any member states other than the four that have adopted the CISG. On the other hand, absent a CISG Article 94 declaration, as soon as a party is in one of those four CISGOHADA states, the UAGCL is likely pre-empted, thereby reducing the UAGCL’s uniform application across intra-OHADA transactions. Especially given an overburdened national judiciary, this outcome cannot be conducive to legal certainty.62 62 Of course, any OHADA member state that adopts the CISG will need to prepare its legal professionals and business people to apply the CISG to transactions with parties in countries that are members of the CISG

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The proposal to have blanket adoption of a CISG Article 94 declaration by all OHADA member states is not hostile to the CISG. The protection of the OHADA’s regional regime is explicitly anticipated by the CISG Article 94, but it certainly does not harm and will likely further the CISG’s goals. The CISG aims to achieve universal unification of sales law, which is already far advanced. The CISG covers the largest percentage of international trade and claims eighty-three member states, including all leading trade nations with the exception of only the United Kingdom.63 For the CISG, a regional effort like the OHADA is worth encouraging as it can be a step towards the CISG’s own universal unification goal. Another option available to the SSA countries is for all to accede to CISG, independently, whether or not they are OHADA member states. By doing so, the OHADA countries would benefit from an easy-to-use, easy-to-understand, multilingual, documented and commented instrument, plus an extensive database. All SSA countries would then be subject to a predictable instrument on an international scale; the OHADA countries could adopt the CISG as their local law, to replace the UAGCL, in order to reduce the multiplicity of laws. For the OHADA countries, however, this would represent a serious dislocation. The UAGCL is just more than 15 years old, and the revisions are barely three years old. Better to introduce, selectively and carefully, modifications that continue to bring this statute into line with the CISG, while preserving the UAGCL’s uniform application within its region.

14.2

Conclusion

The OHADA’s UAGCL, especially in its revised form, is intentionally patterned on the CISG, but it also seeks to respect its regional and sub-regional specificities. These two perspectives explain why the UAGCL, while similar to the CISG, retains significant differences, and thus, why conflicts-of-law issues remain. The OHADA is reducing these issues by moving its UAGCL closer to the CISG. Meantime, the local specificities remain particularly important because the OHADA Uniform Acts, including the UAGCL, are domestic law of the OHADA member states. Further, the OHADA’s mandate to unify the texts and interpretation of business law applicable within its seventeen-country territory means that any changes to the UAGCL have to be slow enough to be assimilated uniformly. The other consequence of the OHADA’s obligation to unify laws is that no external law, not even one as elegant and sophisticated as the CISG, can be allowed to weaken the but not of the OHADA. That, however, is entirely defensible: if the OHADA member state had not wanted this result, it should not have adopted the CISG at all. 63 See the Group of the Ten, supra note 9.

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evolving harmony of the Uniform Acts within the OHADA territory. So long as the differences between the UAGCL and CISG persist, OHADA member states that adopt the CISG should therefore be encouraged to preserve the uniform application of the UAGCL by effecting a CISG Article 94 declaration. This paper is a call to a continued evolution of the OHADA’s UAGCL towards the CISG in a bid for long-term unification of sales law in the region, and, in the interim, a call to the four OHADA member states that also are members of the CISG, and to any future OHADA-CISG members, to protect the OHADA’s legal integration through a CISG Article 94 declaration.

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Harmonization in the European Union

Claude Witz* First of all, it is important to underline the tremendous success of the United Nations Convention on the International Sales of Goods (the CISG or the Vienna Convention or the Convention) in Europe, both within the European Union (EU) and within other states of the enlarged Europe. Thus, most intra-community sales, i.e. sales concluded by operators established in different states of the European Union, fall within the scope of the Vienna Convention. In this respect, the Convention plays a strong regulatory role in intra-community exchanges. This remains the case even if all Member States of the European Union are not parties to the Vienna Convention – namely the United Kingdom, Portugal, Ireland and Malta1 – and even if economic operators can avoid its application thanks to the opting out system. Due to the possibility open to the contractors of excluding the application of the Convention (Article 6 CISG), its actual role is nevertheless smaller than its potential role. However, operators are a long way from systematically setting aside the Convention, as attested by the increasing number of professional and institutional organizations in favour of its application2 as well as by an exponential domestic case law applying the CISG in Europe. In this respect, Europe is by far the biggest supplier of case law applying the Vienna Convention. It is with good reason that already, in 2001, the European Commission qualified the Vienna Convention as the ‘most relevant instrument’ of harmonization of substantive law rules on an international level3. The success of the Vienna Convention as an instrument of standardization of international sales in Europe should nevertheless not eclipse two other aspects of the interface between the CISG and Europe. On the one hand, the CISG has a certain influence on domestic contract law in Europe (Section 15.1). On the other hand, the European integration has provided or will still provide instruments affecting the application of the Vienna *

1

2

3

The author thanks Aurélie Swiderek and Caroline Cohen for their great assistance; abbreviations: CJEU: Court of Justice of the European Union; EJC: European Court of Justice. All web pages last accessed in June 2015. The success of the CISG in European member states is also measured by the rarity of European States having made reservations limiting the scope of the CISG; see C. Witz, ‘Panorama droit uniforme de la vente internationale de marchandises’, 2013, Recueil Dalloz, Issue 43, pp. 2874 et seq., esp. 2874-2785. See the ICC Model International Sale Contract, bilingual French-English version, ICC Publication N 738EF, Paris, 2013; the ITC model contract for the international commercial sale of perishable goods, available from . Communication from the Commission to the Council and the European Parliament on European contract law, COM/2001/0398 final, n 18.

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Convention. Depending on the instruments involved, the CISG seems to be a beneficiary or a victim of harmonization in Europe (Section 15.2).

15.1

The CISG as a Harmonization Factor for Contract Law in Europe

There are numerous illustrations of the influence of the CISG on domestic contract law in Europe. It is important to emphasize them (Section 15.1.1) before assessing their impact (15.1.2).

15.1.1

Illustrations

Many countries in Europe drew their inspiration from the CISG when reforming their sales law or their general law of contract. The cases of Finland or Sweden, which have regarded the CISG as a role model for their sales law reforms, are well known. Norway has even gone a step further by submitting both international and domestic sales to the Vienna Convention’s regime4. In various countries, the influence has been enlarged to the general law of contracts, as attested by the new Dutch civil code of 19925, the German reform of the law of obligations of 20026, the new Estonian law of obligations of 20017 and, regarding the formation of the contract, the reforms of the Polish and Czech civil codes8. By contrast, the Vienna Convention has only a limited impact on the current reform of French contract law9. 4 5 6

7 8 9

See J. Lookofsky, ‘The Scandinavian Experience’, in F. Ferrari (Ed.), The 1980 Uniform Sales Law, Old Issues Revisited in the Light of Recent Experiences, Giuffrè, Sellier, 2003, pp. 95 et seq. See A. S. Hartkamp, ‘Das neue niederländische Bürgerliche Gesetzbuch aus europäischer Sicht’, 1993, RabelsZ 57, pp. 664 et seq., esp. p. 674. See P. Schlechtriem, ‘10 Jahre CISG – Der Einfluss des UN-Kaufrechts auf die Entwicklung des deutschen und des internationalen Schuldrechts’, 2001, IHR, Issue 1, pp. 12-18; U. Babusiaux, ‘L’influence des instruments internationaux d’uniformisation du droit sur le nouveau droit allemand général des troubles de l’exécution du contrat’, in C. Witz & F. Ranieri (Eds.), La réforme du droit allemand des obligations, Société de législation comparée, Paris, 2004, pp. 167 et seq.; C. Witz, ‘Le nouveau droit allemand de la vente sous le double éclairage de la directive et de la Convention de Vienne’, in C. Witz & F. Ranieri, La réforme du droit allemand des obligations, Société de législation comparée, Paris, 2004, pp. 203 et seq. K. Sein & I. Kull, ‘Die Bedeutung des UN-Kaufrechts im estnischen Recht’, 2005, IHR, Issue 4, pp. 138 et seq. F. Zoll, ‘The Impact of the Vienna Convention on the International Sale of Goods on Polish Law, With Some References to Other Central and Eastern European Countries’, 2007, RabelsZ 71, pp. 81 et seq. See ‘Loi n 2015-177 du 16 février 2015 relative à la modernisation et à la simplification du droit et des procédures dans les domaines de la justice et des affaires intérieures’, whose Article 3 authorizes the government to reform general contract law, the general rules of obligations and the law of evidence; the reform will not cover sales law; see the draft ordinance available on the French Ministry of Justice’s website (available from ). Some convergence between the draft and the CISG can be noticed: The distinction between withdrawal and revocation of an offer (draft Arts. 1115 and 1116 civil code); the ‘reception’ theory (draft

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When the influence of the Vienna Convention extends to general contract law, this impact is generally reinforced by international soft law instruments, which have been themselves strongly influenced by the CISG, namely the Principles of European Contract Law and UNIDROIT Principles of International Commercial Contracts10. This famous troïka11 casts a protective shadow over domestic law reforms. The Vienna Convention even inspires the EU legislator directly. The most notable example is, de lege lata12, the 1999’s directive on certain aspects of the sale of consumer goods and associated guarantees13. This example appears surprising because the CISG’s influence manifests itself in the area of the sale of consumer goods, which falls in principle outside its scope of application14. But the merits of the Vienna Convention, which establishes a unitary concept of conformity, whether it is the case of a peius or of an aliud, are such that the 1999’s directive rightly retained this solution15 as well as other aspects, notably the principle of strict liability of the seller which does not require the establishment of a fault16.

10

11 12 13

14 15 16

Art. 1122); the different options offered to the victim of a breach of contract (draft Art. 1217); the ex-nunc effect of avoidance (draft Art. 1229). A further novelty in French law which brings it closer to the CISG is the admission of avoidance by way of notification (draft Art. 1226), which will coexist with the traditional judicial avoidance, a remedy unknown by the CISG. A number of other differences are maintained: the absence of many nuanced CISG rules, such as the ones contained in Articles 19, 20 and 21 CISG, or of more detailed rules, such as the ones contained in Articles 75 and 76 CISG, the transfer of risk linked to the transfer of ownership, the lack of an obligation to mitigate damages, the non-admission of avoidance in case of an anticipatory breach of contract, etc. This was particularly the case of the German reform of the law of obligations, see U. Babusiaux, ‘L’influence des instruments internationaux d’uniformisation du droit sur le nouveau droit allemand général des troubles de l’exécution du contrat’, in C. Witz & F. Ranieri (Eds.), La réforme du droit allemand des obligations, colloque du 31 mai 2002 et nouveaux aspects, Soc. de législation comparée, 2004, pp. 167 et seq. In the famous words of Prof. O. Lando. See de lege ferenda, CESL, infra n 33 et seq. See directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, OJ L 171, 07.07.1999, pp. 0012-0016. Other directives have also been quoted as examples, directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours, OJ L 158, 23.06.1990, pp. 59-64 and the directive 97/5/EC of the European Parliament and of the Council of 27 January 1997 on cross-border credit transfers, OJ L 043, 14.02.1997, pp. 25-30. These two last directives provide for a strict liability and an exemption in the case of force majeure close to the one of Article 79 CISG, see U. Magnus, ‘The CISG’s Impact on European Legislation’, in F. Ferrari (Ed.), The 1980 Uniform Sales Law, Old Issues Revisited in the Light of Recent Experiences, Giuffrè, Sellier, 2003, pp. 129 et seq., esp., pp. 142-143. However, the existence of an authentic influence of the CISG on these last instruments is doubtful: see U. Schroeter, ‘Global Uniform Sales Law – with a European Twist? CISG Interaction with EU Law’, 2009 Vindoboda Journal, 13, Issue 1, pp. 179-196, esp., n 3.1.1.2.; S. Troiano, ‘The CISG’s impact on EU Legislation’, 2008, IHR, Issue 6, pp. 221 et seq., esp. pp. 225 et seq. On the principle and its limits, infra note 23. See Art. 2 of the directive. See Art. 3, Para.1 of the directive, the wording of which is close to that of Art. 36, Para. 1 CISG; For a deeper analysis of the similarities and differences existing between the two texts, see U. Magnus, 2003, supra note 13, pp. 132 et seq.; U. Schroeter, UN-Kaufrecht und Europäisches Gemeinschaftsrecht, Sellier European Law Publisher, München, 2005, Para. 4, n 23, Para. 6, n 188 et seq.

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Thus, fundamental rules contained in the CISG can be found in each Member State’s consumer sales law17.

15.1.2

Evaluation

The influence of the Vienna Convention is to be welcomed since it contributes to the harmonization of contract law in Europe. Indeed, it has a positive effect by bringing domestic and international sales law closer together. Consequently, domestic courts will not feel lost in an unknown world when applying the Convention, which consequently facilitates its application18. Furthermore, the establishment of a single market such as that of the European Union is hindered by the dichotomy between domestic and intra-community contract law19. The Vienna Convention blurs this distinction through its influence on domestic contract law. This should be a source of satisfaction.

15.2

The CISG, Beneficiary or Victim of the Harmonization of Laws in Europe

Some of the numerous instruments used or which could be used by the EU to achieve the objectives of the treaties have an impact on the CISG. They either facilitate or, on the contrary, hinder its application.

15.2.1

The Instruments Facilitating the Application of the CISG

Different instruments support the Convention in international business relationships by standardizing either conflict-of-law (Section 15.2.1.1) or conflict-of-jurisdiction rules (Section 15.2.1.2). 15.2.1.1 Standardization of Conflict-of-Law Rules It is well known that the Convention gives a specific place to conflict-of-law rules. According to the alternative criteria set forth in Article 1 § 1(b), these rules can lead to the

17 See notably H.-W. Micklitz, ‘Ein einheitliches Kaufrecht für Verbraucher in der EG’, 1997, Europäische Zeitschrift für Wirtschaftsrecht, Issue 8, pp. 229 et seq., esp. p. 230. 18 A judge shall nevertheless take care not to read the Convention with the eyes of a domestic lawyer which would compromise the uniform application of the Convention. 19 See J. Basedow, ‘Ein gemeines europäisches Kaufrecht für grenzübergreifende Verträge – Seine Bedeutung und Auswirkung auf offene Märkte’, in M. Gebauer (Ed.), Gemeinsames Europäisches Kaufrecht-Anwendungsbereich und kollisionsrechtliche Einbettung, Sellier European Law Publishers, pp. 3 et seq., esp. pp. 1011.

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application of the Convention when they designate the law of a contracting state. Furthermore, they play a significant role by filling the gaps of the Convention, this role being of varying intensity depending on whether these gaps are external related to Articles 4 and 5 CISG or internal as referred to in Article 7 § 2 CISG. It is fortunate that conflict-of-law rules are widely unified within the EU through Rome I Regulation on the law applicable to contractual obligations20, which replaces the Rome Convention21. This can be welcomed since diversity in conflict-of-law provisions is a source of complexity for operators. Furthermore, it can lead to forum shopping. However, some risks remain. Indeed, the standardization of conflict-of-law rules in contract law is not fully achieved considering the applicability in some Member States of the EU of the Hague Convention of 15 June 195522, whose rules can lead to other solutions than the one provided by the Rome Convention or Rome I Regulation. For instance, insofar as the law applicable to the contract has not been chosen by the parties, the law governing the sale is the law of the country where the seller has its habitual residence23, as is the case under Rome I Regulation, except, however, when the order has been placed in the country of the buyer24. Rome I Regulation does not provide for such an exception25. The applicability of the Hague Convention is often a source of surprise or disappointment for European operators who wrongly bank on a generalized application of Rome I Regulation26. A full standardization of conflict-of-law rules in contractual matters would imply the denunciation of the Hague Convention by the Member States of the EU, which are still bound by it27. Such a denunciation would be all the more welcome as the Hague Convention designates a specific law governing the questions regarding the examination of moveable objects and the related notifications, i.e. the law of the country where this examination is to take place28, which can lead to an unfortunate ‘dépeçage’ of the contract, to the detriment of the uniform law29.

20 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ L 177, 04.07.2008, pp. 6 et seq. 21 Convention 80/934/ECC on the law applicable to contractual obligations opened for signature in Rome on 19 June 1980. OJ L 266, 09.10.1980, pp. 1 et seq. 22 Member states parties to the Convention of 15 June 1955 on the law applicable to international sale of goods: Denmark, Finland, France, Italy, Norway, Sweden, Switzerland, available from . 23 See Art. 3 Para. 1. 24 See Art. 3 Para. 2. 25 See nevertheless the so-called exception clause in Article 3(4) Rome I Regulation. 26 See Article 25 of Rome I Regulation: “(1.) This Regulation shall not prejudice the application of international conventions to which one or more Member States are parties at the time when this Regulation is adopted and which lay down conflict-of-law rules relating to contractual obligations.” 27 See the example of Belgium which denounced the Convention in 1999, available from . 28 See Article 4 of the Convention. 29 See Heuzé, ‘La vente internationale de marchandises, Droit uniforme’, LGDJ, 2000, n° 304; U. Schroeter, 2005, supra note 16, Para. 6, n° 61 et seq.

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15.2.1.2 The Standardization of Conflict-of-Jurisdiction Rules The standardization of conflict-of-jurisdiction rules is an old phenomenon in Europe. It goes back to the Brussels Convention of 27 September 1968 for the Member States of the European Economic Community30 and to the Lugano Convention of 16 September 1988 for the Member States of the EFTA (European Free Trade Association)31. These Conventions have been replaced by the Regulation 44/2001 of 20 December 2000, the so-called Brussels I Regulation32, itself replaced by the Regulation 1215/2012 of 12 December 2012, applicable to legal proceedings instituted on or after 10 January 2015, the so-called recast Brussels I Regulation33, and moreover by the revised Lugano Convention of 15 October 200734. These instruments facilitate the determination of the competent court by fixing uniform conflict-of-law rules. The claimant can easily identify beforehand to which courts he can bring proceedings, whereas the respondent can reasonably foresee beforehand in which courts he can be sued. This means that these instruments facilitate in some way the judicial application of the Vienna Convention in the case of a legal dispute between the seller and the buyer whenever the respondent is domiciled in Europe35. Nevertheless, the combined effect of the Vienna Convention and of these instruments is not limited to this observation. Indeed, the Vienna Convention also plays a supporting role for the application of these instruments36. It is worthwhile remembering that in addition 30 Brussels Convention on jurisdiction and the enforcement of judgements in civil and commercial matters, available from . 31 Lugano Convention on jurisdiction and the enforcement of judgments in civil and commercial matters, available from . 32 Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, JO L 12, 16.1.2001, pp. 1-23. 33 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ L 351, 20.12.2012, pp. 1-32; On this Regulation, see notably, H. Gaudemet-Tallon & C. Kessedjian, ‘La refonte du règlement Bruxelles I’, 2013, RTD Eur 11, Issue 3, pp. 435 et seq. 34 Lugano Convention of 21.12.2007 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ L 339, 21.12.2007, pp. 3-41. 35 Respectively, in a member state of the EU (Articles 2(1) of Brussel I Regulation and 4(1) of Recast Brussel I Regulation) and in a member state of the EFTA (Article 2(1) of both Lugano Conventions). 36 We will only deal with the role played by the Vienna Convention in the establishment of the competence of the place of performance of a contractual obligation (Article 5-1° of Brussels and Lugano Convention and of Brussels I Regulation 1, Article 7-1° of recast Brussels I Regulation), without considering the one that could be played by the Vienna Convention in the framework of jurisdiction clauses (Article 17 of Brussels and 1988 Lugano Conventions, Article 23 of Brussel I Regulation and 2007 Lugano Convention, Article 25 of Recast Brussels I Regulation). This second question is highly controversial. The current dominant opinion favours the application of the Vienna Convention to the agreement containing the dispute settlement clause (see U. Schroeter in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, Kommentar zum Einheitlichen UNKaufrecht-CISG, 6th edn, Beck, before Arts.14-24, n° 10 and contra U. Magnus, Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen, Wiener UN-Kaufrecht (CISG), Sellier-de Gruyter, 2013, Art. 14, n° 41c; P. Schlechtriem & C. Witz, Convention de Vienne sur les contrats de vente internationale de marchandises, Dalloz, 2008, n°99). It also presupposes that the competence of the Conventions of Brussels and Lugano and Brussels I and Recast Brussels I Regulations is limited only to formal requirements (see U.

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to the ground of jurisdiction of the domicile or of the place of business of the respondent, all these instruments also offer the possibility of suing the respondent, in matters relating to a contract, in the courts of the place of performance of the obligation in question (and not the obligation that is characteristic of the contract – Articles 5-1° of Brussels and Lugano Conventions and of Brussels I Regulation37, Article 7-1° of the new recast Brussels I Regulation). Under the Brussels Convention and the Lugano Convention of 1988, the Vienna Convention played an important role in the application of Article 5-1° regarding the interpretation of this norm given by the European Court of Justice in its famous Tessili38 and custom-made39 cases. According to the first case, in the absence of a Community definition, it is for the court before which the matter is brought to determine in accordance with its own rules the law applicable to the legal relationship in question and [to] define in accordance with that law the place of performance of the contractual obligation in question40. According to the second case, this solution applies if those rules refer to the application to the contract of provisions such as those of the Uniform Law on the International Sale of Goods, annexed to the Hague Convention of 1 July 196441. This solution is obviously transposable to the Vienna Convention. This paved the way for the application, for the purpose of determining the competent court, of Article 31 and of Article 57 CISG dealing, respectively, with the place of supply and with the place of payment42. The supporting role played by the Vienna Convention

37

38

39 40 41 42

Schroeter, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, Kommentar zum Einheitlichen UN-Kaufrecht – CISG, 6th edn, C.H.Beck, 2013, before Arts. 14-24, n° 12 and contra Zöller & Geimer, ann. I Art. 23 EuGVVO, n° 21; C. Witz, note under Cass. 1ère civ., 16 July 1999, 1999, Recueil Dalloz, Issue 8, pp. 117 et seq., esp. p. 118). The term ‘of the obligation in question’ has been added to the 1978 Brussels Convention by the accession treaty of Denmark, Ireland and the United Kingdom. It confirms the solution adopted by the ECJ in De Bloos, case 14/76 of 6 October 1976, according to which the obligation to be taken into account is not the characteristic obligation. ECJ, 6 October 1976, case 12/76, Industrie Tessili Italiana Como v. Dunlop AG; see also ECJ, 28 September 1999, case C-440/97, GIE Groupe Concorde and Others v. The Master of the vessel “Suhadiwarno Panjan” and Others. ECJ, 29 June 1994, case C-288/92, Custom Made Commercial Ltd v. Stawa Metallbau GmbH. ECJ, 6 October 1976, case 12/76, Industrie Tessili Italiana Como v. Dunlop AG, n° 13. ECJ, 29 June 1994, case C-288/92, Custom Made Commercial Ltd v. Stawa Metallbau GmbH, n°11. See A. Huet, ‘Convention de Vienne du 11 avril 1980 sur les contrats de vente internationale de marchandises et compétence des tribunaux en droit judiciaire européen’, in Mélanges en l’honneur de Paul Lagarde, Le

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was certainly theoretically attractive, although it has been objected for a long time that the rules enacted by the Vienna Convention are not intended to deal with the question of jurisdiction43. However, the application of the Vienna Convention had, in fact, the disadvantage of favouring the forum actoris. Indeed, the Vienna Convention designates in principle the place where the seller has his place of business as the place of supply (Article 57) and the place of payment (Article 31). It followed for instance that in the case of nonpayment of the price, the seller could sue the buyer in default before the court of its own domicile, whereas the non-payment often results from the non-conformity of delivered goods. This happened frequently as revealed by an abundant case law44. One of the major aims of the Regulation of 2001 and of the Lugano Convention of 2007 was to reform the Article 5-1°45. The resulting norm was incorporated without modification into the recast Brussels I Regulation under a new numbering (Article 7-1°). The principle of the jurisdiction of the courts for the place of performance of the obligation in question is preserved. However, the new norm (Article 5-1°), now the Article 7-1° of the recast Brussels I Regulation, designates for two contracts, on the one hand the sale of goods and on the other hand the provision of services, a unique forum of jurisdiction determined according to the characteristic performance of the contract. Therefore, for the two contracts, the regulation eliminates the diversity of grounds of jurisdiction depending on the place of performance of the obligation in question. This unique forum of jurisdiction is set, in the case of the sale of goods, at ‘the place in a Member State where, under the contract, the goods were delivered or should have been delivered’46. It actually designates, as a general rule47, the court which appears to have the closest links to the conflict. It follows that the combined effect of Article 5-1°, now Article 7-1° of the recast Brussels I Regulation,

43

44 45

46 47

droit international privé : esprit et méthodes, Dalloz, 2005, pp. 417 et seq.; C. Witz, ‘The Place of Performance of the Obligation to Pay the Price Art. 57 CISG’, J L & Com 25, Issue 1, Fall 2005/Spring 2006, pp. 325-333, available from . It is interesting to observe that the Federal Republic of Germany tabled an oral amendment at the Vienna diplomatic conference according to which the place of payment designated by the Convention should not have an impact on jurisdiction: Diplomatic Conference, Doc. C(4), Off.Rec., pp. 368 et seq., reproduced in J. Honnold, Documentary History of the Uniform Law for International Sales, Kluwer, Deventer, 1989, pp. 589 et seq.; see also the numerous doctrinal critics summarized by F. Mohs, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, Kommentar zum Einheitlichen UN-Kaufrecht – CISG, 6th edn, C.H.Beck, 2013, Art. 57, n° 24; within French doctrine, H. Gaudemet-Tallon, Compétence et exécution des jugements en Europe, 5th edn, LGDJ, 2015, n° 193, p. 243. See numerous cases quoted by the CISG-Digest, 2012, Art. 57, n 18 (Brussels Convention) and 19 (Lugano Convention). See notably H. Gaudemet-Tallon, 2015, supra note 43, n° 198; See Heuzé, ‘De quelques infirmités congénitales du droit uniforme: l’exemple de l’art. 5.1° de la Convention de Bruxelles du 27 Septembre 1968’, Rev Crit DIP, 2000, pp. 595 et seq. Article. 5-1°, b) of the Regulation and of Lugano Convention of 30 October 2007. The requirement of proximity is not satisfied when the dispute involves an obligation which has no links with the execution of the characteristic performance or if the goods were resold, see H. Gaudemet-Tallon, 2015, supra note 45, n° 198.

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and of Article 57 CISG allowing the seller to sue the buyer for payment of the price at its place of business is no longer possible. Neither is it possible to apply Article 31 CISG to determine the place of supply. This place is determined ‘under the contract’ (Article 5-1°, b, Article 7-1°, b), i.e. under a purely factual criterion, to use the Commission’s formula contained in its proposal for a regulation, without the possibility of referring to the rules of international private law or the substantive rules that could be applicable. The ECJ had the opportunity to clarify the meaning of ‘under the contract’ in the famous Car Trim case48 which establishes that this place has to be determined “on the basis of the provisions of [the] contract”. In a subsequent reference for a preliminary ruling on the use of Incoterms, the ECJ specified that the competent courts must take into account all the relevant terms and clauses in [the] contract, including, as the case may be, the terms and clauses generally recognised and applied in international commercial usage, such as the Incoterms (…)49. If it is impossible to determine the place of delivery on this basis, it is then appropriate, as stated by the ECJ in the Car Trim case, to refer to the place where the physical transfer of the goods took place, as a result of which the purchaser obtained, or should have obtained, actual power of disposal over those goods at the final destination of the sales transaction. Thus, the ECJ rejected the place at which the goods were handed over to the first carrier50 deciding amongst other things in favour of the place where the physical transfer of the goods took place the purpose of proximity of the court which would assume jurisdiction, since the goods, in principle, were to be in that place after the performance of the contract51. 48 CJEU, 25 February 2010, case C-381/08; this case has been widely commented; see notably B. Gsell, ‘Erfüllungsort beim Versendungskauf und Abgrenzung vom Kauf und Dienstleistung nach Art. 5 Nr. 1 lit. b EuGVVO’, 2011 ZEuP, Issue 3, pp. 675 et seq.; A. Mittmann, ‘Die Bestimmung des Lieferortes beim Versendungskauf im Rahmen von Art. 5 Nr. 1 lit. b EuGVVO nach der Entscheidung “Car Trim” des EuGH’, 2010 IHR, Issue 4, pp. 146 et seq.; B. Piltz, ‘Internationale Zuständigkeit bei Vertrag über Fertigung und Lieferung von Waren – Erfüllungsort beim Versendungskauf’, 2010 NJW, Issue 15, pp. 1061 et seq.; C. Witz, ‘Droit uniforme de la vente internationale de marchandises, décembre 2009 – novembre 2011’, Recueil Dalloz 2012, pp. 1144, 1152 et seq.; see also C. Kessedjian, ‘Le for contractuel en droit européen – Wood Floor, Car Trim et les autres’, in A. Büchler & M. Müller-Chen, ‘Private Law, national-global-comparative’, Festschrift für Ingeborg Schwenzer zum 60. Geburtstag, Stämpfli Verlag AG Bern, 2011, pp. 937 et seq. 49 CJEU, 9 June 2011, case C-87/10, Electosteel Europ SA v. Edil Centro SpA. 50 The combination of Article 5-1°, b (Article. 7-1°, b new Regulation) and of Article 31, a) CISG would have led to this result; the Italian Corte di Cassazione ruled in this way, see Corte di Cassazione, 27 September 2006, Unilex and Corte di Cassazione, 3 January 2007, Unilex; on these cases, see C. Witz, Panorama droit uniforme de la vente internationale de marchandises, D. 2008, pp. 2626-2628. 51 CJEU, 25 February 2010, case C-381/08, supra note 48, para. 48 and 61

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As a result, the Vienna Convention moves aside, without, however, entirely leaving the stage. It continues to play a secondary role. First of all, this is the case if the conditions of Article 5-1°, b), now Article 7-1°, b) of the recast Brussels I Regulation, are not fulfilled. Then, the rule designating the competence of the court for the place of performance of the obligation in question is again applicable, as expressly set out in Article 5-1° c), now Article 7-1°, c)52. This happens when the place of supply is outside the Union. Then, Articles 31 and 57 CISG are again applicable. This also happens when the parties have excluded the application of Article 5-1°, b), now Article 7-1°, b), as expressly allowed by the Regulation. They could, for instance, agree that the obligation which will serve to determine the competence of the court will be the disputed obligation. This would lead to the exclusion of the unique forum of jurisdiction ascertained by the place of supply. Such a clause would restore the application of Articles 31 and 57 CVIM. Thus, a seller who would like to retain the possibility of suing the buyer for non-payment of the price before a court that has jurisdiction in its place of establishment may find it advantageous to include such a clause in the contract. This might be daunting for the buyer. They could also agree that the place of supply would be ascertained by the substantive law governing the sale, which will then lead to the application of Article 31 CISG53. Secondly, the Vienna Convention should also be applicable in the rare cases where the place where the physical transfer of the goods took place cannot be ascertained. Article 51°, c), now Article 7-1°, c), according to which ‘if point (b) does not apply then point (a) applies’ calls for the application of this solution regardless of the reasons for the nonapplication of point b)54. Finally, the Vienna Convention can also be a source of inspiration concerning the interpretation of the Regulation. The ECJ recognized this role when interpreting the notion of ‘sale of goods’ in its famous Car Trim case55 dealing with the qualification of a contract related to the supply of goods to be manufactured or produced. After having noticed that some provisions of EU and international Law ‘can affect the interpretation to be given to the concepts of sale of goods and provision of services’56, the ECJ refers on that point to the EU directive of 1999 on certain aspects of the sale of consumer goods and associated guarantees (Article 1, § 4), the Vienna Convention (Article 3, § 1) and the New York Convention on prescription (Article 6, § 2) to conclude that the provisions of these

52 This norm has been often criticized in doctrine: it would have certainly been better to come back to the general forum of Article 2 of the Regulation, see H. Gaudemet-Tallon, 2015, supra note 45, n 198 and the quoted doctrine. 53 A. Huet, 2005, supra note 42, p. 429. 54 However, a part of the doctrine considers that when the place of delivery cannot be established, one should refer to the general jurisdiction of the Court for the respondent’s domicile (Article 2 of the regulation), See H. Gaudemet-Tallon, 2015, supra note 45, n° 200, p. 253. 55 See supra note 48. 56 See supra note 34.

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instruments are an indication that ‘the fact that the goods to be delivered are to be manufactured or produced beforehand does not alter the classification of the contract at issue as a sales contract’57. To strengthen this argument, the ECJ takes into account other considerations in favour of the sales’ qualification. Some of these could have been sustained by the CISG if the ECJ had wished to go into more detail58.

15.2.2

European Instruments Perturbing the CISG

EU law has some negative effects on the Vienna Convention. Indeed, some directives are liable to conflict with the rules of the Convention (15.2.2.1). But the biggest threat will come from the future regulation on a Common European Sales Law (15.2.2.2) 15.2.2.1

EU Directives

15.2.2.1.1 Examples of Divergences Protection of Consumers The large majority of EU directives in contract law deal with consumer law. The Vienna Convention does not govern sale of goods bought for personal, family or household use – no conflict should then be possible – unless the seller neither knew nor ought to have known that the goods were bought for any such purpose59. This is the case for instance when a lawyer buys computer hardware for his private use at a distance. However, EU directives take into consideration the real purpose of the operation without taking into account appearances. It is in this case of ‘hidden consumer contracts’60, i.e. consumer contracts concluded under the veil of professional contracts that the CISG and some EU directives might be conflicting. For instance, EU law on distance sales contracts and offpremises contracts gives the buyer the right to withdraw from the contract within 14 days61 whereas the Convention stands by the principle pacta sunt servanda. The contradiction is obvious and we will see later how to resolve this conflict62.

57 58 59 60

See supra note 38. See the argument relating to the liability of the supplier for a lack of conformity, supra note 42. See Art. 2(a) CISG. See the German wording “Verdeckte Verbraucherkäufe” in U. Schroeter, 2005, supra note 16, Para. 6, n°107 et seq. 61 Art. 9 of the Directive 2011/83/EU on consumer rights, OJ L 304 of 22.11.2011, pp. 64-88; see before the 7day delay established by article 6 of the directive 97/7/EC, OJ L 144 of 04.06.1997, pp. 19-27 and Art. 5 of the directive 85/577/EEC to protect the consumer in respect of contracts negotiated away from business premises, OJ L 372, 31.12.1985, pp. 31-33. 62 See Heuzé, 2000, supra note 29.

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Fight against Late Payment in Commercial Transactions Potential conflicts between the CISG and EU directives of 2000 and 2011 fighting late payment in commercial transactions are much more prevalent63. Indeed, these directives are at the heart of business-to-business relationships. They apply to all payments made as remuneration for commercial transactions, including the payment of the selling price of the goods, regrettably without any allusion being made to the CISG. The duality of applicable rules, on the one hand those of domestic law implementing the directives and on the other hand the CISG’s rules, creates a succession of difficulties which can perturb practitioners. Three major assumptions from the simplest to the most complicated can be distinguished. In the first assumption, the Convention is not applicable to the question solved by the directives, which lead to the absence of a conflict. This is the case concerning the interest rate set by the directives, at least in keeping with the prevailing view according to which interest rate is not covered by the Convention. This also applies to the questions of the validity of contractual terms which, according to the Article 4 CISG, are not governed by the Convention. It should be noted in this regard that the directive of 2011, the only one we will deal with, brevitatis causae, limits the contractual freedom by forbidding periods for payment fixed in the contract superior to 60 calendar days, unless otherwise expressly agreed in the contract and provided it is not grossly unfair to the creditor64. The inefficacity of such clauses does not conflict with the CISG considering Article 4 of the Convention. It seems then that the French Minister for Foreign Trade, answering two Members of Parliament arguing that these limits are a handicap for French exporter undertakings65, wrongly stated that these restrictions do not apply to sales governed by the CISG, because ‘Article 59 of this Convention dealing with periods for payment refers to the application of contractual provisions and does not fix any limit’66. In short, the Ministry did not take into account Article 4 CISG by virtue of which the validity of contractual provisions is not governed by the Convention, except as otherwise expressly provided. In the second assumption, the Vienna Convention and the directive are both applicable but result in a convergent solution. For instance, the creditor is entitled to interest for late

63 Respectively, directive 2000/35/EC on combatting late payment in commercial transactions, OJ L 200, 08.08.2000, pp. 35-38 and directive 2011/7/EU on combatting late payment in commercial transactions, OJ L 48, 23.02.2011, pp. 1-10. 64 See Art. 3(5). 65 See the question n 22749 to the French government of M. J.-R. Marsac, French OJ 02.04.2013 p. 3445 and its answer, French OJ 01.07.2014, p. 5509; and question n 22748 to the French government of Mme C. Guittet, French OJ 02.04.2013, p. 3445 and its answer, French OJ 30.07.2013, p. 8237. 66 See the answers to M. J.-R. Marsac and to Mme Guitter, supra note 65; for a detailed analysis, see C. Witz, ‘Panorama droit uniforme de la vente internationale de marchandises’, 2015, Recueil Dalloz, Issue 15, pp. 881 et seq., esp. pp. 890-891.

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payment ‘without the necessity of a reminder’67 or ‘without the need for any request or compliance with any formality on the part of the seller’68. In the last assumption, the Vienna Convention and the directive are both applicable and provide for differing provisions. This is the case when the date or the period for payment is not fixed in the contract. Under the Vienna Convention, the buyer must pay the price when the seller places either the goods or documents controlling their disposition at the buyer’s disposal69. As a consequence, interest begins to accrue from this date. However, under the directive, the creditor is entitled to interest for late payment only upon the expiry of different time limits fixed according to the different criteria70. Another example can be found in the compensation for recovery costs provided for by the directive of 2001. According to this new provision, where interest for late payment becomes payable, the creditor is entitled to obtain from the debtor, as a minimum, a fixed sum of EUR 40, whereas under the CISG, the allocation of damages requires the proof of a loss71 and obliges the creditor to mitigate his or her loss72. How can we solve these conflicts? Some of them can be solved easily thanks to a general clause included in the directive: “Member States may maintain or bring into force provisions which are more favourable to the creditor than the provisions necessary to comply with this Directive”. Thus, EU Member States can use this possibility to ensure the supremacy of the CISG’s rules which are more favourable to the creditor than the ones contained in the directive. It is regrettable that the French legislator, and probably many of his European counterparts, did not pay sufficient attention to this possibility. For instance, provisions on the date from which interest for late payment accrues contained in the French Commercial Code73, which are very close to the ones contained in the directive, clash directly with the CISG. This simply leads to a classic conflict between a provision of domestic law, independent of EU Law, and an international Convention. Such a conflict must be solved through the principle of the supremacy of international Conventions on domestic law, according to Article 55 of the French Constitution. However, when the domestic law provision is directly set by the directive, as is the case concerning compensation for recovery cost, the nature of the conflict changes.

67 68 69 70 71 72 73

Art. 59 CISG. Art. 59 CISG. Art. 58 CISG. Art. 3(3)(b) of directive 2011/7/UE. Art. 74 CISG. Art. 77 CISG. Art. L 446-1 Para. 8: “Sauf dispositions contraires figurant aux conditions de vente ou convenues entre les parties, le délai de règlement des sommes dues est fixé au trentième jour suivant la date de réception des marchandises ou d’exécution de la prestation demandée (In the absence of opposing clauses present in the conditions of sale or agreed upon by the parties, the date of payment is fixed at 30 days following the delivery of the goods or the service requested).”

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15.2.2.1.2 Resolving Conflicts between the CISG and EU Law From the CISG Viewpoint The first question that arises is whether the Convention is willing to give priority to EU directives or their implementation under domestic law. The answer is ‘no’. Admittedly, according to Article 90 CISG, the Convention does not prevail over any international agreement, which has already been or may be entered into and which contains provisions concerning the matters governed by this Convention, provided that the parties have their places of business in states parties to such an agreement. However, according to the prevailing view, an EU directive is not an international agreement in the sense of this article for many reasons, the main one being that directives as well as regulations do not come directly from the CISG’s contracting states but from a supranational organization which is not a party to the Vienna Convention74. Moreover, an application by analogy of Article 90 would be at odds with Article 94, which allows two or more contracting states which have the same or closely related legal rules on matters governed by this Convention to declare that the Convention is not to be applied to contracts of sale or to their formation where the parties have their places of business in these states. This encompasses precisely the situation of EU Member States, which have in certain areas similar rules to the ones provided by the directives. However, such declarations are lacking75. From the EU Viewpoint The question that arises is whether EU law could jeopardize the prevalence of the CISG over EU directives. The problem is very complex. Admittedly, the ECJ established the primacy of EU law over Member States’ legal order76. It also ruled that an international agreement concluded by one or more Member States in breach of the Treaties could lead to an infringement proceeding77. However, this primacy is limited in time by Article 351 of the Treaty on the Functioning of the EU (TFEU) according to which the rights and obligations arising from agreements concluded before 1 January 1958 or, for acceding states, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties. For these states, international conventions could prevail on EU law, except

74 See notably F. Ferrari, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, Kommentar, supra note 36, Art. 90, n 3; I. Schwenzer & P. Hachem, in I. Schwenzer (Ed.), Schlechtriem & Schwenzer, Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, 2010, Art. 90, n° 5; (contra: R. Herber, 2001 IHR, Issue 1, pp. 187 et seq., esp. p. 191; this author seems to have softened his position, see 2004 IHR, Issue 3, pp. 92 et seq.). pp. 89 et seq., esp. p. 92. 75 P. Schlechtriem & U. Schroeter, Internationales UN-Kaufrecht, 5th edn, Mohr Siebeck, 2013, n 819; U. Schroeter, 2009, supra note 13, p. 190. 76 See ECJ, 15th July 1964, Case 6/64 Flaminio Costa v. E.N.E.L. 77 See ECJ, 5th November 2002, case C-476/98, Commission v. Germany (‘open skies’) and ECJ, 3rd March 2009, case C-205/06, Commission v. Austria (on bilateral investment agreements).

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the obligation to take all appropriate steps to eliminate the incompatibilities established78. Thus, the primacy of the Vienna Convention could be ensured by the mechanical application of Article 351 TFEU in the states that ratified the CISG before entering the EU. This is the case for 14 states including Austria, Poland and Sweden79. However, other EU Member States such as France or Germany entered the EU before becoming parties to the CISG. Nevertheless, it should not be concluded that EU law prevails over the CISG in the Member States which entered the EU before becoming parties to the CISG. Indeed, the scope of Article 351 TFEU is broader: according to the prevailing opinion, international agreements in which EU Member States are parties prevail also over EU law when they were concluded before the EU acquired exclusive competence or fully exercised its shared competence in the matter concerned80. The underlining idea is that the EU should refrain from putting the Member States in contradiction with the international agreements they concluded in conformity with EU law at the time of their engagement. The ECJ had the opportunity to confirm this position implicitly by refusing to condemn Member States which were in this situation81. What are the consequences concerning the conflict between the CISG and directives on late payment? The CISG could prevail over EU directives when it was ratified before the EU fully exercised its shared competence in the field of fighting late payment82. In this regard, the date of the 1st directive, i.e. the 29 June 2000, should be taken into consideration. To date, no Member State of the EU ratified or adhered to the CISG after that date.

78 Thus, member states should refrain from acting in breach of EU Law when such a breach could be avoided within the margin of action left by an international convention; see e.g.: CJEU, 9th February 2012, case C277/10, Martin Luksan v. Petrus van der Let, n° 62, “when such an agreement allows, but does not require, a Member State to adopt a measure which appears to be contrary to European Union law, the Member State must refrain from adopting such a measure.” 79 P. Schlechtriem & U. Schroeter, 2013, supra note 75; U. Schroeter, 2005, supra note 16 Para. 13, n 12 et seq. 80 See in this sense J. Rideau, V° “Accords internationaux”, rép. droit européen n 401-404, March 2011 (updated January 2014); P. Schlechtriem & U. Schroeter, 2013, supra note 75, n° 820; U. Schroeter, 2005, supra note 16, Para. 13, n° 15 et seq. and 51. 81 In a case dealing with the Common Fisheries Policy, at this time still shared competence of the EC, the ECJ considered that a member state had the power to assume commitments within the framework of an international convention insofar as the community had not yet fully exercised its functions in the matter: see ECJ, 14 July 1976, Jointed Cases 3-76, 4-76 et 6-76, Kramer and others, n° 39; on this case, see J. Rideau, supra note 80. See also, a contrario, condemning a member state for acting in application of the Bern Convention for the protection of Literary and Artistic Works in an area where the EU already exercised its functions: CJEU, 9th February 2012, case C-277/10, Martin Luksan v. Petrus van der Let, n° 64; and, annulling the decision of the Council of 19th December 2011 on the participation of the European Union and its member states in negotiations for a Convention of the Council of Europe on the protection of the rights of broadcasting organisations, as it “falls within an area covered to a large extent by common EU rules” and “those negotiations may affect common EU rules or alter their scope”: CJEU, 4th September 2014, case C-114/12, Commission v. Council, n° 102 (cases kindly reported by the Prof. D. Ritleng). 82 Shared competence based on the establishment and functioning of the internal market (Art. 114 TFEU).

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Therefore, in all Member States of the EU that are parties of the CISG, the CISG should prevail over directives on late payment. .

15.2.2.2

Proposal for a Regulation of the Parliament and of the Council on a Common European Sales Law Will the future of the Vienna Convention be compromized by the upcoming Regulation on a Common European Sales Law? The proposal for a Regulation of the Parliament and of the Council of 11 October 2011 finds its roots in the ‘Action plan for a more coherent contract law’ launched by the EU Commission in 2004. It reflects a lowering of the ambitions of the EU. It seems that the idea of a Common Frame of Reference, which could have led to a European code of contracts and obligation, is no longer on the agenda. It ends up more modestly with the idea of a uniform international sales law, applying to both businessto-consumer and business-to-business relationships. Therefore, it covers only partially the scope of the CISG, which is generally not applicable to business-to-consumer relationships. In business-to-business relationships, the CISG and the Regulation will be in competition, all the more as the proposal deals with questions which are not governed by the CISG such as the validity of the contract and of its terms or the prescription of actions arising from the sale. However, the future Regulation has a certain disadvantage in comparison with the CISG83. This instrument is purely optional. To regulate sales, European Sales Law will imply a choice by the parties in favour of this instrument (opting in system), whereas the CISG applies ex officio, unless the parties have agreed otherwise (opting out system). It is by nature more difficult for the parties to make a positive choice than to submit tacitly to a body of legal rules. Besides, businesses established outside the EU might be reluctant to opt for this instrument instead of the worldwide rules set out by the CISG. As a consequence, European businesses which operate both in and outside the EU would have to juggle with two bodies of rules and provide for two kinds of general terms and conditions of sale, which might be an important complicating factor. Even businesses working only in Europe are likely to suffer from a comparable disadvantage. Firstly, when all the parties to a contract are traders, the Common European Sales Law might be used only if at least one of those parties is a small- or medium-sized enterprise, 83 Concerning the problems raised by the imperfections of the regulation of sales proposed by the text – not covered hereinafter –, see notably I. Schwenzer, ‘Global oder Regional – CISG oder CESL?’, in A. Bruns et al., Internationales, Europäisches und ausländisches Recht, Festschrift für Rolf Stürner, Tübingen, 2013, pp. 1059-1070 and I. Schwenzer, ‘CESL and CISG’, in I. Schwenzer & L. Spagnolo (Eds), Globalization versus Regionalization, the Hague, 2013, pp. 97-114. It could be noticed that the European Parliament adopted more than 200 amendments correcting some of these imperfections: see European Parliament legislative resolution of 26 February 2014 on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law (COM(2011)0635 – C7-0329/2011 – 2011/0284(COD)).

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although this size is loosely defined according to the text84. In addition, and above all, there is little chance that, if this condition is fulfilled, all European business partners would agree to submit their contracts to this instrument. As a result, the CISG will continue to be applied in Europe in competition with the Regulation. This would be even more so if the scope of the Regulation was limited to distance sales contracts as suggested by the European Parliament in its recent resolution85.

15.3

Conclusion

Despite some negative points, the application of the CISG in Europe is, on the whole, positive. However, progress remains to be made particularly in two areas. Firstly, it is to be hoped that all Member States of the EU become parties to the CISG86. The European Union’s institutions should incite87 or even compel88 the stragglers to accede to the CISG89. These steps should be taken in spite of the current legislative process referring to the CESL and, once adopted, despite its promotion by EU institutions. Secondly, EU institutions should refrain from adopting directives or regulations which could contradict the CISG. Furthermore, should we give the CJEU jurisdiction to interpret the CISG?90 This solution appears Utopian and rather inappropriate91. A better uniform application in Europe could be achieved more modestly through a dialogue between judges, particularly

84 For the purposes of the Regulation, a small- or medium-sized enterprise (SME) is “a trader which (a) employs fewer than 250 persons; and (b) has an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million, or, for an SME which has its habitual residence in a Member State whose currency is not the euro or in a third country, the equivalent amounts in the currency of that Member State or third country”. See Art. 7(2) of the proposal for a Regulation. 85 See European Parliament legislative resolution of 26 February 2014 on the proposal for a regulation of the European Parliament and of the Council on a Common European Sales Law, supra note 83; on the latest developments, see the withdrawal of the proposal by the EU Commission and the preparation of a ‘Modified proposal in order to fully unleash the potential of e-commerce in the Digital Single Market’ available from ; E. Clive, ‘Proposal for a Common European Sales Law withdrawn’, in European Private Law News, January 7, 2015, available from . 86 See also U. Magnus, ‘CISG vs. CESL’, in U. Magnus (Ed.), CISG vs. Regional Sales Law Unification, Sellier European Law Publishers, pp. 97 et seq., esp. pp. 121-122. 87 Through a recommendation of the Council (Art. 288 Para. 5 TFEU). 88 Through a decision (Art. 288 Para. 4 TFEU) or a regulation (Art. 288 Para. 2 TFEU). 89 On these measures, see U. Schroeter, 2009, supra note 13, p. 189 and U. Schroeter, 2005, supra note 16, Para. 19 n 54 et seq. 90 On this question, see U. Schroeter, 2005, supra note 16, Para. 21, n 10 et seq. 91 Cf. U. Schroeter, 2005, supra note 16, Para. 21, n 53 et seq. and U. Schroeter, 2009, supra note 13, pp. 195 et seq.

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between Supreme Courts. The network of the Presidents of the Supreme Judicial Courts of the European Union92 deserves to be activated for this purpose. These are some measures that would improve the application of the Convention in Europe.

92 See .

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Contract Law in Latin America: Building of a ‘Latin American’ Ius Commune on Contract Law*

Alejandro M. Garro

16.1

Regionalization of Contract Law as a Threat to Worldwide Unification Efforts Such as the CISG

The proliferation of regional, piece-meal bodies of contract law threatens the consolidation of worldwide harmonization of contract law achieved so far by the CISG. This notwithstanding, there is something to be said in favor of engaging Latin American legal scholars – and eventually judges, lawyers, and law students – in searching for a common ground on contract law, especially if one takes into account relevant reasons behind the drafting of Principles on Latin American Contract Law (PLACL).1 This is the benefit, the most important benefit, of this academic exercise, and for this matter: ‘attention must be paid’. The following notes and reflections are aimed at explaining the reasons inspiring the drafting of the PLACL and, eventually, its distinguishing features.

16.2

Potential Coexistence of Unified Hard Law on International Sales with Regional Soft Law on Contract Law

The “United Nations Convention on Contracts for the International Sale of Goods” (“CISG”) covers an important and extensive area of contract law, and most of its rules applicable to the formation, performance, and non-performance of sales contracts are also suitable for other types of contracts for services. However, t the CISG is not a self-contained code of laws, not even of contract law, for it is meant to coexist within a larger body of rules applicable to conventional obligations in general. * 1

All web pages were last accessed in May 2015. Los Principios Latinoamericanos de Derecho de los Contratos (PLDC), to which specific reference will be made below, is much more recent projects of harmonization of contract law at the regional level, such as the European Principles of Contract Law (PECL), the UNIDROIT Principles of International Commercial Contracts (UPICC), the Uniform Act of the Law of Contract elaborated under the auspices of the Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA), and even the project of drafting Principles of Asian Contract Law (PACL).

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Ideally, any international set of rules applicable to international commercial contracts should apply not only to cross-border but also to cross-regional transactions, serving as a normative bridge between a party based in the Americas and another party based in Africa, Europe, or Asia, regardless of the common law or civil law background of the party in question and whether the parties to the contract belong to any economic or political region in particular. This is why a proposal for worldwide harmonization of contract law, such as the one proposed years ago by the government of Switzerland to UNCITRAL, deserves more enthusiastic and urgent support than a proposal for regional harmonization.2 The Swiss proposal is yet to be taken over by UNCITRAL, probably in the shape of a soft law instrument aimed at reconciling different views on the many aspects of the law of obligations and contracts that are not dealt with by the CISG. While we wait until a more ambitious project of worldwide harmonization is ripe for adoption, it is worth looking at existing efforts of regional harmonization. Although far from ideal, for the reasons stated before, current efforts behind the PLACL may contribute for Latin American jurisdictions to search for common approaches to different aspects of contract law – thus contributing towards the ultimate goal of reaching a more universal consensus. Against this background, it is possible to adopt a more realistic view on the prospects of settling on a Latin American ius commune applicable to international commercial contracts. The long history behind the adoption of the CISG evidences the enormous efforts that were needed to reach genuine consensus on a truly international framework for sales transactions. Most South American countries, and a few from Central America, have been parties for some time to.3 It is therefore instructive to take a look now at the slow and difficult path taken by the Latin American countries to harmonize their legal systems – even in apparently easier fields such as private international law and procedural and judicial cooperation. This retrospect anticipates the magnitude of any task assumed by the PLACL, aiming at the unification of areas of substantive contract law. This entails, in the first place, looking at the phenomenon of cross-fertilization that took place in Latin America at the time of adoption of the early 19th-century civil codes, subsequently surveying the ‘progressive codification’ efforts undertaken under the sponsorship of the Organization of American Sates’ Conference on Private International Law (Conferencia Especializada de Derecho Internacional Privado or CIDIP).

2 3

Proposal from the Government of Switzerland on Possible Future Work by UNCITRAL in the Area of International Contract Law, 45th Session, 8 May 2012, A/CN.9/758. See, generally, CISG Advisory Council Declaration No. 1, The CISG and Regional Harmonization, Rapporteur: Professor Michael Bridge, London School of Economic, available from .

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16.3

The ‘Spontaneous Harmonization’ Brought about by the Codification Movement in Latin America

Having followed the model set up by the Napoleon Code, most Latin American nations belong to a legal category which most notable comparatists would place, within the civil law tradition, in the niche of the ‘Romanistic legal family’.4 Although the French Code Civil was the main source of inspiration for the drafters of the Latin American civil codes, the influence of the French model was combined with the impact of colonial legislation such as Las Siete Partidas, Fueros, and other Spanish colonial compilations, which was quite influential in fields such as family and inheritance law.5 In this area, the Latin American private law developed differently than the main European models, although this generalization does not apply to the area of obligations and contracts. Early codification efforts in Latin America were almost verbatim translations of the French model,6 but this was not the case of subsequent codification movements, led by Andres Bello’ s Civil Code for Chile (1855), Augusto Texeira de Freitas’ sketch (Esboço) of a Civil Code for the Empire of Brazil (1853), and Dalmacio Vélez Sársfield’s Civil Code for Argentina (1869). These civil codes provided more original and modern models that were subsequently adopted in other Latin American countries,7 influenced each other’s

4

5

6 7

K. Zweigert & H. Kötz, An Introduction to Comparative Law, 3rd edn, Oxford University Press Inc., New York, 1998, p. 73. Prominent French and Italian comparatists, however, note that Latin American legal systems are distinctive enough to belong to a category of their own. See R. David, ‘Traite elementaire du droit civil compare: introduction a l’ etude des droits etrangers et à la méthode comparative’, Revue internationale de droit comparé, Vol. 2, No. 2, 1950, pp. 379-381: “[…] on est obligé de reconnaitre que, tout en appartenant au groupe du droit francais, les droits de l’Amerique Latine presentent certaines ceracteristiques et particularités qui le sont propres […].” See also S. Schipani, Armonización y unificación del derecho: derecho común en materia de obligaciones y contratos en América Latina, en Sistema jurídico romanista y unificación del derecho en América Latina: Sistema Jurídico Latinoamericano y unificación del derecho, Editorial Porrua, Mexico, 2006, p. 226 (also distinguishing a Latin American legal family from European legal families in general). Also in favor isolating a distinctive Latin American legal family, though without substantiating such idiosyncratic or definitional characteristics, see A. Guzman Brito, Historia de la codificacion civil en Iberoamerican, Thomson Aranzadi, Santiago de Chile, 2006, p. 187. See D. Lopez-Medina, ‘The Latin American and Caribbean Legal Traditions’, in M. Bussani & U. Mattei (Eds.), The Cambridge Companion to Comparative Law, Cambridge University Press, New York, 2012, pp. 360-316 (referring to the ‘polycentric nature’ of Latin American legal systems). This was the case of the early civil codes adopted in Hati (1825), Bolivia (1830 and 1845), Peru (1836), Costa Rica (1842), and the Dominican Republic (1845). E.g., the 1855 Chilean Civil Code, a remarkably novel and original work, was subsequently adopted by El Salvador (1859), Ecuador (1860), Venezuela (1863), Nicaragua (1871), Colombia (1873), and Honduras (1880). With amendments and modifications, Bello’s Chilean Civil Code is still in force in Ecuador, El Salvador, Colombia, and Honduras. See I. Jaksic & A. Bello, Scholarship and Nation-Building in NineteenthCentury Latin America, Cambridge University Press, New York, 2006, p. 174.

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Alejandro M. Garro civil codes in various ways.8 This phenomenon of cross-fertilization of civil codes resulted in a phenomenon of ‘spontaneous harmonization’ of private substantive law. After the classical codification period of the 19th century, more recent civil and commercial codes adopted in Latin America, as well as significant amendments introduced to existing codes during the last decades, failed to pay much heed to the law of neighboring Latin American countries.9 The few civil codes adopted during the course of the 20th century found in the 1942 Italian Codice Civile a more modern source of inspiration than the French Civil Code. Paying little or no attention to legal developments in other Latin American countries, these new codes and amendments weakened the informal ‘common core’ of private Latin American law resulting from the harmonization efforts achieved during the 19th century.10 Beyond the noted process of early, informal, and spontaneous harmonization of private substantive law, a second wave of harmonization efforts took place by virtue of a more formal process of codification of private international law, to which our attention now turns.

16.4

Early Yet Largely Frustrated Efforts towards the Harmonization of Private International Law, Increased Judicial Cooperation, and Economic Integration

In the 1970s, the Organization of American States (OAS) launched a more formal program for the ‘progressive codification’ of a regional Latin American law, which has been developing during the last decades. Probably, the most accomplished field of a genuine ‘Latin American’ law has been achieved in the field of international human rights law, proudly

8

The 1855 Chilean Civil Code indirectly influenced the civil codes adopted in Uruguay (1869), Mexico (1871 and 1884), Guatemala (1877), Costa Rica (1888), and Paraguay (1876). See M. C. Mirow, ‘Borrowing Private Law in Latin America: Andres Bello’s Use of the Code Napoleon in Drafting the Chilean Civil Code’, Louisiana Civil Code, Vol. 61, 2001, pp. 291-92. See also M. C. Mirow, Latin American Law: A History of Private Law and Institutions in Spanish America, University of Texas Press, Austin, 2004, p. 140 (tracing 170 articles of the Argentine Civil Code of 1869 to the Chilean model). The 1869 Argentine Civil Code was adopted by Paraguay in 1876, indirectly influencing the civil codes of Nicaragua (1904) and Panama (1916). See A. Guzmán Brito, ‘La influencia del Código Civil de Velez Sarsfield en la codificación de Iberoamérica hasta principios del siglo XX’, Revista Chilena de Historia del Derecho, Vol. 18, 2000, pp. 253-254. 9 The Civil Code of Brazil, enacted in 1916, as well as the 2002 Brazilian Civil Code currently in force, found a primary source of inspiration in the German BGB. Other Latin American codes adopted during the course of the 20th century include the Peruvian Civil Code of 1984 (replacing the former Civil Code of 1936), the Bolivian Civil Code of 1975, and the Paraguayan Civil Code of 1985. In 1968, Argentina introduced significant reforms to the 1869 Civil Code, which is to be replaced in 2015 by a recently enacted Civil and Commercial Code of Argentina. 10 See R. Momberg, ‘Harmonization of Contract Law in Latin America: Past and Present Initiatives’, Uniform Law Review, Vol. 19, Issue 3, 2014, pp. 411-428, at p. 416.

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relying not only on a series of Inter-American pacts on human rights but also on a supranational commission and a court in charge of their uniform interpretation and application.11 In the field of private law, distinctions need to be drawn between the very first and incomplete efforts to codify rules of private international law12 and a subsequent wave of multilateral treaties elaborated by the CIDIPs, with the backing of the OAS.13 Between 1975 and 2009,14 not less than twenty-six international treaties were adopted by the CIDIPs, although only few of those conventions came into force and even fewer obtained wide hemispheric adherence.15 11 There is an abundant body of doctrinal and jurisprudential developments on the Inter-American System for the Protection of Human Rights, including the American Convention on Human Rights and a network of Inter-American treaties and the role of the Inter-American Commission and Inter-American Court in charge of its application, see A. Harrington, ‘Internalizing Human Rights in Latin America: The Role of the Inter American Court of Human Rights System’, Temple International & Comparative Law Journal, Vol. 26, Issue 1, 2012, pp. 1 et seq. 12 A conference convened in Montevideo in 1888 leading to the adoption of eight treaties on civil and procedural international law, some of which ratified by Argentina, Bolivia, Colombia, Paraguay, Peru, and Uruguay, followed by a second Montevideo conference in 1939-1940. On the disappointing results of the Montevideo conference, see Antonio F. Perez, ‘The Inter-American Juridical Committee and Private Law in the Americas (or a Road Map for Making the Best the Enemy of the Good)’, Columbus School of Law Legal Studies Series, Ohio, 2007, available from . The PanAmerican Code of Private International Law of 1928 (better known as the ‘Bustamante Code’ or simply ‘Code of Private International Law’), named in honor of its drafter, Cuban legal scholar Antonio Sánchez de Bustamante, gained wider acceptance in Central America and parts of South America. However, the Bustamante Code was subject to crippling reservations by five of the ratifying countries, and it was not even signed by Argentina, Colombia, Mexico, Paraguay, and the United States. See D. Fernández Arroyo, La codificación del derecho internacional privado en América Latina, Beramar, Buenos Aires, 1994, pp. 155-158. 13 Article 99 of the OAS Charter, established in 1948, created the Inter-American Juridical Committee, whose main goal was to contribute to the ‘progressive’ codification of private international law and, eventually, the unification of the law. Article 99 of the OAS Charter puts the main purpose of the Committee thus: “[…]to serve the Organization as an advisory body on juridical matters; to promote the progressive development and the codification of international law; and to study juridical problems related to the integration of the developing countries of the Hemisphere and, insofar as may appear desirable, the possibility of attaining uniformity in their legislation.” The CIDIPs are described by the OAS Charter as ‘inter-governmental meetings to deal with special technical matters or to develop specific aspects of Inter-American cooperation.’ 14 E.g., in the field of private international law, the CIDIPs approved multilateral treaties on topics as varied as adoption (the 1984, Inter-American Convention on Conflict of Laws Concerning the Adoption of Minors, available from ) and the law applicable to negotiable instruments (1975, Inter-American Convention on Conflicts of Laws Concerning Bills of Exchange, Promissory Notes and Invoices, available from ). 15 Thus, the Inter-American Convention on International Commercial Arbitration (also known as the ‘Panama Convention’, available from ) and the Inter-American Convention on Letters Rogatory (available from ), both adopted in 1975, received eighteen and seventeen ratifications, respectively (including the United States). Yet, other treaties, such as one aimed at unifying the predicates of judicial jurisdiction in the Americas (the ‘1984 Inter-American Convention on Jurisdiction in the International Sphere for the Extraterritorial Validity of Foreign Judgments and Arbitral Awards’, available from ) and the international transportation of goods (the ‘1989 Inter-American Convention Contracts for the International Carriage of Goods by Road’, available from ) only received one and no ratifications, respectively.

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At some point, the CIDIPs shifted from the codification of private international law to the elaboration of procedural rules aimed at enhancing judicial cooperation in areas such as service of process, taking of evidence, and enforcement of provisional measures and foreign judgments, areas in which another international law-formulating agency, the Hague Conference on Private International Law (the Hague Conference), had previously adopted similar multilateral treaties with relative success. The harmonization efforts by the CIDIPs significantly diminished after the seventh CIDIP was convened in 2005,16 in part due to the realization that scarce resources of time and money should be channeled through the incorporation of a stronger Latin American presence in harmonization efforts undertaken by global organizations such as the Hague Conference, UNIDROIT, and UNCITRAL. Parallel harmonization efforts in the Americas were undertaken through the conclusion of economic integration agreements, such as the FTA (Canada and the United States) and the NAFTA (Canada, the United States, and Mexico) in North America and the Asociación Latinoamericana de Integración in South America (ALADI),17 all of which include, at least as an indirect or mediate goal, the harmonization of some rules of private law pertinent to the development of a common market. More specifically, a couple of sub-regional treaties concluded for the purpose of promoting and facilitating intra-regional trade, such as the Andean Community18 and the South American Common Market (MERCOSUR),19 list the harmonization of domestic substantive private law as one of the pillars on which economic and political integration is to be built. Furthermore, the Parliament of MERCOSUR (PARLASUR), set up in 2006, also lists as one of its purposes the harmonization of

16 Originally convened to take place in 2005, the seventh CIDIP was postponed on a number of occasions. The first part of CIDIP-VII took place in October 2009, but the second part, which was to tackle issues concerning consumer protection, is yet to receive a certain date. 17 The ALADI was established in 1980 by the ‘Treaty Establishing the Latin American Integration Association’ (Asociación Latinoamericana de Integración), created for the purpose of promoting the development of an economic area with a common market. To date, ALADI counts with the support, at least nominally, of thirteen countries of the region (Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Panama, Peru, Uruguay, and Venezuela). 18 The Andean Community (formerly the Andean Pact) was founded in 1969 by the members of the ‘Andean Subregional Integration Agreement’ (Cartagena Agreement) concluded by Bolivia, Chile, Colombia, Ecuador, and Peru (Chile withdrew in 1976 and Venezuela was a member between 1973 and 2006). 19 Article 1 of the Treaty of Asuncion of 1991 was created for the ultimate purpose of creating a common market, including the free movement of goods and services, the establishment of a common external tariff, the adoption of a common trade policy, and the commitment of the members states of MERCOSUR to harmonize their legislation in areas relevant to the economic integration process. Treaty Establishing a Common Market between the Argentine Republic, the Federal Republic of Brazil, the Republic of Paraguay, and the Eastern Republic of Uruguay, 30 ILM 1041 (1991). For an account of the most recent MERCOSUR Agreements in areas such as enforcement of foreign judgments, jurisdiction in matters of international contracts, international commercial arbitration, etc., see J. P. Schmidt, ‘MERCOSUR’, in R. Wolfrum (Ed.), Max Planck Enciclopaedia of Public International Law, Vol. 7, Oxford University Press, Oxford, 2012, pp. 110-117.

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law.20 However, not only the domestic law of member states remains within the exclusive jurisdiction of the national legislatures but also the MERCOSUR agreements must be internalized by all member states in order to enter into force.21 This is why not much harmonization has been achieved to this date within MERCOSUR and not much is to be expected, at least within the immediate future, via economic integration agreements. More recently, a few Latin American countries, under the auspices of Ecuador, Bolivia, Nicaragua, and Venezuela, as well as the support of a few others, have been promoting the initiatives under the rubric of ‘ALBA’ and ‘UNASUR’, proclaiming the long-standing Latin American aspirations for political unity, solidarity, and economic integration.22 No one should prematurely discard laudable efforts towards Latin American harmonization, but it seems premature to predict whether these initiatives will bring up a more genuine and profound legal harmonization or institutional unity. Equally noteworthy is that the CIDIP, the OAS’ law-formulating agency, more recently turned its attention to the adoption of a model law on secured transactions. This is a new, and apparently more promising, development in the long and incomplete movement towards the harmonization of private substantive law, to which our attention now turns.

16.5

Recent Harmonization Efforts on Substantive Commercial Law: The Case of Secured Transactions

In an effort to revitalize the OAS harmonization efforts, the sixth CIDIP convened in 2001 decided to change its focus from private international law and procedure to substantive law, but within the more flexible format of ‘soft law’ such as a model law and on a specific issue of commercial law such as the simplification and modernization of the law of secured transactions.23 Thus, the OAS Model Law on Secured Transactions, adopted at the sixth 20 MERCOSUR Common Market Decision No. 23/05, preamble. 21 MERCOSUR has set up a supranational tribunal, the ‘Permanent Review Court’, but only with the power to render non-binding advisory opinions (opiniones consultivas) and only upon the request of the highest courts of the member states. See G. L. Gardini, ‘MERCOSUR: What You See Is Not (Always) What You Get’, European Law Journal, Vol. 17, Issue 5, 2011, p. 697. 22 Among those recent, albeit incipient, initiatives, as the Alianza Bolivariana para los Pueblos de América (ALBA) and the Unión de Naciones Sudamericanas (UNASUR), are worth mentioning. Latin American countries as diverse as Antigua and Barbuda, Bolivia, Cuba, Dominica, Ecuador, Nicaragua, St. Vincent and the Grenadines, and Venezuela are full members of ALBA. UNASUR was established in 2008 and counts as members twelve South American nations. Article 1 of UNASUR’s constitutive treaty describes as its main goal ‘to set up, in a participatory, agreed manner, a space for integration and union among its peoples in the cultural, economic, and political fields’. 23 D. Fernandez Arroyo, ‘What’s New in Latin America Private International Law’, in P. Sarcevic, P. Volken & A. Bonomi (Eds.), Yearbook of Private International Law, Vol. 7, Sellier European Law Publisher, Munich, 2005, pp. 85-117 at p. 87; N. Gonzalez Martin, ‘Private International Law in Latin America: From Hard to Soft Law’, in Universidad Nacional Autonoma de Mexico (Ed.), Anuario Mexicano de Derecho Internacional, Vol. 11, Universidad Autonoma de Mexico, Mexico, 2011, pp. 393-405 at pp. 400-401.

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CIDIP, provided a model for reform in the field of security interests in personal property, along the conceptual lines and policies that inspired Article 9 of the Uniform Commercial Code in the United States and many other and most recent regional and worldwide harmonization efforts.24 The active intervention of the US delegation and the National Law Center for Inter American Free Trade proved crucial for the adoption of the model law.25 Despite the resistance provoked by a US-inspired legislation,26 the OAS Model Law on Secured Transactions has proved so far a relatively successful implementation of a modern, simplified framework for asset-based secured credit, approximating rules on creation, effectiveness against third parties, priorities, and enforcement of security rights (garantias mobiliarias), an area of the law not easily amenable to worldwide harmonization.27 It may be too early to assess the enduring success of the OAS Model Law on Secured Transactions, but its adoption in several countries of Central and South America and the Caribbean constitutes in itself a remarkable achievement.28

16.6

More Modest Efforts (so far Purely Academic) towards Building Bridges in Latin American Contract Law

As noted, with the exception of the informal and spontaneous core of Latin American civil law brought about by the 19th-century codification efforts, the harmonization of substantive

24 A. Garro, ‘The OAS-sponsored Model Law on Secured Transactions: Gestation and Implementation’, Uniform Law Review, Vol. 15, 2010, p. 391. See, generally, S. V. Bazinas & O. Akseli (Eds.), International and Comparative Secured Transactions Law, Hart Publishing, London, forthcoming 2016. 25 N. Gonzalez Martin, ‘La conferencia especializada interamericana de derecho internacional privado y la modernización del derecho internacional privado latinoamericano: Un cambio en el iter convencional hacia la ley modelo?’, Boletín Mexicano de Derecho Comparado, Numero conmemorativo, 60th Anniversary, Universidad Autonoma de Mexico, Mexico City, Mexico, pp. 511-544. 26 J. Kleinheisterkamp, ‘Development of Comparative Law in Latin America’, in M. Reimann & R. Zimmermann, The Oxford Handbook of Comparative Law, Oxford University Press, Oxford, 2008, p. 291 (relating the negative reaction of some Latin American delegations against what they perceived as an effort by the United States to introduce common law concepts and pro-creditor policies aimed at benefiting the US investors in Latin America). See also G. McCormack, ‘American Private Law Writ Large? The UNCITRAL Secured Transactions Guide’, International and Comparative Law Quarterly, Vol. 60, Issue 3, 2011, pp. 597-625. 27 At this point in time, the OAS Model Law on Secured Transactions has been adopted in Colombia, Costa Rica, El Salvador, Guatemala, Honduras, and Peru, having inspired law reform efforts in Mexico and other jurisdictions. See J. M. Wilson, ‘Financial Leasing and Its Unification by UNIDROIT: The Role of the Organization of the American States’, Uniform Law Review, Vol. 16, 2011, p. 469. See also B. Kozolchyk, ‘Implementation of the OAS Model Law in Latin America: Current Status’, Arizona Journal of International and Comparative Law, Vol. 28, Issue 1, 2011, p. 1. 28 See, generally, Kozolchyk, 2011, supra note 27, Vol. 1; M. Dubovek, ‘A Guide to a Successful Adoption and Implementation of the Organization of American States Model Law on Secured Transactions and Registry Regulations in Honduras – The National Law Center Experience’, Uniform Commercial Code Law Journal, Vol. 43, 2011, pp. 825 et seq.

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private law had not been formally placed in the agenda of the law-formulating agencies of the Americas. In recent years, however, the massive and fast-paced projects of unification of European private law29 inspired some sectors of Latin American legal academia to launch a similar initiative as Ole Lando’s Principles on European Contract Law (PECL) and the more recent Principles of Asian Contract Law (PACL). Thus, the birth of a project on the PLACL (i.e., Principles of Latin American Contract Law or ‘Principios Latinoamericanos de Derecho de los Contratos’ (PLDC) in Spanish), has already achieved, more than ever before, closer cooperation among Latin American legal scholars devoted to the teaching and scholarship of the law of obligations and contracts.30 The idea of focusing on the drafting of a set of Principles of Latin American Contract Law has been traced to an academic symposium that took place in 2008, gathering scholars with post-graduate studies in France and other European law schools.31 Two years later, another scholarly meeting affirmed a project in which academics from Argentina, Colombia, and Chile gathered with the support of the French Fondation pour le droit continental and the Chilean Fundación Fernando Fueyo, attached to the Diego Portales University in Santiago.32

29 Work on the Principles of European Contract Law (PECL) by the Lando Commission, as well as the speed with which the European Draft Common Frame of Reference (DCFR) proceeded to completion has unquestionably served as a source of inspiration for the drafting of the PLACL. See generally O. Lando et al., Principles of European Contract Law, Kluwer Law International, The Hague, 2003; C. von Bar & E. Clive (Eds.), Draft Common Frame of Reference: Principles, Definitions and Model Rules of European Private Law, Oxford University Press, Oxford, 2010. 30 See Momberg, 2014, supra note 10, pp. 411-428, referring to meetings that took place in 2008 and 2001, reported in Roma America Diritto Romano Comune, 26/2008, p. 7 and 31/32/2011 (2011). A more recent meeting and discussion took was convened in Oxford by the European Institute of European and Comparative Law under the title “The Future of Contract Law in Latin America”, Keble College, 25 June 2015, at . Another meeting of the working group has been announced for October, 2015, in Bogota, at the Universidad Externado de Colombia. 31 See Momberg, 2014, supra note 10, pp. 411-428 at p. 413. 32 See Id., referring to a Lima symposium on civil law that convened in November 2010 (Primera Convención Latinoamericana de Derecho Civil) for the purpose of drafting the foundations of a ‘Latin American Code of Contract Law’ (Bases para un Código Latinoamericano de Derecho de los Contratos). See L. Leiva Fernandez, Bases para un Código Iberoamericano de Contratos, available at . The Lima symposium was followed by the twenty-third National Conference of Private Law (Jornadas Nacionales de Derecho Civil) that met the following year in Tucuman, Argentina, proposing the creation of a research network in charge of studying the ‘normative integration of private law in IberoAmerica’. See A. Silva Diaz, ‘La armonización del derecho de contratos en la UE y en el continente sudamericano’, Revista de Derecho Privado, 2012, p. 115.

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16.7

The PLACL Project in Light of Other Soft Law Initiatives (OHADA, PECL, and PACL)

According to Rodrigo Momberg, from the Institute of European and Comparative Law of the University of Oxford, the main purpose of the PLACL is ‘to provide a source of inspiration for the reform and modernization of contract law in Latin America’.33 Thus, distinctions must be drawn between this Latin American initiative and other projects aimed at increasing the ‘regionalization’ of contract law, such as those that have or are being developed in Europe (PECL), Africa (OHADA), or Asia (PACL). The PLACL does not seem to pursue the elaboration of yet another set of contract principles or rules in order to compete with other ‘hard’ international instruments codifying rules governing cross-border international contracts, such as those elaborated by UNCITRAL governing international contracts for the sale of goods (CISG)34 or the international assignment of accounts receivables.35 The PLACL does not even attempt to elaborate a set of ‘soft’ principles or rules applicable to all international commercial contracts, such as the UPICC or regional variations such as PECL or PACL. The driving force behind the elaboration of the PLACL has been identified, in the first place, in promoting the gathering of Latin American scholars on contract law. The idea is to bring together scholars from other sister nations of Latin America, engaging them into the comparative analysis of contract law in the various countries of the region. Finding commonalities and detecting significant differences separating their legal systems seems relevant to ascertain whether there is a genuine ‘Latin American’ legal identity in this area of the law and, more importantly, to learn from each other’s differences Searching for ‘a common core’ or at least a common policy position on controversial issues on contract law also seems worth to pursue. Issues such as the burden of proof and measure of damages in cases of pre-contractual liability, the information duties accompanying the formation of contracts, the need for special rules on standard terms, the usefulness of relying on causa as an essential element of contractual obligations, the level of protection to be given to the weaker party, whether to allow the revision of contracts due to drastic and unexpected change of circumstances, etc., one a few of many gaps and areas of discrepancy found among Latin American legal systems on contract law. Searching for, and eventually finding, a ‘common core’ of contract law that can be genuinely characterized as typically ‘Latin American’ may pave the way for law reform, especially in countries such as Chile and Colombia, which had no significant reform to the law of contracts since the 33 See Momberg, 2014, supra note 10, pp. 411-428 at p. 414. 34 United Nations Convention on Contracts for the International Sale of Goods, available from . 35 United Nations Convention on the Assignment of Receivables in International Trade, available from .

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adoption of Bello’s Civil Code in the 1850s. Finding a ‘common core’ in the PLACL may also provide a useful tool to judges and arbitrators for interpreting and supplementing domestic contract law, thus filling gaps in the law applicable to cross-border contracts in Latin America.36

16.8

Challenges in the Course of Developing a Latin American Ius Commune on the Law of Contracts

The first challenge faced by the PLACL project is the absence of many jurisdictions belonging to the Latin American legal family. Whereas the PLALC initiative was originally conceived with the participation of legal scholars from only three Latin American countries (Argentina, Colombia, and Chile), representatives from four other countries (Brazil, Paraguay, Uruguay, and Venezuela) subsequently joined the project.37 The first national reports, published in 2012, provide the most updated comparative study on the law of contracts in those seven jurisdictions.38 It remains to be seen whether the Central American countries as well as the Spanish, French, and Portuguese Caribbean nations will be included in subsequent reports. National reports from other major Latin American jurisdictions, such as Bolivia, Ecuador, Mexico, and Peru, remain, to this day, conspicuously absent. Another major challenge facing the elaboration of the PLACL is the absence of institutional support from international or intergovernmental organizations such as UNCITRAL or UNIDROIT, or even regional ones such as the OAS, ALADI, or MERCOSUR. The sponsorship of government organizations does not guarantee a more successful outcome,39 but without a more stable and continued institutional and financial support, it will be difficult to achieve a wider and more active representation of countries of the Americas. A final point to contend with is the need for thorough research and proper identification of the key issues of contract law worth of being compared. In this regard, the initial methodology followed by the PLACL’s national reporters is to be commended. The questionnaire tackled by the national reporters was divided into forty different issues, incorporating not only the relevant primary sources but also doctrinal trends and the most recent

36 See Momberg, 2014, supra note 10, pp. 411-428 at pp. 413 et seq., envisioning that the formal and informal inclusion of the PLACL in undergraduate and post-graduate law courses could facilitate awareness about the contract law of sister Latin American nations. 37 See Momberg, 2014, supra note 10, pp. 411-428 at p. 414. 38 See C. Pizarro Wilson, El derecho de los contratos en Latinoamerica. Bases para unos principios de derecho de los contratos, 1st edn, Universidad Externado de Colombia, Bogotà, 2012. 39 But see Momberg, 2014, supra note 10, pp. 411-428 at p. 427: “[…][T]he support of international organizations such as the OAS or the MERCOSUR may be fundamental to establish a permanent network of academics, judges, public officers, and practicing lawyers for the dissemination of the PLDC (‘PLACL’) as well as for the development of further comparative studies and research on Latin American private law.”

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case law developments. The questionnaire was structured in such a way as to cover the most relevant issues regarding a wide range of topics, including: 1. General principles of contract law (including good faith, freedom of contract, the binding force of contracts, and privity). 2. Formation and proof of contracts, effects of unilateral declarations, pre-contractual liability. 3. Special rules on standard terms (condiciones generales) and contracts concluded by electronic means. 4. Grounds and consequences of invalidity of contracts (including questions dealing with causa and vices of consent such as mistake, fraud, threat, and unconscionability (lesion)). 5. Right to unilateral termination in contracts of indefinite duration. 6. Interpretation, third-party rights, contracts in favor of third parties (estipulación a favor de terceros), simulation (simulación) and its consequences. 7. Allocation of risks (teoría del riesgo), contract revision due to a change of circumstances (teoría de la imprevisión). 8. Performance, including time, place, manner, partial performance, and costs. 9. Non-performance, including the concept of breach, imputability requirements (if any), anticipatory breach, etc. 10. Remedies for non-performance, including the requirements for specific performance, cure, reduction of price, damages, mitigation of harm, termination, exemption of liability, and agreed payment for non-performance (cláusula penal). The preliminary findings, published in 2012, revealed in answer format to the above questionnaire, disclose substantial differences in the law of contracts of the seven jurisdictions surveyed so far.40 Relevant distinctions may be drawn between a set of so-called ‘conservative’ Latin American jurisdictions,41 which have preserved more or less intact the principle of party autonomy as recognized in the 19th century, in contrast to the, so-tospeak, ‘progressive’ Latin American jurisdictions.42 While respecting in principle traditional notions of freedom of contract, the civil codes in the second group of countries have been amended, empowering judges to apply a modicum of socially oriented doctrines (e.g., lesión and imprevisión) aimed at policing the fairness of contracts.43 A case in point on this 40 See Pizarro Wilson, 2012, supra note 38, passim; Momberg, 2014, supra note 10, pp. 411-428 at p. 416. 41 Chile, Colombia, Venezuela, and Uruguay apparently respond to this characterization due to the fact that their code provisions on contracts remain largely untouched since the 19th century. See Momberg, 2014, supra note 10, pp. 411-428 at p. 416. 42 See Momberg, 2014, supra note 10, pp. 411-428 at p. 416, including into this category countries such as Argentina (due to the amendments introduced by Law No. 17711 in 1968), Brazil (which adopted a new Civil Code in 2002), and Paraguay (which adopted a new civil code in 1986). 43 See Momberg, 2014, supra note 10, pp. 411-428 at pp. 416 et seq., observing that the possibility of avoiding a contract on the ground of unconscionability (lesión) has been narrowly permitted in Chile, Colombia, and

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social-oriented conception of contract law is the murky notion of the ‘social function’ of contracts, as introduced in the Brazilian Civil Code that entered into force in 2002.44 The extent to which can reasonable expect a Latin American consensus on this point needs further research and discussion. And this is precisely what the PLACL project intends to stimulate.

16.9

Conclusion

The regionalization of contract law risks the continued fragmentation of cross-border contracting practices at the inter-regional level, where facilitating international trade is needed the most. The consolidation of a genuine ‘uniform’ interpretation of the CISG and existing international instruments is probably more conducive to trade than further production of regional contract rules such as those of OHADA, PECL, PACL, and the ongoing PLACL initiative. Yet, a ‘soft’ set of model rules adopted at a regional level may spur impetus to much needed comparative studies on contract law, otherwise unobtainable, at least in Latin America, where knowledge and understanding of what is going on in neighboring countries does not enjoy the interest and the prestige generally attached to comparisons with European or US law. Whether there is a Latin American ius commune in matters of contract law, or, what is not less important, whether there is indeed a genuinely distinctive Latin American lex mercatoria, is a challenge that the current PLACL initiative seems ready to assume. Finding significant differences of approach, based on the answer provided by the courts in real cases, as opposed to the elucubration of a selected group of academics, will inevitably spur new lines of inquiry and research on comparative Latin American contract law, calling for reflection, choosing among different policy options and, at some point, adopting innovative solutions. Even though at a regional level, such solutions can provide a unified Latin American approach which, at some point in time, may contribute to the unification of inter-regional and genuinely international contract law. To this extent, and only to this extent, initiatives such as the PLACL are most welcomed and deserve to be encouraged.

Uruguay, whereas the possibility of terminating or revising the terms of a contract due to hardship (imprevision) is rejected in Chile and remains of limited acceptance in Venezuela (recognized by the Venezuelan Commercial Code of 1971) and by virtue of scattered case law developments in Colombia and Uruguay. 44 Brazilian Civil Code, Art. 421: “[…][F]reedom of contract has to be performed in function and within the limits of the social function of the contract.”

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Part V CISG and Fair Contract Law

17

The Politics of Fairness in CISG*

Hans-W. Micklitz and Leticia Diez Sanchez**

17.1

Disclaimer and Perspectivism

The authors of this article are ‘outsiders’ – they study and look at the CISG and the debate within the CISG community from ‘outside in’. They do not form part of the CISG community, that is, the group of academics being involved in the making and, more importantly, in the application of the CISG in legal practice. With the rise of European contract law, first in the 1980s with the so-called Lando Principles (the Principles of European Contract Law) and later in the 2000s with the so-called debate around the feasibility of a European Civil Code, the academic fora is divided into two camps – CISG forum and the Study Group/Aquis Group forum. Both are only loosely connected; both discuss mainly within and with their constituencies, but much less across the boundaries. We are therefore grateful to be invited to ‘CISG 35 years and beyond’’ and to provide a perspective which seems to us relatively neglected in the overall discussion on the CISG – the dimension of fairness. At least to our knowledge, the issue of fairness is under-researched in the CISG whilst highly relevant in the debate around a European Civil Code.1 Implicitly, there is certainly the idea that the European Civil Code should be ‘fairer’ than the CISG, because it provides for mandatory rules on consumer protection and anti-discrimination. What this really means, and what exactly fairness in the CISG entails for b2b relations, lies at the forefront to this contribution.

17.2

Argument and Method

The belief that the Convention is a neutral instrument commonly dominates the discussions about the sales regime introduced by the CISG. This neutrality, it is argued, has been the

* All web pages were last accessed in June 2015. ** We would like to thank Ignacio Gonzalez-Garcia, PhD Researcher at the Department of Economics at the EUI for preparing the graphs in the annex and Ulrich Magnus for valuable comments. The responsibility remains ours. 1 M. W. Hesselink, CFR and Social Justice, Sellier European Law Publishers, Munich, 2008; M. W. Hesselink, “If You Don’t Like Our Principles: We Have Others: On Core Values and Underlying Principles in European Private Law: A Critical Discussion of the New ‘Principles’ Section in the Draft Common Frame of Reference”, in R. Brownsword et al. (Eds.), Foundations of European Private Law, Hart Publishing Ltd, London, 2011, pp. 59-72.

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reason why such a great number of states with diverse legal backgrounds have been willing to subscribe to the text. The design of sales law in the CISG aims at striking a fair balance between the rights of the sellers and the rights of the buyers, between the mutual rights and obligations and between the remedies granted to each of them. We intend to challenge the argument for ‘neutrality’ of the CISG, which is commonly quoted from Schwenzer and Hachem.2 Their argument goes like this: Primarily, representatives of developing countries have argued that CISG is too seller friendly. This allegation focuses mainly on the obligation of the buyer to examine the goods and give notice of any non-conformity. At the Vienna Conference, this position was also supported by the delegates from other countries whose legal systems did not provide for any notice requirement. The well-known compromise can now be found in Article 44 CISG. Furthermore, an interpretation of Articles 38-39 CISG invalidates such criticism, as has been previously shown. On the other hand, especially practitioners with a German-speaking background fear that CISG is too buyer friendly. They point specifically to the AngloAmerican concept of ‘strict liability’ as well as – somewhat ironically – to the attenuation of the notice requirement. Yet, in practice, the differences between the liability systems are really negligible. The opposition here reveals mainly a general and irrational fear of the hitherto unknown legal concepts and outside influences. All in all, it seems fair to conclude that if one side is criticizing the seller friendliness, while the other side fears buyer friendliness, these arguments neutralize each other. This, in turn, strongly suggests that CISG actually achieves fair and reasonable results for both parties.

17.2.1

Our Argument

The overall balance, even if it is correct, cannot be understood as the result or evidence of the neutral quality of the CISG. On the contrary, the Convention incarnates – and this is the argument we would like to demonstrate – a particular conception of fairness as selfrealization of the actors’ economic will. It does so by means of a formally rational instrument that promotes free economic exchange while remaining blind to material or subjective inequalities between the contractual parties.

2

I. Schwenzer & P. Hachem, ‘CISG – Successes and Pitfalls’, American Journal of Comparative Law, Vol. 57, 2009, pp. 457-478.

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Given that the signatories do not unconditionally accept default formal rationality, the CISG incorporates options for correcting or exiting the Convention in certain circumstances. Firstly, it excludes its application to sensitive issues, some of which relate to national policies that materialize a more protectionist conception of social justice. Secondly, it allows the signatories to opt out from some provisions of the Convention that seemed to represent a shock for particular legal systems.3 Lastly, the CISG has incorporated some moral notions – the concept of good faith – in order to minimize the pervasive effect of the philosophy behind the CISG. To us, it is safe to assume that the initial Convention served the aims of a conception of international trade very much defended by Western countries and accepted with reservations by the signatories from developing and socialist economies. Paradoxically, the evolution of international trade, as experienced in the last 20 years, means that traders located in the countries that would initially benefit from the Convention see themselves now at the vulnerable side of the trade spectrum. Therefore, the political and economic development over the last decades has turned the initial logic behind the conceptualization of the CISG upside down.

17.2.2

Method

This article analyzes the legal theoretical background behind the architecture of the CISG – its conception of ‘fairness’ – and puts it into an empirical context. In order to do that, the authors first proceed to analyze key articles of the Convention, claiming that (i) the self-realization of the parties’ will and (ii) the blindness towards potential imbalances between them are the core philosophical elements of the CISG. At the same time, the article highlights certain mechanisms with which the Convention softens undesirable effects of this philosophy. All in all, the result is not a pro-buyer or a pro-seller instrument, but one that favours the weaker party over the more powerful and/or knowledgeable one. For the discussion of fairness to be complete, a certain sense of how such architecture operates in practice is needed. This article makes use of two types of empirical data: the relevant case law on the CISG as contained in the UNCITRAL Digest4 and the trade data contained in the database of the UNCTAD. More precisely, we have collected data on the share of each CISG signatory in world imports and exports from 1980 to 2013 from the database of the UNCTAD.5 The main findings suggest that while the decline in the US trade balance has been constant since 1980, China has emerged as an export superpower. 3 4

5

Infra under 17.5. Having the disadvantage, however, that decisions of lower and higher courts are put on an equal footing without any weighing. See U. Magnus, ‘UN-Kaufrecht – Aktuelle Entwicklungen’, ZEuP, Vol. 1, 2013, p. 177. Available from .

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Hans-W. Micklitz and Leticia Diez Sanchez The CISG signatories that can be classified as developing countries6 have also experienced a consistent increase in exports over imports since mid-1990s, reaching a peak just before 2007 and the subsequent recession. Among the developed members of the CISG, the results are more mixed. However, it is clear that Canada, Japan and France start their progressive decline also in the 1990s, Germany being the striking exception of a constant increase in exports even during the financial crisis. We have also conducted an analysis of the composition of trade activities in the CISG signatories. The aim of this exercise was to ascertain whether and to what extent the goods that these countries trade with have become more or less sophisticated than during the early years of the Convention. Again, the clearest trend is that of China, with a constant increase of manufactures goods since mid-1990s, parallel to a constant decrease of primary commodities (excluding fuel). Somehow, this is reflected in our analysis of the case law:7 a great number of legal controversies arising between a developing and a developed country involve China as a seller. This supports our argument that the CISG is going against the predictions of the developed economies; but in order to make it a general argument, we would need to go deeper into the analysis of the case law within the signatories of the CISG and contrast import/export data with the type of litigation. The set of case law supports our main hypothesis, evidencing that the operation of the CISG leads to strong controversies regarding the position of the weaker party in the contract. National courts are often compelled to look for mechanisms not explicitly envisaged in the CISG in order to articulate these controversies. At the same time, the case law shows an increasing role of traders from developing countries in litigating the CISG. Our set of trade data seeks to develop this latter point and demonstrates that the role of developing countries in world trade within the goods subject to the CISG has evolved a lot during the last 20 years. Not only have developing countries (China in particular) increased their trade balance, but they have also improved the sophistication of the goods it exports. For the time being, we tentatively conclude that current world trade in goods is very different from that of the early years of the Convention and that the philosophy of formal rationality and individual freedom incarnated by the CISG might be turning against those Western states that promoted it.

6 7

We do not engage here into a discussion of what a developing or a developed country is. We take this distinction for granted. Particularly helpful are the reports of U. Magnus in the Zeitschrift für Europäisches Privatrecht, although they are only available in German. They follow roughly the same structure of analysis, general trends, then overview of the case law with regard to particular subjects, ZEuP 2015, p. 159, ZEuP 2013, p. 111, ZEuP 2010, p. 881, ZEuP 2008, p. 318, ZEuP 2006, p. 96, ZEuP 2002, p. 523, ZEuP 1999, p. 642, ZEuP 1997, p. 823, ZEuP 1995, p. 202, ZEuP 1993, p. 79. There is also a comprehensive report by C. Witz in French, ‘Droit uniforme de la vente international de merchandise’, Receuil Dalloz, Panorama, January 2012-July 2013, pp. 2874-2886.

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The Politics of Fairness in CISG

How the Paper Flows

The paper is structured in the following way: we will first clarify what we mean by fairness, how the rise of fairness in contract law can be explained and whether or not there is a link to the CISG. In the light of the reversal of imports/exports, our assumption is that matters of fairness will gain relevance in the years to come (17.3). We will then look into fairness as a formal rationality within the CISG (17.4), to be contrasted with mechanisms of correction within the CISG (17.5). Sections 17.4 and 17.5 will bring together statistical data on the changes in import and export with tendencies in the emerging case law, around the distinction between formal rationality and matters of justice. If our overall assumption is correct, there must be a correlation between the economic changes and the cases to be decided in the signatory courts. Section 17.6 is meant as a tentative conclusion built around the dynamics of the CISG in a changing world.

17.3

Fairness – Clarifications

Fairness is related to justice and justice to the famous Artistotlean distinction between corrective and distributive justice (ius commutativa and ius distributiva). Contract law belongs to the first category. It is meant to balance out justice between the parties to a contract. The idea is that it remains for the parties themselves to negotiate and define the level of justice in the contract, which is what Schmidt-Rimpler famously termed Vertragsgerechtigkeit (Justice through contract).8 Whether contract law has also distributive effects and should have them is a matter of academic and political discussion of at least 100 years. Following Duncan Kennedy,9 one might argue that the period of Classical Legal Thought (1800-1900) – the first wave of globalization of legal thought – is dominated by the paradigm of private autonomy, formalism, and the view of parties as being equal in knowledge and power, and thus also as being responsible for the content of the rights and obligations.

17.3.1

The Rise of the ‘Social’

The rise of ‘The Social’ in the 20th century up until 1980s – the second wave of globalization of legal thought – changed the role and function of contract law. Mainly through mandatory rules and social regulation, contract law was infused with moral and social values. Standards

8 9

W. Schmidt-Rimpler, ‘Grundfragen einer Erneuerung des Vertragsrechts’, Archiv für civilistische Praxis, Vol. 147, 1941, pp. 130-197. D. Kennedy, ‘Three Globalizations of Law and Legal Thought: 1850-2000’, in D. Trubek & A. Santos (Eds.), The New Law and Economic Development. A Critical Appraisal, Cambridge University Press, Cambridge, 2006.

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of fairness and justice were regarded to be an integral part of contract law. The drivers behind this change were the Western welfare states, which gradually transformed contract law around the world, though to a different degree. There is much discussion whether and to what extent the regulatory shift yields, has yielded and should yield distributive effects – where we would argue in the affirmative – or whether contract law is an appropriate tool for such an exercise. This latter assumption has been forcefully questioned by law and economics.10 This is where employment law, tenant law and consumer law have to be placed, whether being tied to the national private law orders or – in particular – to the European Private Law order. Since the third wave of globalization of legal thought – still following Duncan Kennedy, which started with the fall of the Berlin Wall – contracts and contract law have even gained importance, in both practice and theory. This is what is meant by ‘private law beyond the state’,11 being discussed in different language, ‘transnational private regulation’12 or ‘contract governance’.13 Questions of fairness and justice take a different form in this ongoing discourse. The new formalism, the rise of the ‘rights’ language – ‘the identity based notion of rights’14– have brought the question to the fore whether and to what extent parties to a contract – including companies – turn into the addressees of human and fundamental rights obligations, and how economic and social rights have to be balanced. In Kiobel,15 the US Supreme Court rejected to deduce such an obligation from the Alien Torts Act, whilst in Europe, the picture might look different. Viking and Laval allow for a different understanding at the EU level, although the CJEU has not had an opportunity to decide on the public (social) responsibility of private parties.16 However, the European experience demonstrates the difficulties of ‘balancing’, as expressed in the overall suspicion towards the idea that economic freedom should trump social (human) rights.

10 Most prominently in the field of contract law, see O. Ben-Shahar & C. E. Schneider, More Than You Wanted to Know: The Failure of Mandated Disclosure, Princeton University Press, Princeton and Oxford, 2014. 11 R. Michaels & N. Jansen, ‘Private Law Beyond the State’, American Journal of Comparative Law, Vol. 54, 2006, p. 843. 12 F. Cafaggi, ‘The Regulatory Functions of Transnational Commercial Contracts: New Architectures’, Fordham International Law Journal, Vol. 36, Issue 6, 2013, p. 1557, who speaks of private regulation and in the supranational context of transnational private litigation. 13 St. Grundmann, F. Möslein & K. Riesenhuber (Eds.), Contract Governance – Dimensions in Law and Interdisciplinary Research, Oxford University Press, Oxford, 2015. 14 K. Carr, Deconstructing and Reconstructing Family Law through the European Legal Order, European University Institute (PhD), Florence, 2014. 15 Kiobel v. Royal Dutch Petroleum Co., 569 U.S. (2013) available from . 16 L. Azoulai, ‘The Court of Justice and the social market economy: The emergence of an ideal and the conditions for its realization’, Common Market Law Review, Vol. 45, Issue 5, 2008, pp. 1350-1355.

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The Politics of Fairness in CISG

The Political Environment around the CISG

So far, the CISG remains relatively free from the human rights rhetoric. This has to do with the time in which it has been developed as a self-standing piece of international law. The CISG was negotiated in the 1970s, perhaps not in the heyday of ‘The Social’ anymore but still inspired by that spirit. In the Western world, the social welfare state still dominated the agenda, and this was also true in the US where the Democrats were in power between 1977 and 1981. Importantly, Europe – meaning the EU as a legislator of private and contract law – had not yet entered the agenda. This changed after the adoption of the Single European Act in 1985. The only subject matter which gained a certain prominence in private law during these years was the debate about the product liability Directive, which was adopted in 1985, still under the unanimity principle (Directive 85/374/EEC). European Private/Contract Law started its career only after 1985, first with a series of consumer law directives, on rather remote subjects, then – to the surprise of most private lawyers around the world – first in standard terms (Directive 93/13/EEC) and then 1999 in consumer sales (Directive 99/44/EEC). Pushed into action by the European Parliament, the European Commission published its ‘Communication on Contract Law’ in 2001,17 which led only 7 years later to the so-called ‘Draft Common Frame of Reference’, and in 2011 – under the auspices of Commissioner Reding – to a political project ‘the Common European Sales Law’. The letter of six Member States (Austria, Finland, France, Germany, the Netherlands and the United Kingdom) to the new Commissioner in November 2014 could be regarded als eine Beerdigung erster Klasse: ‘a first class funeral’.18 Consequently, on 16 December 2014, the European Commission officially withdrew the proposal.19 This should not mean that the European Commission has given up. Under its new president Juncker, private law making in the EU shall be linked to the establishment of the digital market.20 The promoters of the CISG might not be totally unhappy, given that the EU project was perceived as a competitor in the international forum21 which challenged the authority of the CISG. It should not be overlooked, however, that both projects, the CISG and CESL, share perhaps not the same, but similar, or at least comparable spirit. This becomes crystal clear in the architecture of the sales contract, the concept of sales contract, the construction 17 Communication from the Commission to the Council and the European Parliament on European contract law, COM(2001) 398 final, available from . 18 On file with the author. 19 Available from . 20 COM(2015) 192 final 6 May 2015 at 2.1. 21 See Magnus, 2015, supra note 7, p. 159 at p. 178, Magnus, 2013, supra note 7, 2013, p. 111 at p. 112 for a similar competition of models, the Uncitral Code on Consumer Arbitration vs. The EU ODR Regulation and ADR Directive.

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of the remedies and most of all in the language that inserts good faith and reasonableness as the dominant and prominent paradigms which underpin the two concepts. The similarities cannot be rejected by simply referring to different scopes of applications (b2b in the CISG) (b2b and b2c in CESL) or to the distinction between default rules (CISG) and the mandatory rules (CESL). Looking back, one might argue that the CISG benefitted from the competition with CESL, academically and maybe even in practice. Whether the death of CESL works to the benefit or detriment of the CISG remains to be seen. CESL failed – at least to the understanding of one of the authors22 – as it suffered from two major conceptual flaws: first, it underappreciated the fact that the EU is not a nation state, but a unique supranational legal order, and second, it built a concept of sales law on the notions that belong to the 19th and 20th centuries, without taking the third wave of globalization into account.

17.3.3

The Growing Importance of ‘Balancing’ within the CISG

The CISG did not face the same challenge. The CISG was elaborated in a relatively stable political, economic and legal environment, with the world divided between capitalism and communism, with the Western US-EU economy dominating world trade and with a clear perception on where trade relations were dominated by law and where they were dominated by politics. Much of this vanished after 1990. The question is, and will be, whether the CISG can match the challenges of the third wave of globalization and whether its architecture is flexible enough to adapt to the changing requirements and needs; more particularly – and in the context of our contribution – whether its model of fairness, once disclosed and put into question, is strengthened or weakened. In light of the argument we would like to defend, the CISG will automatically get involved into a deeper balancing exercise between the rights and obligations of the developed and the developing states and between the exporters and the importers. As there is no human rights link in the CISG, the language used in the balancing would not be the one of economic rights vs. social rights. The new ‘battlefield’ could be the fight over possible rights of weaker parties to defend their position within the framework established by the CISG.

22 H.-W. Micklitz, ‘Failure or Ideological Preconceptions? Thoughts on Two Grand Projects: The European Constitution and the European Civil Code’, in K. Tuori & S. Sankari (Eds.), The Many Constitutions of Europe, Ashgate, 2010, pp. 109-142; H.-W. Micklitz & F. Cafaggi (Eds.), The European Private Law after the Common Frame of References, Elgar, 2010.

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The Politics of Fairness in CISG

Fairness as Formal Rationality behind the CISG

Despite a fairly social-friendly atmosphere (the Soviet Union still standing and taking an active part in the negotiations), the CISG incarnates a philosophy of individual freedom and self-realization. Whereas an analysis of the text evidences that it is difficult to classify it as either seller- or buyer friendly, this does not mean that the Convention could be considered as ‘neutral’.23 On the contrary, the Convention is an instrument that strongly promotes the survival of the economic transaction while presuming that both seller and buyer are on equal footing. This means that the regime set by the CISG approaches the parties without regard to their hypothetical differences in trade experience and/or economic power. The default position of the Convention treats the small trader from a developing country and the big corporation in the same manner. A number of dispositions in the CISG are a strong illustration of this approach.

17.4.1

General Provisions

17.4.1.1 Choice The Convention includes an element of choice for those who consider that sui generis rules will better fit their interests in the transaction. Freedom of contract is enshrined in Article 6 of the Convention, which states that ‘(t)he parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions’. The thrust of the Article revolves around (i) picking a particular legal system, which triggers the operation of conflict of law rules, or (ii) modifying the substantive obligations of the parties, which would still be subject to certain mandatory provisions of the state law applying by default.24 Freedom of the parties to fix their obligations presupposes their complete equality before the contract. Any imbalance of rights between them would be the result of a considered and meditated choice – and it would not be for the legislator to impinge upon this election. The studies of Stefan Vogenauer suggest, however, that the median contracting party rarely engages in knowledgeable regulatory choice but instead remains passive or follows its intuitive judgements.25 It is remarkable that during the preparation of the Convention, some states manifested concerns on possible abuses by economically stronger parties, yet in the end views in favour of the widest possible recognition of the parties’

23 See Schwenzer & Hachem, supra note 2. 24 More generally, P. Mankowski, ‘Artikel 6 CISG und Abbedingung des CISG’, in P. Mankowksi & W. Wurmnest (Eds.), Festschrift für Ulrich Magnus, zum 70. Geburtstag, Seller, Munich, 2014, pp. 255-271. 25 S. Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’, European Review of Private Law, Vol. 21, Issue 1, 2013, pp. 13-78.

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Hans-W. Micklitz and Leticia Diez Sanchez autonomy prevailed.26 This contrasts with the regime of most European states in which mandatory arrangements are excluded from contractual freedom, which is a manifestation of the attempts of the legislature to ensure a certain balance between seller and (more emphatically) buyer.27 Note how in the CISG, no right or duty is excluded from private autonomy,28 with courts recognizing not only the possibility to derogate from them,29 but also pointing out that some articles (like the CISG 55 open-price contracts) are expected to operate rarely and in the absence of other agreement.30 Article 6 has generated a great deal of litigation before national courts and international arbitrators: according to the UNCITRAL digest, some 177 cases have emerged in this area (although with the addition of other cases that were not comprised in the UNCITRAL database, this number can be higher).31 Most of them involve parties from highly developed economies, but from 2000s onwards, the prominence of traders from developing countries has been on the rise. Russian and Chinese traders, when involved in litigation, are often in the position of sellers.32 Be that as it may, some cases are still good illustration of how freedom of contract operates when one of the parties is an inexperienced trader unable to make a knowledgeable decision vis-à-vis the rules that guide the contract. In the AttorneyGeneral of Botswana, the buyer from Botswana was unaware that by remaining passive to the conditions of the contract, the law of the forum of the seller (Australia) would apply instead of that from his own forum. This resulted in the buyer’s pretentions being considered as a minor part of the agreement; hence, he was not allowed to avoid the contract – an option he would apparently had had under the relevant legislation of Botswana.33

26 M. J. Bonell, ‘Art 6 – Parties’ Autonomy’, in C. M. Bianca & M. J. Bonell (Eds.), Commentary on the International Sales Law: The 1980 Vienna Sales Convention, Giuffrè, Milan, 1987, pp. 51-52. 27 O. Bar-Gill & O. Ben-Shahar, ‘Regulatory Techniques in Consumer Protection: A Critique of European Consumer Contract Law’, Common Market Law Review, Vol. 50, 2013, pp. 109-126. 28 See F. Ferrari, ‘Remarks on the UNCITRAL Digest’s Comments on Article 6 CISG’, Journal of Law and Commerce, Vol. 25, 2005-06, pp. 13-37. 29 For instance on the duty to notify lack of conformity, see Germany, 5 July 1994, District Court Giessen (Women’s clothes case), available from . 30 France, 26 April 1995, Appellate Court Grenoble (Marques Roque Joachim v. Manin Rivière), available from . 31 For a list of Art. 6 UNCITRAL plus added cases, see . 32 For instance, in 5 out of the 22 cases emerged in the year 2003, see Austria, 17 December 2003, Supreme Court (Tantalum powder case), available from ; China, 10 December 2003, CIETAC Arbitration proceeding (Agricultural tools case) available from ; Russia, 17 September 2003, Arbitration proceeding 24/2003 (no case name reported), available from ; China, 23 June 2003, Shanghai No. 1 Intermediate People’s Court [District Court] (Cashmere sweater case), available from ; and Russia, 16 June 2003, Arbitration proceeding 135/2002 (no case name reported), available from . 33 Australia, 23 June 2010, Supreme Court of Western Australia, available from .

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17.4.1.2 Trade Usages Article 9 declares the parties to be bound by any usage that they knew or ought to have known and which is widely known in international trade. The inclusion of international trade usages was extremely controversial: socialist and developing countries considered these to originate in Western industrialized nations, yet other UNICTRAL members saw international trade usages as promoting uniformity. Mexico denounced that their inclusion could lead to ‘unfair usages or inequitable practices’, while the Soviet Union pointed out that not only these practices had been developed outside the interests of developing states but also that the traders from these states were unlikely to be aware of them.34 The application of trade usages to contracts governed by the CISG has also been the object of recurrent litigation, with 44 cases reported including UNCITRAL and subsequently added cases.35 The asymmetric knowledge that can exist between the parties as to particular trade usages is illustrated in the BP Oil International case.36 Here, an American court hearing of a dispute between an American seller and an Ecuadorian buyer insisted in the application of Incoterms. When doing so, the Federal Appellate Court claimed that despite the use of Incoterms not being global, the fact that they are well known in international trade incorporated them into the contract through Article 9 of the CISG. This is a controversial statement that contrasts with the approach of Advocate General Tesauro at the Court of Justice of the European Union.37 Indeed, Tesauro affirmed that for the incorporation of a trade usage via Article 9 of the CISG, it was not enough that the contract be concluded according to a usage in the particular trade that the parties ought to have known. On the contrary, it needed to be proved that not only the usage was widely known in international trade but also both parties to the contract regularly observed such usage in similar transactions. This approach would avoid cases in which a party that is knowledgeable of certain usage attempts to have the contract enforced at the expense of the other party that, coming from a different trade background (be it because of its trade habits or the country where it is based), is not aware of the applicability and content of such usages.

34 A. H. Kastely, ‘Unification and Community: A Rethorical Analysis of the United Nations Sales Convention’, Northwestern Journal of International Law & Business, Vol. 8, Issue 3, Winter 1988, p. 609. 35 This includes cases codified by UNCITRAL thesaurus as 9 D (Usages and practices: impact on provisions of Convention), 9 D1 (parties bound by applicable usages and practices) and 9D2 (Usages and practices – usages impliedly made applicable to contract), see for full list. 36 United States, 11 June 2003 Federal Appellate Court [5th Circuit] (BP Oil International v. Empresa Estatal Petroleos de Ecuador), available from . 37 Opinion of Advocate General Tesauro at European Court of Justice, 20 February 1997, (MainschiffahrtsGenossenschaft eb (MSG) v. Les Gravihres Rhinanes SARL), summary available from .

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Be that as it may, Article 9 of the CISG has opened the door to the inclusion of Incoterms38 and UNIDROIT39 principles that, as denounced by developing nations, have been developed within the Western world and are perhaps better suited to the needs of their economic development. 17.4.1.3 Freedom of Form Article 11 enshrines freedom of form by allowing contracts to be concluded without written or any other formalities. Socialist countries disputed this point during the negotiations, since they considered the lack of writing as an element of insecurity.40 Whereas freedom of form facilitates the celebration of the contract, obliging the parties to formally disclose their respective obligations reduces the chances of unawareness. In the end, the practical benefits of freedom of form in terms of contractual flexibility prevailed as the default position.41 As many as 72 cases are reported in the UNCITRAL digest as emerged in the field of freedom of form, most of them litigated before US Courts.42 When applying Article 11, Courts have been consistent with the mandate of the CISG and have interpreted very extensively the means by which a contract can be proved to exist.43 As a concession to the socialist delegation, the CISG allowed the signatory states that so wished to opt out from Article 11 by means of an Article 96 declaration. Note, however, that this opt out is designed as an exceptional deviation from the standard rule of freedom. Today, more and more of the former opting out countries are joining the majority of the CISG signatories in embracing freedom of form in their international transactions (see Section 17.5 below).

17.4.2

Formation of the Contract and Potential Breach

17.4.2.1 Pricing Although Article 14 sets the obligation to explicitly or implicitly fix the price when concluding the contract, Article 55 gives instructions on what to do when the price has not

38 See for a systematic analysis, B. Piltz, ‘Art. 38 CISG und Incoterms’, in Mankowksi & Wurmnest, supra note 24, pp. 273-290. 39 Russia, 5 June 1997, Arbitration proceeding 229/1996, available from . 40 G. Eörsi, ‘A Propos the 1980 Vienna Convention on Contracts for the International Sale of Goods’, The American Journal of Comparative Law, Vol. 31, No. 2, Spring 1983, p. 342. 41 However, although Art. 12 allowed the contracting states to derogate from Art. 11 (see below). 42 See . 43 For instance, United States, 26 March 2009, Federal District Court [Ohio] (Miami Valley Paper, LLC v. Lebbing Engineering & Consulting GmbH), available from .

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been clearly settled.44 The inclusion of open-price contracts was, again, an object of controversy for the socialist delegation.45 Open terms have been the object of much academic attention and will not be treated here in detail. Sufficient will be to point out that openprice settings can represent an incentive for the seller to enter into opportunistic behaviour. Besides, such contracts are at the mercy of currency fluctuations that may take the inexperienced trader by surprise.46 The instructions of Article 55 for the situations where the price has not been explicitly or implicitly set (to pay the price generally paid for these goods under comparable market circumstances) do not offer a real remedy in this regard: as Tallon notices, it is still possible for the buyer to delay delivery in order to benefit from a price rise.47 The case law on open-price contracts offers an interesting overview on the issues that can arise when the seller demands a given quantity after his own performance but the buyer disagrees about the amount to be paid. Only 22 cases have been reported on Article 55.48 The early cases from the UNCITRAL database involved sellers from the US49 or from Germany. As time went by, more and more cases were reported with sellers from developing countries like Russia,50 Singapore51 and China.52 The Russian courts tend to relate the controversies emerged in open-price contracts with issues of validity, hence analyzing in the first place whether the open-price clause respects the requirements of the Russian legislation that render the contract valid.53 Other courts have entered into the assessment of whether a standard market price could be a fair price to charge in the particular contract

44 On the inconsistency of both arts, see A. Rosett, ‘Critical Reflections on the United Nations Convention on Contracts for the International Sales of Goods’, Ohio State Law Journal, Vol. 45, 1984, pp. 288-289. 45 Eörsi, supra note 40. 46 See M. P. Gergen, ‘The Use of Open Terms in Contract’, Columbia Law Review, Vol. 92, No. 5, June 1992, p. 1001. 47 D. Tallon, ‘The Buyer’s Obligations under the Convention on Contracts for the International Sale of Goods’, in M. Galston & G. Smit (Eds.), International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender, 1984, pp. 7-11. 48 See . 49 With buyer from Argentina, see Argentina 20 May 1991 National Commercial Court of First Instance (Elastar Sacifia v. Bettcher Industries), available from ; and buyer from Hungary, see Hungary, 25 September 1992, Supreme Court (Pratt & Whitney v. Malev), available from . 50 Russia, 16 February 1998, Arbitration proceeding 33/1997, available from . 51 Germany, 19 October 2006, Appellate Court München (Auto case), available from . 52 China, 25 December 1998, CIETAC Arbitration proceeding (Pig iron case), available from . To this date, however, most cases still take place between fully developed countries (see the overview of the UNCITRAL digest cases for Art. 55 at ). 53 Russia, 30 May 2001, Arbitration proceeding 185/2000, available from .

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Hans-W. Micklitz and Leticia Diez Sanchez at issue: in the Pratt & Whitney54 case, the Hungarian court ruled against the appropriateness of finding a ‘market price’ for jet engines given the particularity of that market sector, dismissing the pretentions of the American seller. This demonstrates that the national courts are ready and willing to put the pro-freedom approach of the CISG in context, watering it down with their own national traditions. More interestingly, the case law digest shows a diversification of the country of origin of the seller (the strongest party in open-price issues) over the years. The current picture is one where most controversies involve parties from fully developed economies, but where more and more sellers originate in less-sophisticated countries. This is further discussed in Section 17.6 below on the dynamics of the CISG in a changing global economy. 17.4.2.2 Fundamental Breach and Right to Cure For a party to suspend the contract, the breach of the other party must be of a sufficient gravity so as to deprive him from what he is entitled to expect under the transaction – what Article 25 calls ‘fundamental breach’. The concept of fundamental breach attempts to dissuade the suspension of the contract as much as possible. What primarily matters for the CISG is not the reason that led to the non-compliance, but the effect of this breach on the essence of the contract. Only when the breaching party ‘did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result’, can the consequences of a fundamental breach be avoided. The desire to keep the contract in force seems reinforced by the impossibility of ipso facto avoidance enshrined in Article 26 (‘declaration of avoidance of the contract is effective only if made by notice to the other party’). The desire to protect the transaction gets to the extent of giving the seller a ‘right to cure’ (Article 48) even when he has been the subject responsible for the breach. This approach contrast with English law (in which no such right exists)55 and with Article 106 of the Proposal for a Common European Sales Law,56 in which the buyer holds an unqualified right to reject the transaction given a breach from the seller. A total of 56 cases on fundamental breach and 16 on the seller’s right to cure are reported in the UNCITRAL digest, a remarkable majority of them litigated before German courts.57 In coherence with the spirit of the CISG, the national courts have interpreted the concept

54 See supra note 49. 55 B. Zeller, Damages under the Convention on Contracts for the International Sales of Goods, Oxford University Press, Oxford and New York, 2009, p. 189. This is one of the reasons opponents claim to stand against the UK joining CISG. For a nuanced analysis, see M. Bridge, ‘The CISG from the Common Lawyer’s Point of View’, in P. Mankowksi & W. Wurmnest (Eds.), Festschrift für Ulrich Magnus, zum 70. Geburtstag, Sellier, Munich, 2014. 56 COM(2011) 635 final. 57 See and .

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of ‘fundamental breach’ strictly and rejected the petition of the buyer to avoid the contract even when the good in question had serious faults. Despite some critical voices, some courts have in these cases often given the sellers’ right to cure priority over the buyer’s right to avoid the contract.58 However, jurisprudence in this field seems mixed, and other courts have been willing to uphold the buyer’s right to decide whether to avoid the contract or to have the goods replaced.59 Other decisions that are more deferent to the buyer have included, for instance, that from a Danish court which considered that notice of nonconformity had been appropriate even though it only referred to some of the goods in the order concerned and declared that the seller should have taken the initiative to cure the goods without further actions from the buyer.60 The baseline seems to be whether the product in question is still of some use for the buyer or whether the continuation of the contract is deemed beneficial for the buyer.61 17.4.2.2.1 Force Majeure The drafters of the CISG refused to include force majeure as an explicit justification for breach of contract. The proposal from the Norwegian delegates for the inclusion of the release from responsibility when a radical change of circumstances took place was rejected at the Vienna Conference.62 As a result, unexpected events and hardship (whether economic or of any other kind) were not included in Article 79 as one of the elements exempting from liability. This contrasted with the Roman clausula of rebus sic stantibus which attempted to restore the contractual balance between the parties when such balance had been altered by unforeseen circumstances (be they natural or any other disasters). The approach of the CISG, however, seemed more akin to the common law tradition by which the risks from unforeseen events are assumed by the parties when setting the contract and in which it is not for the court to alter their will at any later stage.63 It was understood that

58 See in this regard Germany, 31 January 1997, Appellate Court Koblenz (Acrylic blankets case), available from , and Switzerland, 5 November 2002, Commercial Court of the Canton of Aargau (Inflatable triumphal arch case), available from , in which the possibility to remedy the defect meant that no fundamental breach could be appreciated. 59 France, 26 April 1995, Appellate Court Grenoble (Marques Roque Joachim v. Manin Rivière), available from . 60 Denmark, 21 December 2004, Western Appellate Court (Check valves case), available from . 61 Germany, Supreme Court 2.3.2005, Recht der Internationalen Wirtschaft, 2005, p. 547. 62 I. Schwenzer, ‘Force Majeure and Hardship in International Sales Contract’, Victoria University of Wellington Law Review, Vol. 39, 2008, p. 712. 63 See F. R. Fucci, ‘Hardship and Changed Circumstances as Grounds for Adjustment of Non-Performance Contracts’, American Bar Association Section of International Law, Springer 2006, also published at 5 Oil, Gas & Energy Law, No. 2, 2007. However, as Schwenzer (supra note 62, p. 711) explains, both English and US law grant exceptions to this general rule when the contract becomes useless by the change of circumstances.

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the Convention had given priority to the principle of pacta sunt servanda and that it remained oblivious to the occasional misfortunes of the contractual subjects. The early interpretations of force majeure in the CISG were consistent with this view,64 although a great deal of litigation in the field has enabled jurisprudence to develop a more nuanced approach.65 Early on the Hamburg Chamber of Commerce declared that the seller was not released from his obligation to comply with the contract even when he had lost the means to do so due to unforeseeable events, since the pre-payment agreements implied that he had accepted such risk.66 Other courts considered that price variations, no matter how acute, also needed to be understood as part of the risk that a professional must face.67 However, the Belgian Supreme Court has recently accepted that the CISG covered a hardship claim. This was possible by using the gap-filling provisions of Article 7. Since the UNIDROIT Principles include an explicit set of hardship rules, and given that the Court understood these as part of the principles on which the CISG is based, it ordered the renegotiation of the contract so that contractual equilibrium could be restored.68 In a similar vein, the Polish Supreme Court accepted the unforeseeable huge price increase as a reason to discharge the seller from his delivery duty under Article 79.69 17.4.2.3 Interim Conclusion on Formal Rationality All in all, we observe an architecture that promotes the survival of the contract ‘at all cost’ (through the concept of fundamental breach and the seller’s right to cure), while remaining oblivious to potential imbalances between the parties (as freedom of form, exclusion of hardship, freedom of contract and the implied inclusion of trade usages tend to favour the knowledgeable and sophisticated trader at the expense of the weaker, inexperienced one). This model bears two strong implications. The first is that the SME70 with a low external profile and/or poor access to legal counsel will most likely lose out in the application of the CISG. The second is that this architecture can be indirectly seen as benefitting indus64 C. Brunner claims that “it is predominantly accepted that Article 79 CISG does not leave any room for recourse to the applicable domestic law relating to hardship situations”, Force Majeure and Hardship Under General Contract Principles, Kluwer Law International, 2009, p. 218. 65 From all the cases related with Art. 79, ‘hardship’ is invoked in as many as 65 (See cases coded as ‘79B’ by the UNCITRAL thesaurus, available from .) 66 Germany, 21 March 1996, Hamburg Arbitration proceeding (Chinese goods case), available from . 67 ICC Arbitration Case No. 6281 of 26 August 1989 (Steel bars case), available from . 68 For discussion, see A. Veneziano, ‘UNIDROIT Principles and CISG: Change of Circumstances and Duty to Renegotiate according to the Belgian Supreme Court’, Uniform Law Review/Revue du droit uniforme, 2010, pp. 137-149; see, more generally references to the case law in Magnus, 2002, supra note 7, p. 539; Magnus, 2010, supra note 7, p. 901. 69 Magnus, 2015, supra note 7, p. 177. 70 It is far from being clear what SMEs are, how they should be defined and whether there is a justifiable reason at all to provide them with a particular status.

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trialized countries that rely on broad experience in external trade as well as high-level legal expertise.71 These are the same countries that contributed to the formation of the principles, like UNIDROIT, and that are said to lay behind the CISG. As Eörsi put it, ‘it is still the strong who rule in international trade’72 – and this involves a normative choice that cannot be said to be neutral. Many of the cases that emerged within the articles analyzed show this to be problematic. The Courts’ extensive interpretation of what can constitute ‘international trade usages’ opens the door to the use of these usages, despite the fact that not all the parties to the contract are being familiar with them.73 In the same way, freedom of contract can be detrimental to the trader with poor knowledge of regulatory choice (who unsurprisingly happens to be from Botswana in the Attorney-General case).74 However, in many cases, the national courts can appreciate the perils of such a ‘blind’ approach and have developed interpretations that allow for some redress. Thus, the judicial development of a doctrine of force majeure, the decisions strengthening the position of the buyer vis-à-vis the seller in case of breach from the latter, and the refusal to charge a market price in certain open-price contracts show that the Courts are not willing to accept a self-executing formal rationality. The other trend worth mentioning is that of the role of developing countries within the case law selected. Although most cases involve traders from industrialized nations, the case digest evidences an increasing prominence of traders from developing countries in the litigation of the CISG – often as the sellers in the contract.75 These ‘politics of the CISG’, discussed more thoroughly in Section 17.6, lead to an interesting reflection on how the evolution of world trade might mean that formerly disadvantaged countries can now take full advantage of the Convention’s underlying philosophy.

17.5

Exit from Formal Rationality: Mechanism of Correction

Despite its ‘neutral’ appearance, formal rationality is a legal choice that carries strong value choices. The view of the contractual party as a free subject that can enter into asymmetric contracts was not unconditionally accepted by all the CISG signatories. In fact, it is not accepted unconditionally as a one-size-fits-all model by any Western legal system. It is for this reason that the CISG includes a number of ‘mechanisms of correction’ that softens the blindness of the Convention vis-à-vis particular issues. These consist of (1) the exclusion

71 72 73 74 75

In the same line, Eörsi, supra note 40, p. 335. Id., p. 336. See supra notes 36-37 and accompanying text. Supra note 33. Particularly in the case law on Arts. 7 and 55 CISG.

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of socially sensitive issues from the sphere of application of the Convention, (2) the possibility for the contracting states to opt out from dispositions that would otherwise apply by default, and (3) the inclusion of moral standards for the rest of the elements of the CISG that fully apply to the contract in question. The inclusion of mechanisms of correction implies that the CISG is not as neutral as claimed. If it had been neutral, contracting states would not have taken such great care in limiting its scope and practical effects. As these parts of the Convention show, a great emphasis was put on the respect for national policies that are often linked with redistributive or other type of public concerns, as well as on guaranteeing that the Convention does not openly clash with the basic rules of bona fide that guide contractual relations at the national level.

17.5.1

Socially Sensitive Issues

17.5.1.1 Consumer Transactions The exclusion of ‘goods bought for personal, family or household use’ pursuant Article 2[a] does not come as a surprise, given that these transactions involve a contracting party (the consumer) that is generally weaker in terms of both its knowledge of the market in question and its economic power. As a result, many contracting states (particularly within the European Union framework) view consumer protection as a field where redistributive concerns (and demands for social justice) are materialized. These concerns collided headon with the way in which the CISG approached the parties to a contract. There are nevertheless a whole series of cases that turn around the status of the consumer, be it in cases of the sale of used cars through a dealer or in cases where the product in question serves mixed purposes.76 17.5.1.2 National Mandatory Law The remaining of Article 2 excludes a miscellaneous list of goods from the operation of the CISG: auction sales contracts, stocks, shares, investment securities, negotiable instruments, money, electricity, ships, vessels and aircrafts. This exclusion could be connected to the fact that they represent an important portion of economic activity (at least in certain countries) in which the signatories would prefer a closer control instead of the uncertainty 76 See the references to the extensive case law in Magnus, 2010, supra note 7, pp. 886-891 where he draws a distinction between the overall purpose of the exclusion, mixed use, recognizability of the purpose for private use, investigation duty of the seller, private sellers. Similar discussions exist in EU law where the ECJ takes a rather narrow view on products serving mixed purposes. See ECJ Case C-464/01 Gruber v. Bay Wa AG, 2005 ECR I-439, which triggered an extensive debate and encouraged the DCFR to opt for a wider more consumer-friendly definition. See also N. Reich under 1.38 in H.-W. Micklitz et al., European Consumer Law, 2nd edn, Intersentia, Cambridge, 2014.

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of individual freedom. Yet, the economic importance of these excluded goods for the total trade figures of the CISG signatories is slim: below 4% of total exports and 2% of total imports for developed economies. The figures are even lower in the case of developing economies.77 Instead of economic calculations, the reason commonly quoted for the exclusions of Article 2(b) to 2(e) are the concerns that the signatories had about potential clashes with relevant domestic mandatory provisions.78 At least with regard to 2(e), the reason behind might confidentiality concerns about technological knowledge and property rights. The existence of mandatory laws that regulate the goods thereby listed seems closely linked to the relationship of these goods with pre-defined public interests.79 Consider the case of electricity, the area in which contracts were excluded by the Convention due to the unique problems of the electricity market.80 This uniqueness was mainly due to electricity being usually operated by state enterprises (with all the public sensitivity this entails). Today, however, most electricity companies are managed privately, which has led some authors to suggest that the Convention should now include electricity within its scope of application.81 17.5.1.3 Validity Article 4(a) of the Convention excludes from its scope questions pertaining to the validity of a contract or any of its provisions. Validity issues include topics like capacity, mistake and other factors leading to procedural unfairness – that is, situations where one of the parties is known to be in a position prone to render any contractual relation unbalanced. The exclusions of contractual validity from the scope of the CISG juxtaposed the Convention’s spirit to achieve a standardized international trade order and the signatories’ concerns to protect some class of subjects.82

77 Source: United Nations Council on Trade and Development, UNCTAD, available from . The only outlier is France, whose exports of these goods represent some 11% of its total trade figures as of 2013. 78 See D. Fairlie, ‘A Commentary on Issues Arising under Articles 1 to 6 of the CISG’, in Celebrating Success: 25 Years United Nations Convention on Contract for the International Sale of Goods UNCITRAL-SIAC Conference, 2005. 79 On the principles of mandatory law, see H. C. Grigoleit, ‘Mandatory Law: Fundamental Regulatory Principles’, in J. Basedow, K. J. Hopt & R. Zimmermann (Eds.), Max Planck Encyclopaedia of Private Law, Oxford University Press, Oxford, 2012. 80 C. Gregory, ‘The Proposed UNCITRAL Convention on Electronic Contracts’, Business Law, Vol. 59, 2003, p. 313. 81 A. Janssen & O. Meyer, CISG Methodology, Sellier European Law Publishers, Munich, 2009, p. 333. 82 H. E. Hartnell, ‘Rousing the Sleeping Dog: The Validity Exception to the Convention on Contracts for the International Sale of Goods’, Yale Journal of International Law, Vol. 18, 1993, pp. 2-3. One can note, moreover, that the exception of contractual validity is in addition to that of consumer protection law.

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National courts seem to be consistent in declaring that the party claiming the exclusion of the CISG in matters pertaining validity must bear the burden of proof.83 Invoking Article 4(a) has been particularly useful when dealing with standard forms in which the other party did not necessarily understand the terms included84 or when these terms were abusive.85

17.5.2

Opt out

In addition to the initial exclusion of certain transactions, there is a second ‘mechanism of correction’ offered by the Convention. Such mechanism consists of the possibility given to the contracting parties to opt out from provisions that would otherwise apply by default. Although Article 93 regarding the exclusion of the CISG to certain territorial units has been the focus of interesting litigation,86 from the point of view of fairness, the most important provision is the one that compels the conclusion of the contract in writing. Indeed, Article 96 allows the signatories to derogate from the freedom of form enshrined in Article 11. The derogation from Article 96 was included at the insistence of the Soviet Union which was distrustful of the element of insecurity introduced by the lack of writing. As explained above, the socialist countries were reluctant to accept a system that, while promoting flexible trade, would be prone to turn against those actors with poor experience in foreign trade.87 All the former socialist states (Russia, China Ukraine, Latvia, Hungary, Armenia and Belarus) as well as Chile, Paraguay and Argentina declared the exception applicable in their international contracts (although some of them would later suspend this opt out). It is plain that the opt out from Article 6 must be explicitly stated – otherwise, the default option offered by the CISG is that of freedom of form.

83 Germany, 20 December 2007, Appellate Court Oldenburg (Industrial tools case), available from . 84 Germany, 12 June 2008, District Court Landshut (Metalic slabs case), available from . 85 France, 13 February 2007, Supreme Court (Computer motherboard case), available from . 86 A great deal of cases emerged regarding the applicability of the CISG to Hong Kong after it became a special administrative region of China; see France, 2 April 2008, Supreme Court (Telecommunications products case), available from ; United States, 3 September 2008, Federal District Court of Illinois (CNA Int’l, Inc. v. Guangdong Kelon Electronical Holdings et al.), available from . 87 In this sense, X. Wang & C. B. Andersen state that “(i)f China had not declared reservation on the principle of freedom from form requirement, foreign trade corporations managed by such staff [not familiar with international sales of goods] would have encountered more chances of falling into the traps of contract formation”. See ‘The Chinese Declaration against Oral Contracts under the CISG’, Vindobona Journal of International Commercial Law & Arbitration, Vol. 8, 2004, p. 153.

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The controversies where Article 96 has been invoked involve mainly traders from the two classic signatories to the opt out: Russia and China and to a lesser extent, traders from Argentina.88 Interestingly enough, the use of Article 96 before the courts shows a pattern that deviates from the initial intent of the provision: a number of cases involve traders that (seemingly) reach a verbal agreement changing the original contractual terms but are unaware that the other party belongs to a country that has derogated from Article 11. The party from the opting out country later claims the invalidity of the new conditions given that they do not appear in writing.89 As a result, the countries that derogated from Article 11 on protectionist grounds might be host to traders that use that very same derogation in order to ‘abuse’ other parties that are unaware of the opt out. As of today, more and more states that made an Article 96 declaration are withdrawing their declaration and joining the majority of contracting states in which freedom of form is the rule. This has been the case with Estonia in 2004, Latvia in 2012, Lithuania in 2013 and importantly China in 2013. The progressive opening of these countries to foreign trade and open markets (particularly in the case of China) are likely to explain this change of policy: as the free market economy penetrates into the system, the political mentality seems to become more supportive of the idea of individual freedom behind the CISG.90

17.5.3

Inclusion of Morality Standards

The third technique used by the CISG is the application of certain morality standards to those parts of the Convention that remain in full force. Article 7(1) provides that when interpreting the Convention, due regard is to be paid to ‘the observance of good faith in international trade’. The concept of good faith remains abstract, not the least because of being alien to the common law systems.91 Yet, a certain consensus exists as to its moral connotation: whereas good faith does not compel the parties to act altruistically, it prevents them from acting in a purposively unfair or indecent manner.92 This means that any disadvantage produced in the aftermath of a contract should not occur as a consequence of the intentional purpose of one party to defraud the other one. 88 Only 15 cases are reported in the UNCITRAL digest, see full list, available from . 89 I.e. on litigation between a Chinese seller and an American buyer, see United States, 19 May 2008, Federal District Court [Florida] (Zhejiang Shaoxing Yongli Printing and Dyeing Co., Ltd v. Microflock Textile Group Corporation), available from ; between a Russian seller and an American buyer, see Russia, 16 February 2004, Arbitration proceeding 107/2002 (no case name reported), available from . 90 Not least because, as the cases illustrate, traders from these countries might no longer be the inexperienced and uninformed commercial actors of the 1980s. See Wang & Andersen, supra note 87, p. 148. 91 See, e.g. H. Collins, Regulating Contracts, Oxford University Press, Oxford, 1999, p. 172, pp. 187 et seq. 92 T. Keily, ‘Good Faith and the Vienna Convention on Contracts for the International Sale of Goods (CISG)’, Vindobona Journal of International Commercial Law and Arbitration, Vol. 3, Issue 1, 1999, p. 17.

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As Eörsi describes, it was after the proposal of the Hungarian delegation, and the insistence of the socialist countries that the clause of good faith was included.93 The Western section tried to dismiss the proposal on the grounds that it was too vague, and it would promote insecurity in international trade. Ultimately, the inclusion of good faith as an interpretative tool of the Convention was a triumph for the Eastern axis. A great deal of controversy among the commentators of the CISG emerged as of the precise extent of Article 7(1); in fact, Article 7 is one of the most litigated before the courts, with as many as 245 cases contained in the UNCITRAL digest.94 One of the most recurrent questions has been if the parties’ conduct should be subject to a general duty of good faith pursuant Article 7(1). The case law stemming from national courts suggests an affirmative answer. In the Used Car Case,95 a German court declared that an Italian trader had acted contrary to the duty of good faith and hence to the CISG when concealing the real mileage of a used car. As a result, even though the German buyer should have promptly detected the car’s defect, the seller could not rely on Article 35(3)96 in order to avoid the consequences of liability. A Mexican arbitration commission (Compromex) reached a similar conclusion regarding a sale contract between a Mexican producer and two Korean companies.97 The buyers had performed a verbal contract with the producer for the purchase of candies but later submitted written terms of contract with different content. When asked about this inconsistency by the Mexican producer, the Korean companies adduced that they were compelled to change the written terms in order to comply with the relevant Korean legislation but that the real terms would be those agreed upon orally. The Mexican seller trusted the word of the Korean companies. However, the Koreans later relied on the written terms in order to declare that there were discrepancies between the goods delivered and the terms of the contract. Compromex found that the principle of good faith enshrined in Article 7 needed to be respected by the parties and that the actions of the Korean buyers had clearly contravened such principle. As with the Used Car Case, this was so even though the Mexican seller should have noticed that the inclusion of written terms different to those agreed upon with the buyers constituted a suspicious activity prone to create problems.

93 Eörsi, supra note 40. 94 See full list at . 95 Germany, 21 May 1996, Appellate Court Köln, summary available from . 96 Art. 35(3) CISG: “The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.” 97 Mexico, 30 November 1998, Compromex Arbitration (Dulces Luisi v. Seoul International), available from .

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17.5.3 1 Interim Conclusions The introduction of ‘mechanisms of correction’ has in some cases come as a consequence of the replication of similar trends at the national level, for instance in the field of consumer protection which is more and more characterized by a protectionist ethos. In other cases, the move was made as a compromise with the socialist block; the examples being the option to opt out from the freedom of form rule, and the inclusion of good faith as an interpretative tool of the Convention. In this latter case, the judicial decisions show that the mechanism of correction is indeed effective: the cases here considered would have had a different outcome if the possibility for one party to reasonably foresee the breach of contract had weighted more than the other party’s duty to observe good faith in their transactions. The same can be said on validity matters under the Article 4(1), which has been useful in tackling the issues that emerged as a result of standard form contracts and abusive terms. However, the jurisprudence shows a paradoxical trend on Article 96 declarations: although this article responded to a concern from the socialist countries to avoid contractual insecurities and eventual abuses from one party, some Russian and Chinese sellers seem to have benefited from the ignorance of the other party about the existence of such reservation. This allows such traders to claim that subsequent reforms to the contract are invalid on the ground that they were not registered in writing, despite the other party claiming that such changes existed and were effected verbally.

17.6

The Dynamics of the CISG in a Changing World

We have so far reflected on the architecture of the CISG as it stands now and the philosophy that lies behind such architecture. It has been defended that, far from being a ‘neutral’ instrument, the CISG incarnates a particular philosophy that promotes the execution of the contract and the individual will of the parties at the expense of potential imbalances between them. At the same time, certain elements (exclusions, opt outs and the imposition of good faith) are used in order to soften the spirit of individualism and legal formalism that operate by default. A natural question to ask in the light of these reflections is: why did the CISG become what it is today and how has it played out during its years of existence?98 The Vienna Convention included states with varied political and economic backgrounds: the Western delegation counted on an eastern, socialist counterpart, plus a small number of developing countries defended their particularities vis-à-vis the trade arrangements proposed by the industrialized nations. The preamble of the CISG pays special regard to the developing sector by acknowledging that the Convention borne in mind ‘the establish-

98 Magnus, 2013, supra note 7, p. 111 at p. 115, in the pace data file 2792 judgements are registered per 2012.

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Hans-W. Micklitz and Leticia Diez Sanchez ment of a New International Economic Order’.99 It can be assumed, however, that although developing and socialist nations took an active part in the discussions, their bargaining power was not comparable, given that they would have had the most to lose if they had remained at the margin of the unification of international trade. A balance was reached when making the pro-individual freedom and legal formalistic approach the default option, while also giving contracting states the opportunity to deviate from certain dispositions and including formulas (like good faith) that moderates the impact of the applicable text. The result is not a straightforward pro-buyer or pro-seller Convention. Certain provisions, like those on open-price contracts or the right to cure, seem to favour the seller over the buyer. Yet, the CISG also includes an extensive list of rights as well as remedies for the seller (see Chapter III, ‘Obligations of the Buyer’) that have been seen as a pro-buyer approach.100 This architecture is consistent with previous accounts on the political economy of the CISG,101 according to which a hypothetical ‘buyer’ or ‘seller’ lobby did not influence the outcome of the Convention. First, such categories might respond to wider interests that could not be easily described with a ‘buyer’ or ‘seller’ label. Second, international buyers in one transaction are often sellers in another one. This made it unlikely for the contracting states to purposively favour one group over the other. What can be observed, however, is a Convention that favours the strong trader over the weaker one (be it buyer or seller)102 – and more often than not, the weaker traders originating from developing and not-so-developed contracting states. This might be not so much the result of a deliberate choice from industrialized nations to favour their own businesses, but the manifestation of the ideology that prevailed in the trade sector within the Western world. The fact remains that from the early years of the CISG, some voices denounced it as a text devised for the strong and highly developed signatories and argued that other signatories could lose out more than they could benefit from it.103 Be that as it may, trade has much evolved since the negotiation of the Convention and the tables have turned. The passage of time has led to a new picture where the previous developing countries are the rulers of international trade and former export-oriented signatories have now got a negative trade balance. UNCTAD data104 in this regard are conclusive: the decline of exports over imports in the US has been constant since 1980, while the opposite trend can be observed in China. As a result, the US is a net importer since the

99 Declaration for the Establishment of a New International Economic Order: United Nations General Assembly document A/RES/S-6/3201 of 1 May 1974 triggering a huge, mainly academic, debate. 100 Schwenzer & P. Hachem, supra note 2, p. 475. 101 C. P. Gillette & R. E. Scott, ‘The Political Economy of International Sales Law’, International Review of Law and Economics, Vol. 25, 2005, pp. 446-486. 102 In agreement, see J. M. Lookofsky, Understanding the CISG: A Compact Guide to the 1980 United Nations Convention on Contracts for the International Sales of Goods, Kluwer Law International, 2008, p. 158. 103 Eörsi, supra note 40. 104 Available from .

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late 1990s, and at the same time, China emerges as an export superpower. A similar trend to that of China is followed by the rest of the CISG signatories that can be classified as developing countries:105 from 1995 onwards, the increase in exports over imports rises constantly, reaching a peak just before 2007 and the subsequent recession. Among the developed signatories, the picture is mixed. For instance, France, Japan and Italy share a common trend of declining trade balance after the late 1990s and Canada follows in the early 2000s; however, Germany constantly strengthens its position as a net exporter and Italy reaches a trade surplus in 2012. With the exception of Germany, the data show that the world of trade in goods is progressively taken over by developing nations, in particular China. China has also developed a greater sophistication in the goods it exports, with a constant increase of manufactured goods since mid-1990s parallel to a constant decrease of primary commodities (excluding fuel). A similar trend of sophistication can be noticed in the gross of developing nations within the exports of manufactured goods, with a slight increase in high- and medium-skill technology intensive products from 1995 onwards.106 This means not only that developing nations are increasingly important players in the world of international exports but also that the days where they only exported raw materials and agricultural products are passing. And with all these developments, their traders (we must assume) are no longer the inexperienced subjects that could lose out in the CISG’s early days. The progressive inclusion of traders from developing countries observed in the CISG litigation is consistent with this picture. Actors from China, Russia and – to a certain extent – Latin America play an increasing role in the judicial development of the Convention. At the same time, the actors are more often in the position of the seller than in that of the buyer. And, as the cases on Article 55 illustrate, they might be becoming experts in litigating certain norms to their own benefit and at the expense of other traders that are less familiar with the field. This goes hand in hand with a change of mentality in some of these signatories, who are now ready to embrace the ethos of the Convention with less constrains. An illustration of this circumstance is the increasing number of states (including China) suspending their Article 96 declaration and opening themselves to the freedom of form rule. The politics of the CISG makes the effects of this freedom-oriented and formally rational instrument ambiguous. As of today, it is perfectly possible that the stronger and multinational trader from a developing country like China might benefit from his superior position over the traders from the Western world. In other words, the CISG might have turned against those who inspired its main rationale. Further research could explicitly link 105 The classification between developing and developed economies follows the statistical convention in the United Nations system. This classification excludes countries of Eastern Europe and of the Commonwealth of Independent States in Europe, which are not included under either developed or developing regions. Chile and Mexico, current members of the OECD, are included in the category of developing economies. 106 All this according to the UNCTAD data (see supra note 5).

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data on international trade with precise statistics on the CISG case law in order to ascertain the role of different sets of traders (and their position as buyers or sellers) in litigating the Convention along time.

17.7

Conclusion

The concept of fairness behind the CISG is based on formal equality before the Convention and the maximization of private autonomy within the contract. This formalistic approach means that the Convention remains oblivious to potential imbalances (be they material or knowledge-based) between the parties. The cases where the CISG is litigated before national courts or international arbitrators show that such imbalances do occur and that the courts react in various manners to them, sometimes applying the spirit of the CISG in a strict manner; sometimes developing mechanisms to soften its effects. As a result, we argued that contrary to the prevailing opinion, the architecture of the CISG is not neutral but instead carries strong value choices. Evidence of the Convention’s strong ethos are the mechanisms that exclude its application in socially sensitive matters or harmonize it with rules of good faith. If the CISG had truly been a neutral instrument, an extensive scope of application would not have been considered intrusive. The rules on exclusions and good faith have been useful for the national courts to deal with situations that would have had intuitively unfair consequences for the community, such as those related to abusive terms. These rules, however, are presented as exceptions to the Convention’s default architecture. The establishment of an instrument that benefits the strong and knowledgeable trader over the weaker one is likely to benefit big corporations located in industrialized nations at the expense of SMEs and/or traders placed in developing nations. Trade data, however, suggest that with the passage of time, more and more developing nations (especially China) are taking over the world trade, becoming more experienced and more sophisticated traders. The increasing number of cases involving these players supports our argument, especially because most times, the Chinese or the Russian trader are the sellers in the contracts litigated. Our hypothesis is that the philosophy of formal rationality behind the Convention might end up benefitting the increasingly powerful traders from emerging countries and turning against the Western block that envisaged the instrument. Further research will help to clarify what the exact role of traders from developing countries has been in litigating the CISG and whether this role has evolved since the Convention entered into force.

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The CISG – A Secret Weapon in the Fight for a Fairer World?

Petra Butler*

18.1

Introduction

I would like to start this contribution by thanking Professor Ingeborg Schwenzer for organizing ‘The CISG and Beyond’, a conference to celebrate the CISG’s 35th anniversary, and for the invitation to share my thoughts on the topic in this book. This paper is based on the conference commemorating 35 years of the CISG in Basel at the end of January 2015. ‘The CISG and Beyond’ concerns the question of the CISG’s future, and the contributions in this volume aptly discuss the CISG’s future within the realm of international commercial law. However, will questions of the interpretation of the CISG and its relationship with the wider international commercial law be the main playground for the CISG in the future? Or, might the CISG be destined to help to achieve far more – a better future for everyone? What kind of future are we talking about? – Will we in – say 50 years’ time – still have 168 million children working 10 hour days under degrading conditions?1 – Will governments force and/or enslave people to work in mines, i.e. will we be able to use our smartphones knowing that they were produced with conflict free coltan?2 and – Will the world’s geography have changed with some small island states being erased from the map? Will the number of environmental refugees, currently estimated at 30 million, triple? Will we still be able to enjoy the beaches of Mauritius or the Maldives?3

*

1 2 3

I would like to thank Associate Professor Alberto Costi for his helpful comments on a draft of this paper and Justin Li for his proof-reading skills. Simon Wilson’s discussion of the issues discussed in his LLM thesis provided helpful references. (last accessed 25 May 2015).

(last accessed 25 May 2015). Compare in 2008 Deputy High Commissioner for Refugees L Craig Johnstone who put the figure conservatively to 250 million by 2050, available from (last accessed 23 May 2015). Natural disasters displaced on average 27 million people a year (UNCHR, Global Estimates 2014: People displaced by disasters (UNCHR, Sept 2014) Executive Summary, 8.

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While it is primarily the duty of states to safeguard its citizens and their well-being, in other words implementing universally accepted human rights, this can be difficult in practice.4 In one sense, it has become harder to do this in a globalized world where many corporations operate across borders and human rights abuses often occur far away from the corporation’s headquarters, like the pollution in Nigeria5 or the unsafe working conditions in Bangladesh.6 Multinational corporations often generate profits larger than states’ GDP.7 However, those corporations are also often crucial in a state’s well-being through paying taxes, providing employment and infrastructure, thereby being able to exert a certain amount of political influence.8 Like the CISG, multinational corporations play undoubtedly a crucial role in the world’s future. Even though corporations are not (yet) directly subject to any human rights obligations under international law,9 they can either immensely effect human rights compliance or be responsible for aiding human rights violations.

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I. Schwenzer & B. Leisinger, ‘Ethical Values and International Sales Contracts’, in R. Cranston, J. Ramberg & J. Ziegel (Eds.), Commercial Law Challenges in the 21st Century: Jan Hellner in Memoriam, Iustus Forlag, Stockholm, 2007, pp. 249 et seq.; J. Ruggie, ‘Business and Human Rights: The Evolving International Agenda’, American Journal of International Law, Vol. 101, 2007, p. 819. See Gbembre v Shell Petroleum Nigerian Limited, et al. FHC/B/CS/53/05, High Court of Nigeria, 2006; [2005] – F.H.C.L.R. – (Nigeria), available from (last accessed 20 May 2015). See, generally, Shi-Ling Hsu, ‘A Realistic Evaluation of Climate Change Litigation through the Lens of a Hypothetical Lawsuit’, University of Colorado Law Review, Vol. 79, 2008, pp. 701 et seq. See R. D. Mariani & F. Valenti, Working Conditions in the Bangladeshi Garment Sector: Social Dialogue And Compliance, available from (last accessed 23 May 2015). 29 of the world’s largest economies are companies (Paul de Grauwe, Filip Cameraman ‘How Big Are Multinational Companies’) available from (last accessed 4 June 2015). In 2000, the world’s largest multinational by values added was ExxonMobil. Its revenue was larger than the GDPs of Pakistan, New Zealand, Hungary and Viet Nam (B. Roach, Corporate Power in a Global Economy, Tufts University Global Development and Environment Institute, Medford, 2007, p. 5, available from . B. Roach, 2007, supra note 7, pp. 11 et seq; P. Rodriguez, D. S. Siegel & A. Hillman et al., ‘Three Lenses on the Multinational Enterprise: Politics, Corruption, and Corporate Social Responsibility’, Journal of International Business Studies, Vol. 37, 2006, p. 733; see, already, J. Nye, ‘Multinational Corporations in World Politics’, Foreign Affairs, Vol. 53, 1974, p. 153. J. Ruggie, Promotion and Protection of All Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development Protect, Respect and Remedy: A Framework for Business and Human Rights, Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, Human Rights Council, A/HRC/8/5, Agenda Item 3, 7 April 2008. See the proposal for an International Arbitration Tribunal on Business and Human Rights available from (last accessed 26 May 2015).

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Various attempts have been made to prevent corporate human rights abuses and emphasize corporate social responsibility, including through soft law instruments,10 voluntary initiatives, like UN Global Compact,11 and the establishment of a UN Human Rights Council working group tasked with creating a binding instrument that imposes human rights obligations on corporations at international law.12 These different initiatives, in addition to a heightened awareness on the parts of consumers in regard to fair trade,13 have resulted in some progress being made to achieving comprehensive protection of human rights. This paper will explore the possibility of using the CISG as an additional means of encouraging and regulating corporate ethical conduct. It is particularly appropriate to explore whether – and if so how – the CISG can play a part in helping to build a future where human rights of all are respected and human rights abuses are minimized since those questions were first explored by Professor Schwenzer in an article co-authored with Benjamin Leisinger in 2007 with the title ‘Ethical Values and International Sales Contracts’.14 To evaluate whether the CISG can be another tool in the ‘fight’ for a better future, this paper concentrates on whether the conformity requirements in Article 35 CISG can be used to require goods to conform to certain ethical standards, even when this is not expressly required by the contract. Professor Paulo Nalin explores in Chapter 4.3 what remedies might be available if a breach due to non-ethical production of the good is established. The inquiry in this paper will concentrate on Article 35(1) CISG and whether the conformity requirement can extend to ethical standards. The role Article 35(2) CISG can play in helping to uphold ethical standards and issues arising in supply chains (which undoubtedly holds some interesting challenges) are beyond the scope of this paper. 10 Such as the United Nations Guiding Principles on Business and Human Rights, available from (last accessed 24 May 2015), and the OECD Guidelines for Multinational Enterprises, available from (last accessed 25 May 2015). 11 Such as the United Nations Global Compact, available from (last accessed 25 May 2015); the Electronics Industry Code of Conduct, available from (last accessed 25 May 2015), and the Kimberley Process, available from (last accessed 25 May 2015). 12 (last accessed 25 May 2015). R. Dumbuya, Corporate Responsibility to Respect Human Rights: Is the UN Guiding Principles on Business and Human Rights up to the Task or Is There a Need for a Treaty on Business and Human Rights?, LLM Paper, University of Dundee, 2014, p. 5, at p. 7 13 S. Castaldo et al., ‘The Missing Link between Corporate Social Responsibility and Consumer Trust: The Case of Fair Trade Products’, Journal of Business Ethics, Vol. 84, 2009; S. Lyon, ‘Fair Trade Coffee and Human Rights in Guatemala’, Journal of Consumer Policy, Vol. 30, Issue 3, 2007, pp. 241-261; E. MacBride, ‘Jens Hainmueller: Will Consumers Actually Pay For Fair Trade?’, Stanford Business Insides, 8 April 2015; EU Commission ‘Attitudes of EU Consumers To Fair Trade Bananas’ (EU Commission 1997, available from (last accessed 27 May 2015). 14 Schwenzer & Leisinger, 2007, supra note 4, pp. 249 et seq.

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However, before conformity under Article 35 CISG is discussed, this paper explores the importance of Article 7 to the issue.

18.2

Article 7 CISG – The CISG as Part of International Law

Article 7(1) CISG refers to the CISG’s international character.15 This ‘self-reference’ to its international character is the crucial underlying core notion for the overall thesis advanced in this paper: the CISG as part of the international legal order has to take account of universally accepted obligations stipulated by that order. The CISG is an international treaty like, for example, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) or the Convention on Biological Diversity (1992) and as such part of international law. International law also comprises human rights treaties.16 Those human rights conventions build the international framework within which international institutions operate but they also inform and influence states’ domestic law.17 The International Bill of Rights (Universal Declaration, Convention on Civil and Political Rights, Convention on Economic, Social and Cultural Rights) is like a domestic constitution, and like a domestic constitution, the International Bill of Rights sets the parameters in which non- human rights treaties like the CISG operate. And even though international treaties bind their member states rather than individuals, their implementation may have a direct effect on the individual.18 It follows that the International Bill of Rights determines the scope and the limits of party autonomy of parties contracting under international devised contract law, like the CISG. Article 38 of the Statute of the International Court of Justice identifies additional sources of international law as, inter alia, customary law derived from the practice of states and general principles of law recognized by civilized nations.19

15 CISG, Art. 7(1): “In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.” 16 There are 9 core human rights treaties: ICERD, ICCPR, ICESCR, CEDAW, CAT, CRC, ICMW, CPED, CRPD, ICESCR-OP, ICCPR-OP1, ICCPR-OP2, OP-CEDAW, OP-CRC-AC, OP-CRC-SC, OP-CRC-IC, OP-CAT, OP-CRPD, available from (last accessed 28 May 2015). 17 See T. Pegram, ‘Governing Relationships: The New Architecture in Global Human Rights Governance’, Millennium Journal of International Studies, Vol. 43, 2015, pp. 618 et seq. 18 See M. Shaw, International Law, 7th edn, CUP, Cambridge, 2014, pp. 188-189. 19 See Shaw, 2014, supra note 18, pp. 53-65; C. Greenwood, ‘Sources of International Law: An Introduction’, available from (last accessed 25 May 2015), who indicates that the list enumerated in Art. 38 (1) of the Statute of the International Court of Justice is not thought to be complete anymore. See also A. da Rocha Ferreira et al., ‘Formation and Evidence of Customary International Law’, UFRGS Model United Nations Journal, 2013, p. 182, at p. 184.

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Customary international law refers to a ‘general practice accepted as law’.20 Practices which are so important in the international (or domestic) arena that every state, even states that have not signed (any of) the human rights conventions, will have to adhere to them (in accordance with Article 38 of the Vienna Convention 1969). In order for a practice to become customary international law, there must be duration, consistency and generality of practice, as well as opinio juris.21 It is generally recognized that a number of fundamental principles of human rights, especially the rights enshrined in the International Bill of Rights, are part of customary international law.22 An example of a right not explicitly enshrined in the International Bill of Rights but accepted as a customary human right, and one which is especially at risk to be violated in regard to the production of goods, is the prohibition of child labour.23 Child labour is explicitly prohibited by the UN Convention on the Rights of the Child (UNCRC),24 which has 194 state parties,25 making it the most widely adopted of all international conventions.26 The right of children to be free from child labour is also enshrined in the ILO Convention on the Minimum Age for Admission to Employment and Work27 and the ILO Convention on the Worst Forms of Child Labour,28 which have been ratified by 167 and 179 states, respectively.29 In addition, Article 25(2) of the Universal Declaration of Human Rights affords children ‘special care and assistance’, the Preamble to the International Covenant on Economic, Social and Cultural Rights in Article 10 recognizes that children should be protected from ‘economic and social exploitation’, and Article 24 of the Convention of the Rights of the Child stipulates that every child shall have, without any discrimination as to race, colour, sex, language, religion, national or social origin, property or birth, the right to such

20 ICJ Statute Art. 38(1)(b). 21 J. Crawford, Brownlie’s Principles of Public International Law, 8th edn, Oxford University Press, Oxford, 2012, pp. 24-25. Opinio juris has been defined as the assertion of a legal right or the acknowledgment of a legal obligation, see C. Greenwood, ‘Sources of International Law: An Introduction’, available from (last accessed 25 May 2015). 22 Crawford, 2012, supra note 21, p. 642. 23 A clear definition of child labour is lacking, and there is some controversy around the edges of what child labour entails. For the purpose of this contribution, child labour refers to the worst form of child labour. 24 CRC Art. 32. 25 Including the Holy See – the only states that are not parties are the USA, Somalia and Sudan. See (last accessed 03 August 2015) 26 See list of human rights treaties on (last accessed 25 May 2015); J. Muncie & B. Goldson, ‘Youth Justice: In a Child’s Best Interests?’, in J. Simon & R. Sparks (Eds.), The SAGE Handbook of Punishment and Society, SAGE Publications Ltd, London, 2013, p. 345. 27 ILO Convention 138. 28 ILO Convention 182 and recommendation 190. 29 (last accessed 26 May 2015).

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measures of protection as are required by his status as a minor, on the part of his family, society and the State.30 Moreover, most states, in compliance with international standards, have in place child protection laws, including the prohibition of child labour.31 The prohibition of child labour is not only generally but universally practiced by states and is also accepted as being binding at international law.32 It is a rule of customary international law.33 The same is now arguably true for the right to a sustainable environment.34 If the customary international law analysis is not adopted, the right to be free from child labour as well as the right to a sustainable environment can arguably be conceptualized as general principles of law recognized by civilized nations.35 Freedom to contract is also a protected human right (domestically and internationally). The right encompasses the right of parties to conclude contracts with parties of their choice and to negotiate the content of the contract free from any constraints.36 The CISG recognizes

30 See also European Convention on Human Rights, Art. 5(1)(d); African Charter on Human and People’s Rights, Art. 29(1); American Convention on Human Rights, Art. 19. 31 See country reports on the ILO website (last accessed 25 May 2015). It has to be noted that the ratification of UNCRC and/or the ILO Conventions and national legislation prohibiting child labour does not mean that child labour is not practised in that country. See ICJ in the Nicaragua case: “In order to deduce the existence of customary rules, the Court deems it sufficient that the conduct of States should in general be consistent with such a rule; and that instances of State conduct inconsistent with a given rule should generally have been treated as breaches of that rule, not as indications of the recognition of a new rule.” ICJ in Nicaragua ICJ Reps, 1986, at p. 98. See also F. Humbert, The Challenge of Child Labour in International Law, Cambridge University Press, Cambridge, 2009, pp. 110 et seq. 32 Humbert, 2009, supra note 31, p. 110 who argues that child labour has not become customary international law yet since it is still practised. 33 H. Cullen, The Role of International Law in the Elimination of Child Labor, Martinus Nijhoff, Leiden, 2007, pp. 266 et seq. Even if the reader does not agree with the analysis that the prohibition of child labour is customary international law, the paper should be read as that being the hypothetical premise. 34 See S. Glazebrook, ‘Human Rights and the Environment’, (2009) VUWLR: Human Rights in the Pacific 293; P. Taylor, ‘From Environmental to Ecological Human Rights: A New Dynamic in International Law?’ Georgetown International Environmental Law Review, Vol. 10, 1997, p. 309. 35 Humbert, 2009, supra note 31, p. 110 et seq. who argues that the prohibition of child labour is better analysed as a ‘general principle’. 36 Cf. Chicago, Burlington & Quincy RR Co v McGuire 219 US 549, 567 (1911); BVerfGE 8, 274. 328; BVerfGE 89, 214, 231; D. N. Mayer, Liberty To Contract: Rediscovering A Lost Constitutional Right, Cato Institute, Washington, 2011, pp. 1-10; D. Weber, ‘Restricting the Freedom of Contract: A Fundamental Prohibition’, Yale Human Rights and Development Journal, Vol. 16, 2013, pp. 51 et seq.; P. Webster, ‘Contract Law and Human Rights’, in E. Reid & D. Visser, Private Law and Human Rights: Bringing Rights Home in Scotland and South Africa, Edinburgh University Press, Edinburgh, 2013, p. 290; S. Laing & D. Visser, ‘Principles, Policy and Practice: Human Rights and the Law of Contract’, in E. Reid & D. Visser (Eds.), Private Law and Human Rights: Bringing Rights Home in Scotland and South Africa, Edinburgh University Press, Edinburgh, 2013, p. 330, pp. 334 et seq.; L. Fastrich, ‘Human Rights and Private Law’, in K. Ziegler (Ed.), Human Rights and Private Law: Privacy as Autonomy, Bloomsbury, London, 2007, III A.

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the parties’ freedom to contract in Article 6.37 Unlike the UNIDROIT Principles of International Commercial Contracts (PICC) and the Principles of European Contract Law (PECL),38 the CISG does not explicitly state that party autonomy is limited by mandatory rules. Some commentators have taken this to mean that party autonomy under Article 6 is not limited by any mandatory rules that relate to matters within the CISG’s scope.39 In their view, only mandatory rules relating to matters outside the scope of the CISG apply to contracts governed by the convention.40 According to Article 4, “the rights and obligations of the seller and the buyer arising from [the] contract” are within the CISG’s scope.41 Therefore, under the above view, party autonomy under Article 6 is not limited by mandatory rules that determine these obligations. However, the view does not take account of the position Article 7(1) places the CISG in within the international framework as set out earlier. The right of the parties to contract freely has to be weighed against rights enshrined in international treaties but more importantly against rights which are accepted as customary international law. The position that the CISG is part of international law is also in accordance with Article 31(2)(c) of the Vienna Convention. Customary human rights standards, like the prohibition of child labour and the right to a sustainable environment, as part of international law therefore set a limit to party autonomy under the CISG in the sense that those customary human rights standards have to be taken into account when interpreting the provisions of the CISG.42

37 CISG, Art. 6 states “the parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions”. M. Fogt, ‘Contract Formation under the CISG: The Need for a Reform’, in L. DiMatteo (Ed.), International Sales Law: A Global Challenge, Cambridge University Press, Cambridge, 2014, p. 184. 38 UNIDROIT Principles of International Commercial Contracts 2010, Arts. 1.1.3 and 1.4; The Principles of European Contract Law 2002, Art. 1:103. 39 U. Schroeter, ‘Freedom of Contract: Comparison Between Provisions of the CISG (Article 6) and Counterpart Provisions of the PECL’, The Vindobona Journal of International Commercial Law and Arbitration, Vol. 6, 2002, p. 257, at p. 262; F. Enderlein & D. Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods – Convention on the Limitation Period in the International Sale of Goods: Commentary, Oceana, New York, 1992, p. 49. 40 Schroeter, 2002, supra note 39, p. 257, at p. 262. 41 Article 4 reads: “This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:(a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold.” 42 The argued mandatory rules through customary law have to be distinguished from domestic public law regulations or mandatory rules that condemn certain behaviour. Domestic mandatory rules or public regulations that concern the validity of the contract do not fall under the CISG (Article 4(a)). It is an issue to be decided in accordance with the applicable domestic law to the contract.

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18.3

Conformity under Article 35(1)

In the following section, this paper will discuss how the CISG, particularly Article 35(1), must be interpreted in the light of existing customary law. Article 35(1) requires the seller to deliver ‘goods which are of the quantity, quality and description required by the contract’.

18.3.1

General

18.3.1.1 Minimal Ethical Standards How do generally accepted human rights standards affect the conformity of goods? Schwenzer and Leisinger argued already in 2007 that goods had to conform to ‘minimal ethical standards’.43 Article 7(1) and the CISG’s position within the international realm require that goods have to adhere to ethical standards which meet the requirements of customary international human rights, like ‘child labour free’ and ‘produced in a sustainable way’. The fact that human rights are violated in the manufacturing of goods alone does not affect their physical features. Jurisprudence and academic commentary agree that under Article 35(1), ‘quality’ includes not only the physical condition of the goods but also ‘all factual and legal circumstances concerning the relationship of the goods to their surroundings’.44 However, the issue that arises is what constitutes child labour or what is sustainable production in the particular case? How do those rights translate into concrete frameworks which can be enforced between contractual parties? What a customary right entails is a question for the human rights jurisprudence and the academy to define. Only clearly defined rights can impose standards between parties.45 In regard to the prohibition of child labour, Article 3 of ILO Convention No. 182 stipulates concrete enough norms.46 Hazardous 43 Schwenzer & Leisinger, 2007, supra note 4, pp. 249 et seq. 44 I. Schwenzer, ‘Art. 35 Para. 9’, in I. Schwenzer (Ed.), Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010. 45 A comprehensive discussion of the issue of the ascertainment of the content of a right for the purposes of being an enforceable standard in regard to Article 35(1) is beyond the scope of this article. 46 Art. 3 ILO 1999 No. 182 reads: “for the purposes of this Convention, the term the worst forms of child labour comprises: (a) all forms of slavery or practices similar to slavery, such as the sale and trafficking of children, debt bondage and serfdom and forced or compulsory labour, including forced or compulsory recruitment of children for use in armed conflict; (b) the use, procuring or offering of a child for prostitution, for the production of pornography or for pornographic performances; (c) the use, procuring or offering of a child for illicit activities, in particular for the production and trafficking of drugs as defined in the relevant international treaties;

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work is defined as ‘work that jeopardises the physical, mental or moral well-being of a child, either because of its nature or because of the conditions in which it is carried out’.47 The law is not foreign to amorphous concepts. The CISG itself uses concepts like ‘reasonable’.48 The public policy exception in the New York Convention49 and the analogous concept in most domestic private international law regimes are also ‘amorphous’ and can be clarified and substantiated through jurisprudence and academic commentary. 18.3.1.2 Non-Minimal Ethical Standards What about ‘non-minimal’ ethical standards, in the following referred to as NME standards, i.e. rights like adequate working conditions or corruption that do not (yet) meet the threshold of a customary human right or a general principle? Express inclusion is the easiest and most certain way to require a seller to deliver goods produced in accordance with other ethical standards, like fair working conditions or production without corruption. However, if no clear express term is included in the contract, can ethical standards be implied? The question becomes whether the contract can be interpreted in line with Articles 8 and 9, so as to require the seller to deliver goods produced in an NME manner and for the buyer, for example, not to use the payment of the purchase price for money laundering purposes.

18.3.2

Can a Term Producing NME Goods Be Established from the Circumstances? Article 8 Inquiry

Article 8 CISG sets out (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties (d) work which, by its nature or the circumstances in which it is carried out, is likely to harm the health, safety or morals of children.” 47 ILO No. 182, 1999, Art. 3(d). 48 E.g., CISG, Art. 39(1) ‘reasonable time’; Art. 8(3) ‘reasonable person’. 49 NY Convention, Art. 5V2(b).

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have established between themselves, usages and any subsequent conduct of the parties. Article 8 sets out how to conduct an inquiry to establish whether NME standards that have not been explicitly agreed upon between the parties have become contractual standards. NME standards can be incorporated through the parties’ contractual negotiations. It will be a matter of a factual inquiry in accordance with Article 8 whether a reasonable person in the shoes of the seller and/or buyer agreed to certain NME standards to be adhered to in the production of the goods and the payment of the purchase price. Of particular importance in that inquiry are whether the parties participated in a voluntary initiative, the incorporation of NME standards or obligations through standard terms, or whether there is a trade usage in accordance with Article 9(1)50 between the parties. 18.3.2.1 Mutual Participation in a Voluntary Initiative If both parties participate in a private initiative prohibiting certain NME behaviour such as the UN Global Compact, it can be argued that they have agreed to adhere to the NME standards. “[I]f both parties have agreed to certain standards on a broader scale, they must, consequently, be deemed to have, at least implicitly, agreed to such standards in their individual contracts”.51 On the other hand, as it has been argued: It is one thing to generally participate and sponsor a United Nation initiative. It is another thing to contractually agree that a contractual party is entitled to contractual remedies if an ethical standard is not met.52 Signatories to voluntary initiatives make certain commitments, and most voluntary initiatives require reporting on the compliance with the espoused principles.53 In other words, signatories ‘cannot have their cake and eat it, too’. If both parties are parties to the same initiative, even a reasonable third person would understand that the NME standards set out in the respective initiative will be adhered to by both parties. That means, a seller who has expressed a commitment to upholding the principles of a voluntary initiative, has also impliedly agreed to be contractually bound by NME principles in every international sales contract it enters into with other participants to the same initiative.

50 CISG, Art. 9(1): “The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves”. 51 Schwenzer & Leisinger, 2007, supra note 4, p. 249, at p. 264. 52 C. Ramberg, Emotional Non-Conformity in the International Sale of Goods, Particularly in Relation to CSR Policies and Codes of Conduct, research paper, Stockholm University, 2014, pp. 13-14. 53 See reporting in regard to Global Compact available from (last accessed 27 May 2015).

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18.3.2.2

Incorporation of Standard Terms without Explicit Reference: Buyer’s Code of Conduct A code of conduct sets out the social and environmental standards that a corporation expects its suppliers to abide by.54 Codes of conduct are widespread.55 Where a buyer has a code of conduct requiring suppliers to adhere to certain ethical standards, this code can be incorporated into the contract as a set of standard terms.56 One of the recurrent problems in regard to standard terms is whether or not the terms which are usually not the object of specific bargaining have been included in the agreement between the parties. The CISG does not specifically deal with the issue of the incorporation of standard terms. The issue is governed mainly by Article 8(2), i.e. where a party is not aware of the intent that the other party had with a specific statement, that statement must be interpreted according to the understanding of the NME obligations that a reasonable person of the same kind as the other party would have had in the same circumstances. In addition, in accordance with Article 9, trade usage between the parties can also be determinative. Whether or not the other party had and have to have the opportunity to take notice of the standard terms is one of the contested issues.57 18.3.2.3 Article 9(1) CISG Parties are free to establish explicitly or impliedly a trade usage or practice58 between themselves. That particular trade usage or practice will be applicable between them whether or not they have explicitly referred to it in their contract.59 However, parties are also free

54 M. Andersen & T. Skjoett-Larsen, ‘Corporate Social Responsibility in Global Supply Chains’, Supply Chain Management: An International Journal, Vol. 14, Issue 2, pp. 75-86, at p. 78. 55 See, for example, Rio Tinto Code of Conduct, available from (last accessed 29 May 2015); The Nestle Supplier Code, available from (last accessed 29 May 2015); Kraft Code of Conduct, available from (last accessed 29 May 2015). 56 See in regard to a definition of ‘standard term’ in regard to the CISG: CISG-AC Opinion No. 13, Inclusion of Standard Terms under the CISG, Rapporteur: Professor Sieg Eiselen, University of South Africa, Para. 1; see also UNIDROIT Principles of International Commercial Contracts 2010 (UNIDROIT Principles) Art. 2.1.19(2). 57 See CISG-AC Opinion No. 13, supra note 56, Paras. 2.1 et seq. 58 See UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, United Nations, New York, 2012, Art. 9 Para. 6; cf. Art. 1.9(1) UNIDROIT Principles. 59 P. Perales Viscasillas, ‘Art. 9 Para. 11’, in S. Kröll, L. A. Mistelis & P. Perales Viscasillas (Eds.), UN Convention on Contracts for the International Sale of Goods (CISG) Commentary, Beck/Hart, Munich, 2011; cf. M. Schmidt-Kessel, ‘Art. 9 Para. 6’, in I. Schwenzer (Ed.), Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd edn, Oxford University Press, Oxford, 2010; C. Pamboukis, ‘The Concept and Function of Usages in the United Nations Convention on the International Sale of Goods’, Journal of Law and Commerce, Vol. 25, p. 107, p. 112, p. 113; OGH (21 March 2000) 10 Ob 344/99g, available from (Wood case).

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18.3.3

In Which Circumstances Is an Industry-Based Trade Usage Established that Requires the Production of NME Goods?

By virtue of Article 9(2),65 trade usages do not need to be expressly agreed upon by the parties if they are so widely recognized and observed that the parties’ reliance on them is presumed unless they express otherwise.66 Article 9(2) does not require universal knowledge

60 CLOUT case No. 579. 61 CLOUT case No. 579; OGH (15 October 1998) 2 Ob 191/98x, available from (Timber case). 62 See CLOUT case No. 750; Perales Viscasillas, 2011, supra note 59, Art. 9 Para. 8; Schmidt-Kessel, 2010, supra note 59, Art. 9 Para. 8; cf. §1-205 (1) UCC; P. Schlechtriem & P. Butler, UN Law on International Sales, Springer, Heidelberg, 2009, Para. 60. 63 UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, United Nations, New York, 2012, Art. 9 Para. 7. 64 So arguably, too, Perales Viscasillas, 2011, supra note 59, Art. 9 Paras. 15-16. Examples of trade usages often agreed upon by parties (in accordance with Art. 9(1)): USP 600, INCOTERMS. 65 CISG, Article 9(2) states: “The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.” 66 UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, United Nations, New York, 2012, Art. 9 Para. 9; S. Seppälä, The Responsibilities and Rights of Both Buyer and Seller in International Trade Concerning the Conformity of the Goods and Additional Contractual Requirements, LLM Thesis, University of Lapland, 2013, p. 23.

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or observance of the trade usage.67 It is sufficient that the usage is recognized and observed by the majority of persons doing business in the particular industry in question.68 This raises interesting issues in the context of this paper: are there already widely recognized practices in particular industries or even globally that amount to trade usages that oblige the manufacturing of NME goods. If so, this prohibition forms an implied term in any CISG contract to which the usage applies. The inquiry is therefore two-fold – does a global trade usage already exist and/or are there any particular industry trade usages. To be clear, this paper advances the argument that minimum ethical standards determine the characteristics of the goods under Article 35(1) due to the CISG being part of the international law canon. To find a global trade usage in regard to ‘minimum ethical standards’ is an alternative. Allocating the analysis of ‘minimum ethical standards’ as overarching principles that have to be taken into account when interpreting the provisions of the CISG in accordance with Article 7(1), means that parties cannot exclude ‘minimum ethical standards’ and that the parties’ performance has to comply with those minimum ethical standards. The establishment of ‘NME standards’ as a global trade usage means that businesses would be more human rights sensitive than states. If ethical standards as global trade usages do not exist, the issue arises as to whether particular industry trade usages exist that incorporate minimum and NME standards. 18.3.3.1

Globally Applicable Trade Usage?

18.3.3.1.1 Ethical Behaviour Globally Demanded? Schwenzer and Leisinger assert that the observance of ‘minimum ethical standards’ can be regarded as an international trade usage, thus forming an implied term in every international sales contract.69 Private initiatives such as the UN Global Compact, the Principles for Responsible Investment70 and the Initiative Social Accountability 8000 International Standard71 suggest a general business condemnation of unethical business practices, even wider than ‘minimum ethical standards’. Others have argued that while the prohibition on ‘minimum ethical standards’ may be theoretically accepted worldwide, it is not observed by the majority of contracting parties 67 Schmidt-Kessel, 2010, supra note 59, Art. 9 Paras. 11, 16 and 18. 68 OGH (21 March 2000) 10 Ob 344/99g, available from (Wood case); CLOUT case No. 175; UNCITRAL, Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods, United Nations, New York, 2012, Art. 9 Para. 11; Schmidt-Kessel, 2010, supra note 59, Art. 9 Paras. 16 and 18. 69 Schwenzer & Leisinger, 2007, supra note 4, p. 249, at p. 249, p. 264, p. 266 and p. 273. 70 “PRI” the PRI has more than 1325 signatories, and the total assets under management total more than US $45 trillion: (last accessed 27 May 2015). 71 ‘SA8000’, which is a voluntary standard requiring companies to adhere to certain requirements relating to workplace conditions and workers’ rights. See (last accessed 27 May 2015).

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Petra Butler in practice.72 The observance of minimum ethical standards may be widely acknowledged in developed states, but cannot yet be adhered to by parties in developing countries.73 Global Compact and the SA8000 Standard companies, for example, represent only a small percentage of the total firms involved in the international sale of goods. It could be argued that their participation is irrelevant in terms of determining the existence of a trade usage in the international goods trade. Furthermore, participants are not evenly distributed throughout the world. For example, while there are 951 business participants from France and 1231 from Spain, there are only 199 and 307 from China and the USA (the world’s two biggest manufacturers), respectively, 18 from India, 55 from Pakistan, 33 from Russia and 26 from Bangladesh.74 Thus, while the Global Compact indicates an observance of this standard by many corporations in some countries, its utility in terms of demonstrating a truly global trade usage in regard to more general ethical standards is limited On the other hand though, the corporations that are signatories to those voluntary initiatives generate the most trading volume.75 Angel et al. have argued, in regard to environmental standards, ‘globally’ should not be understood in the sense of geographical global but rather as a global network. That means, the standard or practice reaches further than where it is located. That reach is achieved, for example, through trade, investment and global production networks.76 UN Global Compact has more than 12,000 corporate participants across 145 countries, large corporations are adhering to those minimal ethical standards even if they are not part of any voluntary organization and that, for example, re-insurers like the Münchener Rück will not re-insure projects that do not conform, inter alia, with accepted sustainability principles.77 In addition, international law firms like Freshfields78 and Clifford Chance79 are advising their clients on human rights compliance in their commercial dealings including contracts. Codes of conduct comprise ethical standards based on UN Global

72 See P. Schlechtriem, ‘Non-Material Damages – Recovery under the CISG?, Pace International Law Review, Vol. 19, 2007, p. 89, at p. 98; K. Mitkidis, ‘Sustainability Clauses in International Supply Chain Contracts: Regulation, Enforceability and Effects of Ethical Requirements’, Nordic Journal of Commercial Law, Vol. 1, 2014, pp. 14-15. 73 Seppälä, 2013, supra note 66, pp. 24-25; see Enderlein & Maskow, 1992, supra note 39, Para. 70. 74 (last accessed 20 May 2015). 75 Global Compact signatories comprise, inter alia, Nestle, Kraft, Rio Tinto, Shell, Rosneft, Petro China, BP, see (last accessed 20 May 2015). 76 D. P. Angel, T. Hamilton & M. T. Huber, ‘Global Environmental Standards for Industry’, Annual Review of Environment and Resources, Vol. 32, 2007, p. 295, at pp. 299-300. 77 (last accessed 27 May 2015). 78 (last accessed 27 May 2015) 79 (last accessed 27 May 2015).

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Compact which demand, especially in supply chains, their adherence.80 And organizations, like the European Ethics Network,81 or conferences, like the Responsible Business Summit,82 indicate that the need to behave ethically has become a mainstream concern for businesses. Most importantly, since UN Global Compact and concepts like social corporate responsibility have become ‘sexy’, the global number of children in child labour has declined by one third since 2000.83 Specifically Angel et al. have defined a global environmental standard as a measure of performance to which a firm or industry is bound. Such environmental standards can take the form of an external regulatory mandate, but they can also take the form of an environmental performance standard that a firm applies to its own activities and to those of its suppliers, or a requirement that an investor group imposes on a firm as a condition of financing.84 A standard that has arguably met the threshold of global reach is ISO 14001.85 ISO 14001 is an environmental management standard. It defines the characteristics of a certified environmental management system, rather than a specific standard of environmental performance.86 In addition to private initiatives that set a variety of ethical standards, there are now recent international and regional initiatives to devise frameworks that are designed to compel businesses to behave ethically.87 The UN Guiding Principles on Business and Human Rights set out three overarching principles in regard to the implementation of human rights in business dealings:88 (a) States’ existing obligations to respect, protect and fulfil human rights and fundamental freedoms; (b) The role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights; (c) The need for rights and obligations to be matched to appropriate and effective remedies when breached.

80 See, for example, Rio Tinto, The Way We Work (Rio Tinto, 2011) 14 available from (last accessed 23 May 2015). 81 (last accessed 22 May 2015). 82 (last accessed 22 May 2015). 83 (last accessed 27 May 2015). 84 Angel, Hamilton & Huber, 2007, supra note 76, p. 295, at p. 299. 85 At the end of December 2008, there were over 188,000 organizations globally that had been issued ISO 14001 certificates. A total of 155 countries had organizations participating in the scheme, see (last accessed 27 May 2015). 86 (last accessed 27 May 2015). 87 OECD, OECD Guidelines for Multinational Enterprises, 2011 edn, OECD Publishing, Paris, 2011. 88 United Nations, UN Guiding Principles on Business and Human Rights, HR/PUB/11/04 (2011) 1.

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Those principles apply to all states and to all business enterprises, transnational or otherwise, regardless of their size, sector, location, ownership and structure. The European Union has incorporated the UN Guiding Principles into its Corporate Social Responsibility strategy.89 The EU expects its member states to develop national action plans to implement the UN Guiding Principles.90 The United Kingdom was the first state to implement UN Principles through its National Action Plan.91 The National Action Plan initiated, inter alia, an amendment to section 172 of the Companies Act 2006. Section 172 of the 2006 Act now requires (1) ….directors to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to – […] (d)the impact of the company’s operations on the community and the environment, […] Another measure that is set to affect change is procurement requirements92 since government spending in procurement of goods and services is a major component of the overall global economy.93 The OECD has also issued a set of guiding principles (amended in the light of the UN Guiding Principles on Business and Human Rights) that assist its member states to implement measures that enhance their businesses’ compliance with human

89 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A renewed EU strategy 2011-14 for Corporate Social Responsibility, COM(2011) 681 final (25 October 2011) 4.8.2. 90 Id. 91 Secretary of State for Foreign and Commonwealth Affairs, Good Business: Implementing the UN Guiding Principles on Business and Human Rights, CM8695 (4 September 2013). 92 Supra note 89, 4.4.2; implementation of the UN Guiding Principles includes devising procurement requirements that ensure that businesses that do not meet the human rights standards are excluded from the process, see, for example, supra note 91. 93 Across OECD countries, public procurement accounts for an average of 12% of GDP (excluding procurement by state-owned utilities: OECD iLibrary, Size of public procurement market: (last accessed 20 December 2014). The United States government, for example, spends approximately $350 billion dollars annually in federal procurement alone (Mission Statement, Office of Management and Budget, (last accessed 13 January 2015). In the European Union, around one fifth of GDP is spent on procurement, including procurement by public utilities see (last accessed 14 January 2015). Essential Elements of State National Action Plans for Implementation of the UN Guiding Principles on Business and Human Rights Expert Workshop organized by the UN Working Group on Business and Human Rights (7 May 2014, Geneva).

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rights.94 OECD and EU investment guidelines incorporate human rights principles and complement businesses’ human rights obligations.95 In sum, ethical business behaviour today is already required through a multitude of global private and government initiatives. Even though all these initiatives prohibit unethical behaviour, such prohibitions are limited in scope. These initiatives only prohibit behaviours contrary to minimum ethical standards, i.e. behaviour required by customary international human rights law. There is no universal consensus as to what amounts to NME behaviour. Therefore, at this point in time, those initiatives do not go far enough to prove that, other than in regard to minimum ethical standards, there is a developed globally accepted trade usage to produce ethical goods. 18.3.3.1.2 Minimum Ethical Standards as a ‘Rule’? Schmidt-Kessel points out that Article 9 is ‘not concerned with the acknowledgment of legal norms, but rather with the determination of the content of the parties’ agreement’.96 However, for a trade usage to become part of the parties’ contract, its content has to be definite. As stated above, even though one could argue that there is a global agreement that ‘minimum ethical standards’ should be observed between the parties, the question arises whether those standards are determinative enough to become part of a contract. For a ‘minimum ethical standard’ to be a trade usage which is universally part of every contract under the CISG, the standard has to refer to a reference point, i.e. the standard has to be clear and unambiguous. Certain provisions of the INCOTERMS and USP 600 are regarded as trade usages under Article 9(2).97 Those are clear and unambiguous rules hardly open to interpretation. Even ISO 14001 which specifies the requirements for an environmental management system would not satisfy the requirements of a trade usage since it only sets out a framework for managing good environmental practice rather than setting concrete

94 OECD Due Diligence Guidance for Responsible Supply Chains for Minerals from Conflict Affected and High Risks Areas, see (last accessed 10 May 2015); OECD, Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones, see (last accessed 10 May 2015); OECD, Voluntary Principles for Security and Human Rights, (last accessed 10 May 2015); OECD, Human Rights Training Toolkit for Oil and Gas Industry, see (last accessed 10 May 2015); Guide Conflict Sensitive Business Practice: Guidance for Extractive Industries (International Alert 2006), see (last accessed 10 May 2015). 95 OECD, Guidelines for Multinational Enterprises, “Declaration on International Investment and Multinational Enterprises” available from (last accessed 25 May 2015); Council of the European Union, EU Strategic Framework and Action Plan on Human Rights and Democracy, 11855/12 (25 June 2012) 11. 96 Schmidt-Kessel, 2010, supra note 59, Art. 9 Para. 2. 97 Id., Art. 9 Para. 26.

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Petra Butler expectations.98 This analysis is not contrary to the analysis advanced in regard to the interpretation of ‘characteristic’ under Article 35(1). For a trade usage to be established, there has to be agreement in regard to the specific usage in question. The trade usage has to be so concrete in its terms that it is applicable to an international sales contract without the parties particularly negotiating its content. Trade usages in that regard are like standard terms. The characteristics of the goods on the hand are always part of the essentialia negotii (Article 14), i.e. they are always subject to the individual negotiation of the parties. Within those negotiations, there is room for interpretation. 18.3.3.1.3 Summary It is tempting to find a global trade usage implying a term into every international sale of goods contract for ‘ethical’ produced goods. However, the existence of a trade usage is determined according to actual evidence. At this point in time – other than for minimum ethical standards – no general global trade usage in regard to the production of ethical goods exists. However, even in regard to ‘minimum ethical standards’ for a trade usage, those ‘minimum ethical standards’ are probably not prescribed concretely enough to be a trade usage. 18.3.3.2 Trade Usage in Particular Industries? Even if a global trade usage cannot be established at this point in time, trade usages in particular industries requiring ethical behaviour might be established. This paper will look at the electronics and the apparel industries as examples. 18.3.3.2.1 Electronics Industry The Electronic Industry Citizenship Coalition (EICC) Code of Conduct sets out standards relating to social, environmental and ethical issues in the electronics industry supply chain.99 EICC members are required to publically commit to the code of conduct and ensure that this commitment is spread to their supply chains (at a minimum, members must require that all tier one suppliers adhere to the code).100 Members are held accountable for their conduct and that of their suppliers through audits and are required to identify and self-audit high-risk facilities.101 Members must also implement Corrective Action Plans to remedy any non-compliance with the code of conduct by suppliers and prevent 98 See also ISO 2600:2010, which provides guidance rather than requirements, so it cannot be certified to unlike some other well-known ISO standards. Instead, it helps clarify what social responsibility is, helps businesses and organizations translate principles into effective actions and shares best practices relating to social responsibility, globally. It is aimed at all types of organizations regardless of their activity, size or location. Available from . 99 (last accessed 20 May 2015). 100 (last accessed 20 May 2015). 101 (last accessed 20 May 2015).

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reoccurrence.102 The EICC Code of Conduct prohibits, for example, the use of child labour in any stage of manufacturing.103 The EICC comprises around 100 electronics companies with a total combined revenue of almost US $2.6 trillion.104 These companies employ more than 5.5 million people and have thousands of tier one suppliers.105 Moreover, over 3.5 million people from 120 countries are involved in the manufacture of members’ products.106 EICC members include most of the major multinational electronics companies, such as Apple, Acer, Blackberry, IBM, Microsoft, Samsung, Sony and Oracle. Thus, the powerhouse of the electronics industry is comprised of EICC members, who are all committed to eliminating child labour from both their own activities and (at least) those in the thousands of companies which make up their next-tier suppliers. The requirement that companies take responsibility for their tier one suppliers is also only a minimum standard, and many companies take it upon themselves to ensure that the code of conduct standards are enforced throughout their supply chains.107 Furthermore, a survey of 39 major multinational electronics companies conducted in 2014 found that 85% of the companies surveyed had codes of conduct prohibiting the use of child labour, and of those companies, two thirds included their codes of conduct in their supplier contracts.108 Child labour undoubtedly still exists in some electronics industry supply chains. For example, both Apple and Samsung have come under fire recently for the use of child labour in their suppliers’ facilities.109 Apple has discovered 349 child labourers in its supply chain since 2006 through audits of its suppliers.110 However, the fact that child labour does still exist in companies’ supply chains does not mean it is tolerated by those companies. In

102 103 104 105 106 107

(last accessed 20 May 2015). EICC Code of Conduct v 5.0 at A (2). (last accessed 20 May 2015). (last accessed 20 May 2015). (last accessed 20 May 2015). See, for example, Philips, which addresses conflict mineral issues 7 tiers or more down its supply chain available from (last accessed 20 May 2015). 108 G. Nimbalker, C. Cremen & Y. Kyngdon et al., The Truth Behind the Barcode: Electronics Industry Trends, 2014, p. 16 available from . 109 ; ; ; ; ; (last accessed 23 May 2015). 110 ; J. Garside, ‘Child Labour Uncovered in Apple’s Supply Chain’, The Guardian, 25 January 2013 available from .

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Apple’s case, suppliers found to be using child labour are placed on probation, and in the most serious cases, the business relationship is terminated.111 The widespread condemnation of child labour by the majority of major players in the electronics industry worldwide, as well as these corporations’ commitment to expunging child labour from their supply chains, leads to the conclusion that the prohibition of child labour constitutes an international trade usage within the electronics industry. 18.3.3.2.2 Apparel Industry Unlike the electronics industry, the apparel industry does not currently have a central, quasi-regulatory initiative like the EICC. However, voluntary initiatives such as the Cotton Pledge, the Better Cotton Initiative, the Fair Labor Association and the Fair Wear Foundation all indicate efforts in the apparel industry to combat forced and child labour at multiple levels of the supply chain. The Fair Labour Association (FLA), for example, is a collaborative initiative of businesses, universities and NGOs committed to protecting workers’ rights by promoting adherence to international labour standards.112 The FLA has a Workplace Code of Conduct, which affiliated companies are responsible for implementing throughout their entire supply chains.113 The Workplace Code of Conduct prohibits child labour. While the FLA covers several industries, most of its participants are garment and textile brands and manufacturers. Participating companies include Adidas, H&M, Hanes, Hugo Boss, Kathmandu, New Balance, Nike and Puma, as well as a multitude of garment and textile manufacturers.114

18.4

Conclusion

At a minimum level, there are some industries like the electronics industry and the apparel industry where trade usages prohibit at least the use of child labour. There is a strong argument to be made that minimum ethical standards like the prohibition on child labour and sustainability (sustainable production) are global usages. However, that they are not concrete enough to be a trade usage in accordance with Article 9(2), customary human rights like the prohibition on child labour and sustainability determine the characterization of the goods under Article 35(1).

111 Apple progress repost 2014 at 14; an example of the relationship being terminated is when auditors discovered in 2012 that Guangdong Real Faith Pingzhou Electronics hired 74 child workers – see (last accessed 20 May 2015). 112 (last accessed 20 May 2015). 113 ; (last accessed 20 May 2015). 114 (last accessed 20 May 2015).

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To end with a thought from the beginning of the paper – multinational corporations might not account for most traders, however, they account for the most trade volume and profit generated – the standards they set should have some weight in regard to the standard of ethical contracting and they should be held accountable for it. That the meat lies in the supply chain I am aware of – how that meat will be cooked is for another paper. Everything elaborated on in this paper would be rather academic if there were be no remedy for a breach of an ethical standard. Professor Paulo Nalin explores what remedies a buyer might have should a breach of an ethical standard be found in Chapter 4.3.

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International Fair Trade (Fair Trade in International Contracts and Ethical Standard)*

Paulo Nalin

19.1

Introduction

The theme we will analyze is rather challenging, once it works in the opposite way of common sense in the international trade, in which the private autonomy of the contractual parties seems to reign supreme and with no limits whatsoever. Would it be absurd to think of international contractual relationships with some equity or even some solidarity? Maybe, yes. However, I remember that few years ago, it would be absurd to think of a contractual justice other than that based on the unrestricted performance of the contract, on the pacta sunt servanda principle, even if one of the parties would be lead to bankruptcy when fulfilling the consideration, due to the dogmatic and absolute meaning of the principle of contractual obligation. The Cartesian description of the direction of the operation served that exclusively economic function of the contract, always from the debtor to the creditor, without understanding the contract as a complex and dynamic relationship, in its objective and subjective meanings. Objectively, there are many classes of rights involved in it; therefore, it is not appropriate to qualify the contract as a simple legal relationship, comprised of a subjective right of credit against a legal duty of consideration. To that end, it is possible to establish a variety of other rights, apart from the subjective right, related to the relationship and potentially breakable by the parties, including the creditor. Therefore, it also does not seem right to qualify the parties of the contractual relationship as creditors or debtors, once the patrimonial and existential legal status of such contract is dynamic and the parties to the relationship take turns in the positions of credit and debit throughout its execution, so that the initially assumed positions are never static. On the other hand, subjectively, we have a new contract, especially in mass relations or in contracts involving substantial businesses (mergers and acquisitions, for instance),

*

All web pages were last accessed in June 2015.

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which affect third parties. Consequently, it is outdated to approach the principle of relativity of contract in an absolute manner. For that reason, in line with this brief introduction, one cannot forget to pay a tribute to the school of thought of the Italian Professor Enzo Roppo, who has supported the relative and historical nature of the contract, which must be construed at its time and in a certain place, since the 1970s, which is particularly relevant in this exposition. At last, I must warn that the present research is not only theoretical, but it actually transits from theory to practice, since it is intended to present concrete solutions to the proposed theme, in accordance with the CISG.

19.2

Globalization and Business Law

Had it not been for globalization, the proposed theme would have become meaningless – once such phenomenon is distinguished by the strengthening of some global subjects, which enables them to leap over traditional policies and national legal barriers, according to Thomas L. Friedman.1 Its origin is based on the technological and organizational revolution experienced in the last 30 years, even though it is not possible to ascertain any change in human nature or the human desire to renounce the conception of national state, traditional ideologies and religious beliefs, in favour of a new supranational society. Still in accordance with the thoughts of Thomas L. Fridman (The World is Flat. A Brief History of the Twenty-first Century), the state law would not have any influence on or play a relevant role in the globalization phenomenon, maybe because it is distinguished by a certain transgovernmentalism, as explained by Anne-Marie Slaughter, through which the states are dissociated in autonomous functional parties, which are called sector subgovernments by Sabino Cassese,2 Professor and Justice of the Italian Constitutional Court. Those parties (Tribunals, regulatory agencies, intelligence agencies, Executive and even Legislative Branches and mainly private businesses) are connected with other parties in other national states, so that together they make their own operating standards through international transactions called transnationalisme (Cassase), which define the means of conflict resolution between such sector subgovernments, as in World Trade Organization (WTO) panels, for instance.

1

2

J. Ziegel, ‘The globalization of the law and its limitations, with particular reference to the globalization of commerce law’, in R. Cranston, J. Ramberg & J. Ziegel (Eds.), Commercial law challenges in the 21st Century, Uppsala, Iustus Förlag, 2007, p. 278. S. Cassese. ‘La globalisation du droit’, in P. Tititun & P. Dumaine (Eds.), La conscience des droits. Mélanges en l’honneur de Jean-Paul Costa, Paris, Daloz, 2011, p. 113.

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Private businesses use this new global wave to agree on international contract obligations essentially based on the practices of international trade and on general principles of law, without compliance to the national legal regimes. All of it is done aside from any state regulation, therefore forming, as a direct effect, the new lex mercatoria, represented by the 78 principles of the UNIDROIT – Principles of International Commercial Contracts.3 The Law, as we know it, made by an autonomous and sovereign state by means of its Legislative Power, does not penetrate this new rational wave of management of transnational interests. As a matter of fact, there is a parallel, global, fragmented and not official law, which affects the lives of citizens and explains, to some extent, the post-modernity and the fragmented, relative and incomplete spirit of men, the reflex of a state with the same characteristics. The legal phenomenon of the existence of parallel systems of law is not a novelty, recognized as legal pluralism by legal sociology and as unilateralism in the field of Private International Law, while the monism is called bilateralism. Such theoretical designations are currently reputable as overcome by European schools of Private International Law, which, since the year 2000, began to delimit the object of this research under the theoretical or methodological name of method of recognition, unilateralism, pluralism, pluralismunilateralism, new unilateralism or method of unilateral recognition, as explains Didier Boden.4 From the point of view of the German philosopher Alexander Somek, Niklas Luhmann would have foreseen globalization as ‘a state of mutual or reciprocal indifference’ between the functional relations of a globalized civil society. The implications of such state of indifference are worrisome; when outside the legal and coherent framework of the legislative rules, they safeguard, ultimately, the man and the human rights. Luhmann’s theory of systems can be used to support the understanding of those normative parallel systems or sub-systems, which operate in an autopoietic or self-referential model, without other systems having influence on this new globalized system, especially the state system. Although economic reports might suggest that the phenomenon of globalization has brought progress to humanity in the past 30 years, highly negative social and environmental effects are imputed to globalization, such as the extension of the social difference between the rich and the poor, by use of slave and child labour, especially in underdeveloped countries, the destruction of natural reserves and tropical forests, the convulsion of local cultures and traditions, by act of large corporations such as Wal-Mart, McDonalds and 3 4

R. Goode, ‘Is the Lex Mercatoria autonomous?’, in R. Cranston, J. Ramberg & J. Ziegel, Commercial law challenges in the 21st Century, Uppsala, Iustus Förlag, 2007, p. 76. D. Boden, ‘O pluralismo jurídico em direito internacional privado – lição propedêutica para o estudo de uma revolução em curso’, in L.O. Baptista, L. Ramina & T.S. Friedrich (Coords.), Direito internacional contemporâneo, Curitiba, Juruá, 2014, pp. 670-671.

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more recently Starbucks. Such negative phenomena, as we will see later, produce a direct impact on transnational private contractual relations. However, once globalization does not really have any contact with positive law, operating in a functional paralegal subsystem, it would be advisable to investigate whether it produces any impact in the two large legal families of civil law and common law. It is also inquired what its point of contact with business law and international agreements would be. Let us consider, first, the relationship with the Western traditional legal families and the result caused on the internationalization of Law. Vivian G. Currant, professor at the University of Pittsburgh, notes that the legal postmodernity imply the fragmentation of the laws, which in fact can be observed in the decoding of the systems of civil law, as the Civil Code is the greatest symbol of rationalism, a model that was exhausted in the period between World Wars. As a consequence, models of contractual recoding have been being studied in Europe for a long time, among which the Lando Commission, which inspired the Principles of European Contract Law (PECL) and which presents a new paradigm of Civil Code for the European Community. However, if more deeply observed, any coding project aims to rebuild the encoder model, yet based on the unification of international law. This is clearly a reaction of lawyers trained in the system of civil law, who feel deprived of a great control code. According to the same American author, Vivian G. Current, such anxiety is not present in common law operators, who see in globalization and legal fragmentation only a stage that will provide new elements for future jurisprudential precedents. In this context, the internationalization of law and the law of contracts in particular becomes immensely relevant, not only as a legal industry aimed to special operators (entrepreneurs, exporters and importers) but also as a potentially radiating source of a new wave of positive effects for the global community, founded on fair trade deriving from international contracts, reducing, if not eliminating, the abuse of economic dependence and the preponderance of the dominant position. Paradoxically, such process of international coding is done at the peak of the decoding of the national laws. It is precisely in this area of legitimation of new legal sources that an institution that has tried to shorten the global distances between the people comes into play, in order to offer democratically debated laws and, therefore, legitimate laws. We are talking about the UNCITRAL (United Nations Commission on International Trade Law). Among the Model Laws’ of UNCITRAL, some stand out: International Commercial Arbitration (54 states), Recognition and Enforcement of Foreign Arbitral Award (142 states) and the no less important International Sales Convention (83 states). Such international regulations are not the origin of globalization, but a consequence, a response to it. Opposite to a process of destruction of national laws, replaced by fragmented, functional, non-official rules, increasingly indifferent to men, internationalization

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seems to be an acceptable path and a point of no return, before the counter-cultural movement of globalization. The codification of European law precisely depicts this reactive process, although the success of a future European code of contracts is regarded with a certain pessimism, before an increasingly global kind of law, with which an European code would not be able to compete and would be doomed to failure, once authoritarian, centralizer and anti-pluralist, as Natalino Irti5 recalls in his Nichilismo giuridio.

19.3

Contractual Freedom: the Abstract Hypothesis of Equal Forces or All International Contracting Parties Are Materially Equal from the Point of View of Power Bargain?

Since the French Civil Code, contractual freedom is the core principle of all private contracts, because it broke the caste system of the European aristocracy to assign a new status to man, who went on to be a citizen and a contracting party. The principle of equality runs alongside freedom to ensure that the man (now citizen) contracts because it is equal to the other man (citizen). Therefore, the contract is an act of freedom and it is the foundation of the new rational standard of social justice. Even the state is a contractual creation, as stated the British liberal contractualists. According to Fouillée “[…] quid it contractuel dit just!” And this, which is a social synthesis of the 19th-20th centuries, still seems to be useful for the understanding of certain sectors of international contract law. Therefore, in addition to comprising a proprietary attributive circulatory operation, as well summarizes Pietro Barcelona,6 the contract established a new standard of social justice, the so-called justice under contract, based on the funzione traslativa-circolatoria. Since 1804, social justice lies in the free exercise of the contractual intent and in the effects achieved by such, usually bilateral, act of will: the man, who went on to be a citizen and holder of rights, earned the right to run the risks of his own initiatives, pursue his interests. Such principles were obviously designed for a specific time, for a place, for a liberal and manifestly agricultural and pastoral society. Even though the Napoleonic Code has withstood for centuries, it currently seems that the cultural concept or the political symbolism of the French Civil Code is more relevant than its text, which has already been reformed several times.

5

6

Apud in G. Alpa, ‘The future of European contract law: some questions and some answers’, in K. BoeleWoelki & W. Grosheide, The future of contract law, Austin, Kluwer, 2007, p. 6 and . P. Barcelona, Diritto privato e società moderna, Nápoles, Jovene, 1996, p. 320.

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After overcoming that time period and, especially, the individual and equalitarian model of exercise of such wills, the Napoleonic legislator faced the Industrial Revolution, which, despite having emerged in 1760, was only fully realized in 1830. Everything indicates that the designers of the French Civil Code did not take the Industrial Revolution into account when drafting the Code. As a consequence, it was already out of date when it was born, although it is the initial time limit of modern contract law. The Industrial Revolution turned the contract into an instrument of social injustice, through the radicalization of the exercise of contractual freedom, by means of which free men began to be slaves of the will of the strongest contracting parties. There is nothing more convenient for a new market than a legion of old contracting parties, bound by the justice of the pacta sunt servanda and by the false argument that when contracting they had some kind of social and economic freedom. At this point, it is suitable to offer a critique on the abstract constructions of Law. The abstract model or the technical concept of contract of the 18th and 19th centuries served as a tool for the radicalization of the exploitation of the weak by the strong, an abstraction which was not overcome by the BGB (Bürgerliches Gesetzbuch, German Civil Code) in the end of the 19th century. Quite the contrary, the extravagant abstractions of the BGB stimulated the school of jurisprudence of the concepts (or the legal science of concepts), responsible for defining the hermetic institutes of the German Civil Code. Note that in a very particular way, the Italian Civil Code brings its own concept of contract (Article 13217), which identifies it as an agreement of wills. However, according to Rodolfo Sacco, in the Treaty of Private Law, coordinated by Pietro Rescigno,8 the same code still comprises Article 1325,9 which redefines the contract with other four elements, among which the agreement and the cause, whose dubious character implies contradiction, in addition to being “[…] tropo restritiva”,10 always according to the lesson of SACCO, because some effects of the contract and also the consequences of a null convention escape from it. It is, indeed, a right set by law.

7

Art. 1321 “Nozione. Il contratto è l’accordo di due o più parti per costituire, regolare o estinguere tra loro un rapporto giuridico patrimoniale”. A very close concept we can find at the newest Argentinian Civil and Commercial Code (08/10/2014), Art. 957. – “Definición. Contrato es el acto jurídico mediante el cual dos o más partes manifestan su consentimento para crear, regular, modificar, transferir o extinguir relaciones juridicas patrimoniales”. 8 R. Sacco, Tratatto di diritto private, 2nd edn, Torino, UTET, 2004, t. 10, pp. 13-16. 9 Art. 1325 “Indicazione dei requisiti I requisiti del contratto sono: 1) l’accordo delle parti (1326 e seguenti, 1427); 2) la causa (1343 e seguenti); 3) l’oggetto (1346 e seguenti); 4) la forma, quando risulta che è prescritta dalla legge sotto pena di nullità (1350 e seguenti)”. 10 Sacco, 2004, supra note 8, t. 10, p. 16.

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However, no matter how hard the legislator might work, abstract concepts have proved to be uncertain and contradictory, subject to extensive criticism and, therefore, the desired conceptual security normally transforms into doctrinaire insecurity. For this reason, and on the contrary, I would rather define the contract as a right in construction, from concrete reality, precisely in order to avoid social injustices that are based on doctrinal and legal abstractions with no commitment with reality. Finally, the perception of a built right is one of the results of its social functionalization.11 But what would be the social function of the contract? This is a theme which may only have a practical approach, of time and space, so that a so-called social function of contract in Italy certainly differs from a Latin American one. Nevertheless, once again I remember Roppo, which associates the concept of contract to an external factor to itself and which defines it. In this line of thought, Professors Rodolfo Sacco and Giorgio de Nova12 claim that the social function of the contract is the market, being illusory to imagine its function from the control of its content, of its clauses and the protection of the weak contracting party, based on private autonomy and the Constitution. In the Brazilian case, the social function of the contract has other contours, because I believe that the market forms the set of values of the economic function of the contract, which has always existed and always will while a constitutional rule prevails over the autonomy of the parties and the free market. Now, by mere chance, if the Italian Civil Code did not define the contract in respect of property effects, would the contract stop comprising an economic functional operation? I do not think so. In Brazil, in an even more socially radical and committed way, I contend that the contract can only have its economic effects confirmed if such effects respect a certain social function of the contract,13 whose general clause is provided for in Article 421 of the Brazilian Civil Code: Art. 421. The freedom to contract will be exerted on the basis and within the limits of the social function of the contract. Due to abstract and general judgments, the debate between the strong and the weak of the market still remains, especially in developing countries, whose contract, in my opinion, is the most perverse instrument of social domination, since it disguises, by means of a legitimate

11 P. Nalin & H. Sirena, Da estrutura à função do contrato: dez anos de um direito construído (estudos completos), available from . 12 R. Sacco & G. De Nova, Trattato di diritto civile. Il contratto, 3rd edn, Torino, UTET, 2004, t. 1, p. 28: “La funzione sociale del contatto e il mercato”. 13 P. Nalin, Del contrato: concetto post moderno (alla ricerca della sua formulazione nella prospettiva civilecostituzionale), Porto, Juruá, 2013, pp. 197-209.

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legal institute, the full dominance of poor masses by the lords of the market, normally financial institutions, media and technology companies. But this problem of abstraction is not a sad privilege of developing countries, because the same applies on the European scene and the process of drafting a European Contract Code. This is because the abstraction has always an ideological connotation of neutrality and this, in turn, tends to favour the interests of the market players and prejudice singular contracting parties, citizens and consumers, as Guido Alpa14 alerts. Perhaps, more complex than defining a European codification model, between a singular law for all Europeans (monolithic code) and a minimum and solid legal basis (legal frame), which complies with the local laws and creates a strong network between them (uniform contract law), is to define the ideology behind this new regulation. Will their ideology be founded on market law or will a fair contract law be proposed, which respects the man and the environment, an ideology based on a sustainable contract? In this field of inquiry, the international businesses bring a historically perverse component, which is the abstract connotation of formal equality between the contracting parties. One could imagine that the power bargain of the parties in such a high level of business is equivalent, because the obligations are substantial, usually between entrepreneurs and traders of international status, such as oil companies, automobile and aircraft manufactures etc. However, the reality is beside this certainty, as the market and the international business become more and more popular each day, especially because of contracts executed in chain or sub-contracts. It should not be assumed in an absolute way that businesses are equitable only because the subject of the contract is of significant value or is international. For instance, a small producer of buttons from Argentina sells its product to a major brand of clothes from Italy to be placed on their products and sold around the world. We are before an international trade contract, governed by the UN Convention on International Sale. The seller is vulnerable to the purchaser, on the factual and economic perspectives, and there is no negotiation equivalence whatsoever. Moreover, before a non-exceptional reality of differences between contractual powers, the institute of the General Conditions of Contract is becoming increasingly more common in international business, so called adhesion contracts in Brazil, in honour of the French tradition, or standard terms or standard conditions in the countries of the common law. The introduction and the increasing use of such standard terms reveal the absence of material equality between international contracting parties and, as a consequence, the predominance of one’s will over the other, as we see in national contracts. However, the discussion forums on a proposal to balance or rebalance international contracts are limited or almost non-existent, when, at the end, the contract is unfair or 14 Alpa, 2007, supra note 5, p. 11.

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unbalanced to one of the parties, prevailing the dogma of the pacta sunt servanda or the binding force of contract in this area of law. The dogma of freedom of contract has already been somewhat mitigated for the national contracts, in view of a reality of unequal and vulnerable contracting parties, considering all the national and transnational law on consumer rights that has been produced worldwide since the 1970s (20th century). The very concept of contractual justice has changed with the massification of contracts. Before, if the fair contract was the enforced contract (pacta sunt servanda), today, the concept of contractual justice rests on equity, being the act of enforcement as important as the means by which it occurs. For this reason, as well as in national contracts, it does not seem very reasonable to believe in the existence of a single model or concept of contract, because the same fact that caused the conceptual revolution of national contracts, with the introduction of consumerist rules, for example, can be found in international contracts, which is the possible factual, economic or legal inequality between contracting parties. In other words, if contractual vulnerability has led to profound changes related to principles and interpretation of national contracts, the same can be suggested for the international ones. In any way, the solutions arranged to resolve the crisis of the classical contract may not be simply transferred to international contracts, although an area of influence and dialog between them can be observed. In broad lines, national systems have sought to move the importance of the formative elements of the contract to assign greater weight to a new concept of justice, based on the principle of fairness. In the Brazilian case, general legislative relevance began to be assigned to the principle of objective good faith since the Code of Consumer Protection (1990), having the Brazilian jurisprudence welcomed not only the good faith, broadly speaking, but also began to admit variations of good faith, after the Civil Code of 2002, on the basis of the venire contra factum proprium15 and the Tu quoque.16 The Brazilian doctrine has also been admitting the

15 The venire contra factum proprium finds support in situations in which a person, for a certain period of time, behaves in a certain way, creating expectations in another person that his behaviour will remain unchanged. Such expectation determines the other person’s behaviour, who acts in good faith. Suddenly, the holder of the right changes his posture, also requiring a different behaviour from the other, which is contradictory. 16 A.M. da Rocha & A. Menezes-Cordeiro, Da boa fé no direito civil, Coimbra, Almedina, 2007, p. 837: “Traduz, com generalidade, o aflorar de uma regra pela qual a pessoa que viole uma norma jurídica não poderia, sem abuso, exercer a situação jurídica que essa mesma norma lhe tivesse atribuído. Está em jogo um vector axiológico intuitivo, expresso em brocardos como turpitudinem suam allegans non auditur ou equity must come with clean hands. A sua aplicação requer a maior cautela. Fere as sensibilidades primárias, ética e jurídica, que uma pessoa possa desrespeitar um comando e, depois, vir exigir a outrem o seu acatamento. Não é líquido, contudo e sempre a priori, que um sujeito venha eximir-se aos seus deveres jurídicos alegando violações perpetradas por outra pessoa.”

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17 There are several hypotheses of estoppels, being the contractual one more usually called ‘promissory estoppel’. It directly impacts one of the funding principles of contractual law of the common law, since the promise of the declarant subtracts from the consideration from the contract. It can only be used as an exception (defence) and never as a claim (‘used as a shield not as a sword’). In addition, the promise must be made by words or behaviour, clearly and without ambiguities, as taught by M. Furmston, Law of contracts, 12th edn, London, Butterworths, 1991, pp. 99-103. 18 S. Greenberg, C. Kee & J.R. Weeramantry, International commercial arbitration (an Asia-Pacific Perspective), Cambridge University Press, Cambridge, 2011, p. 167. 19 R. Sacco, ‘Does contract law have a future?’, in K. Boele-Woelki & W. Grosheide, The future of contract law, Austin, Kluwer, 2007, pp. 109-110.

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PECL Article 2:105 (4) A party may by its statements or conduct be precluded from asserting a merger clause 83 to the extent that the other party has reasonably relied on them. Article 2:106 (2) A party may by its statements or conduct be precluded from asserting such a clause to the extent that the other party has reasonably relied on them. This renewal of the contractual dynamics, as provided for in national laws and international sources, implies the current operational description of the effects of the contract, aimed at the idea of a cooperative relationship between the parties. And in the Brazilian case, greater emphasis is given to good faith, which is assumed as an instrument of the social function of the contract. In Brazil, the large hermeneutic arc founded in good faith can be applied to civil contracts and to consumer contracts, with some restrictions regarding business contracts, according to the most recent jurisprudence of the Brazilian Superior Court of Justice. But could all this collection of new principles serve as a source for fairer or more balanced international business? Would good faith itself, a great contract humanizing principle, so to speak, have the same relevance for international contracts as it has for the national ones? Could international contracts, which somehow portray the new lex mercatoria, be endowed with the cooperative function? And even more specifically, to what extent can such contemporary contractual principles, whose core is good faith, determine the inclusion of ethical clauses in international contracts? Let us see where the contemporary contractual principles lead us. In the case of good faith and international contracts, it is essential not to lose sight of the fact that, symbolically, we are before the encounter of two worlds, the common law and the civil law, worlds which understand good faith differently, without denying it, though. And much to the contrary of what one might imagine, the good faith is an angular principle of the North American common law, although it finds more limitations in the British common law, in which it is used in a concrete and casuistic way, being the hypothesis of estoppel.

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The application of good faith in contracts governed by the North American common law20 stems from its explicit reference in the two more relevant normative sources (l.s.), so to speak, of that system, consecrating the jurisprudential experience: The Restatement (2d) Contracts, Section 205 Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. Uniform Commercial Code (UCC), Section 1-203 Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement. As Robert S. Summers21 explains, an effective development in case law regarding the adoption of good faith by North American courts was observed, since the editing of the first Restatement on contracts, promulgated in 1932, and the second Restatement officially, promulgated in 1981. In the meantime, the UCC was issued, which, in 1968, presented the writing transcribed herein and eventually influenced the second Restatement. The same author highlights that before 1980, the American literature had not more than 300 cases with a judgment based on good faith and that 12 years later, in 1995, there was more than 600 cases. In fact, since 1963, E. Allan Farnsworth has been working with concepts relating to good faith and the UCC. In 1990, the same author noted in his Farnsworth on Contracts the classic lesson that has been repeated in subsequent editions22: The concept of good faith has in a relatively few decades, become one of the peculiarly American cornerstones of our common law of contracts. One party’s acting in bad faith may amount to such a breach as will not only subject that party to an action for damages but will excuse the other party’s remaining duties of performance.

20 The limitation of the research to the North American common law is justified because England is not a signatory to the CISG, so the British approach to good faith are restricted to the domestic field of such system, being uninteresting to the present study. Besides, the British Law does not recognize good faith as a duty imposed to the parties of a contract, so that they should negotiate and act accordingly. 21 R.S. Summers, ‘The conceptualism of good faith in American contract law: a general account’, in R. Zimmermann & S. Whittaker [Coord.], Good faith in European contract law, Cambridge University Press, Cambridge, 2000, p. 120. 22 A.E. Farnsworth, Farnsworth on contracts, Vol. 2, 3rd edn, Austin, Kluwer, 2004, p. 393.

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Thus, currently, it is mythological and devoid of sense to debate the application of good faith in contracts governed by the North American common law, once it is a consecrated principle in jurisprudential, doctrinaire and even normative levels. The limitation of the use of good faith in international contracts comes, then, from civil law itself, because since the CISG, a wide-ranging debate has been established on the extension of the use of good faith, on the meaning and limit of its employment, if: (A) exclusively, as a canon of interpretation of contracts or (B) also as a source of contractual duties, in promotion of the duty of cooperation, as it is usual in national systems. I would draw your attention to Article 7 (1) of the Convention: Art. 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. Although there is an endless debate on the topic, it prevails in the specific doctrine on the CISG that “it has been repeatedly declared that good-faith only governs the interpretation of the Convention and does not create obligations between the parties to act in good faith”.23 In fact, it is worth asking: if good faith, this great humanizing principle of national contracts, have such a limited reach in international business, which would be an acceptable legal standard so that we could have more equitable and ethically compromised international contracts?

19.4

Ethical Standard in International Contracts: International Contracts and Human Rights

19.4.1

Business and Ethics: A Possible Approximation?

The much-feted contractual freedom, whose roots are very deep in private international law, stimulates thoughts like the following: The business of business is business (Milton Friedman. The social responsibility of business is to increase its profits).

23 I. Schwenzer, C. Fountoulakis & M. Dimsey, International sales law: a guide to the CISG, Oxford, Hart, 2012, p. 48.

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Companies only social responsibility was thought to be to use their resources to make profits for their shareholders (Milton Friedman. Capitalism and Freedom). Business and ethics are maximized values by orthodox liberal economic policies. We have had the opportunity to watch the debate between the values of efficiency (economic) and equity (legal) proposed by the schools that are dedicated to Law and Economics. According to the school of New Haven, softer than the school of Chicago, and in the opinion of Guido Calabresi,24 considering studies on civil liability, even if an approach to the rules of the market would be possible, in the balance between life and law, any decision can never be only monetary, i.e., based on rules of market efficiency.25 We cannot simply accept efficiency as a legal standard, whilst it is economic. But what about ethics? Would it be a legal standard or only a philosophical one? The liberals say that ethics, which, from the perspective of international business, is expressed by human rights, would be a mission of the state and its public policies, in which companies cannot or should not interfere. In fact, even the international and national laws that safeguard human rights are intended to discourage the abuse of state power against man, in a vertical direction, as second generation fundamental rights, so that the transnational corporations and their business practices are not affected.26 But are the policies established by the states efficient to impede the violation of human rights? In addition, considering that such public policies actually exist, which states are currently equipped to enforce them? I fear that few states are really committed to human rights, especially in its business interface, and that an even smaller number of states is capable of forcing compliance with such policies. Although the state is the main responsible institution for such protective initiatives, fortunately, some of the large international companies started to establish standards of ethical acceptability for the performance of their business, which has brought statistically proven impact on reputation and profits. As stated by Claude Fussler,27 76 publicly traded companies, which are publicly committed to social responsibility policies, according to the Dow Jones Sustainability Index

24 G.B. Portale, Lezioni di diritto privato comparator, 2nd edn, Torino, Giappichelli, 2007, p. 146. 25 Id. 26 National Initiatives with certain international reach and with reflections on transnational companies are being promoted in the United States: ATCA – U.S. Alien Tort Claims Act; RICO – Racketeers Influenced and Corrupt Organizations Act; TVPA – Torture Victim Protection Act. The ATCA authorizes U.S. District Courts to receive claims of recovery from foreigners, for damages arising from acts contrary to the human person, caused in violation of national laws or treaties signed by the United States. 27 All statistic data were extracted from the text of I. Schwenzer & B. Leisinger (I. Schwenzer & B. Leisinger, ‘Ethical values and international contracts’, in R. Cranston, J. Ramberg & J. Ziegel, Commercial law challenges in the 21st Century, Uppsala, Iustus Förlag, 2007. pp. 249-275).

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(DJSI World Index), had a 3.7% over-evaluation of their stocks and shares between June 2001 and June 2004, in line with the Morgan Stanley Capital Index (MSCI), which demonstrates that the social reputation of a company can be converted into profits. But the profit that a sustainable business produces to a transnational company may not be the only incentive for this correction of conduct. The severe punishment for acts against man by means of national and international cuts; the overexposure of companies that infringe such rights of man by an increasingly active media; the complaints made by non-governmental organizations (NGO’s), certainly contribute to the formation of a new social and market awareness of ethical compliance. For this reason, an opposite approach will demonstrate that an unethical behaviour does not generate profits: “if you think compliance with ethical criteria is expensive, try non-compliance”, challenges Klaus Leisinger. Among several cases tried over the past few years, I would point out that in 1984, the Carbide Corporation was ordered by the Supreme Court of India to pay US$470 million for having released methylisocaine into the environment, causing the death of 15,000 people and contaminating other 170,000. Of course, the force of a heavy condemnation requires the change of behaviour of any company. Another factor that reveals how ‘reputation and ethical behaviour pays’, from the perspective of companies’ investors and shareholders, is the large sum of money which is being invested in social responsibility. Until 2003, European funds called SRI – socially responsible investment – which accumulated more than 336 billion Euros from European investors. In the United States, in 1999, this investment was US $2.16 trillion, having risen to US $2.29 trillion in 2005! Some private initiatives may hereby be remembered: A. Business Leaders Initiative on Human Rights (www.blihr.org). B. ISO 14000, the specific ISO family for environmental issues, implemented in 760,900 organizations in 154 countries. C. SA8000 certification, from the Social Accountability International (SAI), which sets out the commitment of companies with human rights. D. Countless companies that publicly announce its commitment to a sustainable environment, whose products are made in compliance with environmental rules and human rights. Another initiative in favour of the balance between business and ethics was launched by the UN (UN Global Compact) at the World Economic Forum in Davos, in January 1999, when Kofi Annan invited the present entrepreneurs to commit to the ten principles on human rights, labour, environment and anti-corruption acts (Global Compact principles). The Global Compact had, in January 2006, 2,774 participants, many of whom with more than 50,000 suppliers.

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Such principles of the UN are of voluntary membership and do not impose any sanction to the participants. They are distinguished for being a sort of ‘soft law’. The only obligation is to make their business practices transparent in the so-called ‘Communication on Progress’ (COP), and if there is no publication for 2 years, the member is classified as ‘inactive’. According to studies, 15% of the members actually performed the change of suppliers or other business partners because of issues concerning human rights, environment and labour aspects. As a consequence of this new global trend on ethical contractual standards or protective behaviours of the rights of the human person, many international contracting parties have been determining ethical and environmental audits of their business partners before the execution of the contract, to ensure that these new partners follow acceptable standards. Currently, nothing seems to be worse for the finances of a large corporation than discovering that in its chain of suppliers, there is one that violates human rights, with the employment of child or slave labour. Or, still, when the worker employed in this chain is devoid of resources inherent to work such as housing, food and freedom of speech. In the same way, when the product or service is explored in violation of environmental regulations, being such practice abominated in the recipient market of the product or service purchased. Slavery must be seen in a contemporary perspective of profound exploitation of workers, due to the abuse or denial of their fundamental rights, to the payment of degrading wages or less than the due amount, according to the national legislation, or to the refusal to offer acceptable conditions of safety and hygiene in agreement with the applicable law. As a result of commitments with a sustainable contract, from an environmental and human point of view, ethical contractual terms, so to speak, began to be inserted in private and public contracts, which, of course, may be breached. Therefore, the question that arises is to identify the legal nature of such ethical contractual clauses, in order to determine the consequence of its breach and the remedies available to the innocent contracting party. In other words, what would be the material and procedural solutions available to the chain purchaser who receives a product or a service not in conformity with the ethics clause? Furthermore, it is not uncommon for a buyer to pay more for a product that follow biological and organic specifications. The same does not apply to products which are manufactured in places with unacceptable hygiene and safety conditions or which employs child labour. Therefore, the certification of origin of products and services, especially in chain relations, may bring greater costs to the producer, which is perfectly acceptable, because, in some sectors, such certifications of origin began to be a requirement of the consumer markets. For instance, the scandal involving a large company of chocolates, known as CACOA NOMICS, and the employment of slave labour in the Ivory Coast.

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To answer this question, and in view of the magnitude of international contracts, it is necessary to do a methodological cut, so that I will deal with the international sale of goods, excluding contracts whose object is a service. When it comes to international sales, the naturally adopted legal framework is the UN Vienna Convention on the international sale of goods (CISG), because it is presently undertaken by 81 countries, including Brazil and Switzerland. Before we look at the CISG and its remedies, it is important to highlight that the Convention was designed decades before the movement that today is directed to contemplate ethical contractual standards and, thus, one may not require the CISG to provide a timely and accurate answer on the subject. In fact, the CISG applies to concrete cases in a systemic way, often related to principles, in view of ethical contractual clauses, which can be expressly or tacitly breached by the contracting parties. Let us look at what the Convention offers us, initially about the legal nature of the noncompliance with the contract or the performance against the contract:

19.4.2

The Lack of Conformity of the Product (Article 35 (1) (2) (b)) CISG

Art. 35 (1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. (2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: (b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgment; In the hypothesis of the existence of a specific contractual clause reporting the importance of ethical standards or even of implied terms, the lack of conformity lies in number (1), Article 35 of the CISG. In turn, the implied contractual conditions (implied terms) comprise a constellation of contemporary international usages and practices, which serve as interpretation rules for international business. It seems excessive to me, for example, to require the parties to establish a prohibitive clause of the use of slave labour, otherwise the seller would have legitimized his aggressive practice against human rights. The prohibition of slave labour

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is an implied negative obligation in any contract; however, it may be included in an expressed clause. Child labour deserves a special connotation, since it may prove culturally and economically indispensable in some countries, despite being despicable and reprehensible to Western people. For this reason, an ethics clause which forbids child labour needs to take into account such peculiarities, by means of the broad exchange of information between the parties. In any case, the lack of respect for such ethical standards affects the quality of the product, as this should be widely understood in all its dimensions, even because the violation of these standards rarely leads to the physical uselessness of the product. Exemplifying: the delivery of footballs sewn by children of a young age does not remove the utility from the product, although it violates an ethical standard, impacting on its value and even in their marketing. The ball will be useless to the contract and the purchaser, although functionally useful. The most critical situation is when there is no clause or detail in the contract, even if not sufficient, about the requirement of the ethical quality of the product. In this situation, number (2), Article 35 of the CISG, applies. The hypothesis we are analyzing is very subtle, because it is not, for instance, the trade of an organic product which depends on certification by the authorities of the seller’s country in order to demonstrate compliance with the contract, in which the quality of the product was expressed and mandatory to the seller (Oberlandesgericht München – Germany – NOVEMBER 13, 2002 – in: CISG-online 786). In this very particular case, it is recommended that the seller should take into consideration the purpose the buyer wants to give to the product or the market to which it is intended. In any way, the purchaser should also let the seller know, expressly or implicitly, the destination of the product or the market in which it will be sold. The implied information is made evident, for example, when the buyer sells the final product only in markets that demand high standards of ethical requirements in its production. Likewise, when it is clear in its ads that it only works with organic, bio-sustainable or free of child labour products, for example. In Brazil, we have an example which transits between the ethical and the religious. A portion of the Brazilian exports of cattle and poultry is intended for Islamic countries and also for Israel. Such people only consume animals which are inspected by religious authorities, following ethical and religious standards for the slaughter. The Brazilian seller must know the peculiarities of the purchaser and the market for which the slaughtered animals are intended; otherwise, it may be charged with lack of conformity of the product and non-performance.

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It is obvious that a solution is not always simple, because in many cases, the products are finalized and distributed in the market after a long chain of sales and resales, and the final purchaser is a simple assembler of things and goods produced by sub-contractors. Even so, I understand that the buyer will always be objectively responsible for the product it introduces in the consumer market – a conclusion which have been drawn from national consumer protective laws, not the CISG (Articles 2 (a) and 5). Following the solutions of the Convention, when the lack of conformity is identified, the buyer must inspect the product and notify the seller in accordance with Articles 38 (1) and 39 (1) (2) of the CISG: Article 38 1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. Article 39 (1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. (2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this timelimit is inconsistent with a contractual period of guarantee.

19.4.3

Possible Remedies

The CISG provides three levels of solution for the hypothesis that we are analyzing: 1st level – the unilateral termination or resolution of the contract (Articles 49 (1) (a) and 25); second level – damages or recovery of damages (Articles 45 (1) (b) and 74); third level – price reduction (Articles 45 (1) (a) and 50).

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19.4.3.1

The Unilateral Termination or Resolution of the Contract (Articles 49 (1) (a) and 25)

Article 25 A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. The unilateral termination or resolution of the contract must be understood in the context of the CISG, which differs in degree and effect from the continental European systems, which do not distinguish the degree or the importance of the non-performance, if it is substantial or not. And as a result of non-performance, such legal systems regularly offer to the innocent contracting party the right to terminate the contract, with or without recovery of damages, “[…] even in case of minor defect of the goods”, as taught by Professor Peter Schlechtriem.28 When comparing the CISG to the British legal system, the same author explains: The CISG, on the other hand, allows avoidance only in case of a very serious breach, for which it coined the term ‘fundamental breach’ and tried to define in Article 25. The option of the CISG is the maximum preservation of the contract, and its resolution is the last legal option. As a consequence, the principle of preservation of the contract ended up composing the table of principles of the CISG, which is known in several national legal systems. In addition, in view of the international character of the contracts governed by the CISG, the importance of preserving international business, especially exporting and importing, and the peculiarities surrounding traders of various legal cultures, the termination of the contract is the last option offered by the CISG and, therefore, non-performance (breach) is not enough or the end of the contract to be determined, but such non-performance must be substantial (fundamental breach), resulting from an essential failure in the performance (substantial deprivation). But if the parties expressly or implicitly contracted ethical standards of behaviour, its violation may involve fundamental non-performance (substantial breach), once the simple 28 P. Schlechtriem & P. Butler, UN law on international sales, Berlin, Springer, 2009, pp. 97-98.

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recovery of damages cannot always sanction the violation of the contract properly. The termination of the contract might sometimes be the only way the innocent party can show the market that it does not share the practices of an ethically unsustainable contract. In addition, if the buyer is not allowed to terminate the contract, its image may be associated with a trader that violates ethical standards of behaviour, which is not acceptable. In the original approach of the CISG, which takes into account only economic effects of the contract, the configuration of the fundamental breach of contract depends on a caseby-case analysis, once the breach of contract is an effect admitted by the Convention only in exceptional cases. However, I believe that in the event of violation of ethical obligations, expressed or implied, the strictness of Article 25 can be mitigated. 19.4.3.2

Damages or Recovery of Damages (Articles 45 (1) (b) and 74)

Article 45 (1) If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may: (b) claim damages as provided in articles 74 to 77. The contracts governed by the CISG can and should include a clause of anticipated settlement of damages, which configures a penalty clause. However, in the case of obligations of ethical nature, non-quantifiable, which may potentially be violated, the anticipated settlement of damages or the establishment of a penalty rule normally reflects an insufficient or excessive value for the contractual tort. That is the reason why we refer to Article 74 of the CISG: Article 74 Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. On the basis of Article 74, the damages will be the loss and the lost profits, which may also be current or future. But particularly in relation to lost profits, they need to be predictable for the seller, at the time the contract was executed, in case it is breached. In other words, for the CISG, the quantification of the damage suffered by the buyer is based on the perspective of the seller.

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Let us imagine, for example, goods delivered to an international chain of clothing stores. It was discovered, by means of a news program on American network television, that the clothes were made by a supplier employing slave labour. The buyer chain of stores returns the clothes to the seller and asks for damages, alleging the violation of basic ethical standards against the dignity of the human person. The extent of such claim could reach the price paid and the injury caused by frustrated sales along its world chain, but it would hardly comprise a recovery for the loss of value of shares of the same company on the stock market. It can be observed that Article 74 has as function the calculation of damages, in which it is supported by Article 76 (purchase of replacement, compensatory sale and initial term of indemnity) and Article 77, which introduces the duty to mitigate the damages to the party that claims recovery. In any event, the responsibility will be always objective, called by the CISG authors of no-fault rule, and exceptions to the rule may be found in the hypothesis of Articles 79 and 80 CISG. 19.4.3.3 Price Reduction (Articles 45 (1) (a) and 50) Price reduction is a remedy available to the buyer, whose hypothesis is perfected if it resells the good, although defective, and whose defect implies a loss because the sale was not as profitable as expected. Thus, the price to be paid to the seller shall be reduced in proportion to the loss of the buyer and considering the price of resale. It is an intermediate hypothesis between a full recovery of damages and the termination of contract, but which has, according to the CISG, damages of an essentially patrimonial nature, while the damage hereby analyzed, are of immaterial nature, with a possible material impact, which is eligible for compensation in view of the CISG. Let us look at Article 50: Article 50 If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price. However, this seems to be a very limited alternative considering the scenery of violation of any ethical provision, although it cannot be ruled out a priori.

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19.4.3.4 The ‘Remedies’ of the Seller The same scenery of damages to the image and the business of the purchaser can be verified by the seller, in case the product delivered to the purchaser is used against or to the detriment of the human person, in a line of what is called dual-use goods. Thus, a deviation in the intention of the buyer may determine the use of the object of purchase of a chemical product, for example, in a biological weapon or in agricultural defensives which are harmful to the health of farmers. It is obvious that such a situation would be unacceptable and the great difficulty lies in the quantification of the seller’s damages, since the CISG does not refer to them, because, as discussed, the Convention deals only with damages of the purchaser. Perhaps, it would be more reasonable to determine the compensation with the same criteria established in favour of the buyer, if this is not the hypothesis of avoidance of the business, in view of the legal system indicated by the rules of private international law. 19.4.3.5 Ethical Hardship? A final argument on the CISG is about the hypothesis of the state in which the seller or buyer is located being proved to be a violator of human rights after the execution of the contract. Thus, the contracting party would be buying or selling to a market which tolerates the violation of human rights, whose political practice only came to the fore after the execution of the contract. In the international context, the supervening legal impossibilities of execution are allocated to hardship clauses. Nevertheless, the CISG does not comprise a rule on hardship nor adopts the theory of change of circumstances, more known to us as the theory of the basis of business. Such lack of provision leads some authors to indorse the complete impossibility of applying the theory of hardship to contracts governed by the CISG, while others believe that the Vienna Convention adopted the theory, but not expressly, and in order to be applied, the technique of integration, provided for in Article 7 (2), must be used. In view of such controversy, a solution can be suggested by means of Article 79 of the CISG and for the account of an apparent impediment in the execution of the contract, although the impediment is defined as an external circumstance or exogenous cause (physical or legal) which prevents the debtor from performing the obligation. It is not exactly the case, which is why institutes such as force majeure and even an innovative ethical hardship may be raised to initially suspend the effects of the contract and then terminate it, before the real hypothesis.

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19.5

Conclusion

All of us seek a sustainable contract, because a contract that serves only the egoistic purpose of exploitation of man by man is no longer accepted. This process of mutation of the contract, which arises from its own crisis, has been being improved in national models for more than 40 years. In turn, international contracts, which in a way are a reflection of globalization, can no longer be treated as if they did not imply some positive or negative effect in the life of every citizen. The comfortable neutrality with which such contracts are being interpreted is like the blindness that prevents us from seeing human exploitation and degradation of the environment. In addition, the current design of contractual cooperation, founded in principles such as good faith and its variables, which seeks to build a new concept of contractual justice, does not seem to present an acceptable response to civil law itself. The enforcement of ethical conducts and clauses on large international negotiators is a mission that in ultima ratio depends on the imposition of the consumer market, and their infringement results in contractual non-performance fixed by the CISG and in the remedies provided for by the Convention.

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Beyond CISG: Agricultural Production under Contract*

Anna Veneziano

20.1

Introductory Remarks

The choice of contract farming, or agricultural production under contract, as topic for a contribution in a conference mainly dedicated to the UN Convention on International Sale of Goods (CISG) was prompted both by the general title of the conference (the CISG and beyond) and the focus of the specific panel to which it belonged (fairness in contract law). As to the first point, the reference to what lies ‘beyond’ CISG in the realm of contracts invited speakers to reflect upon areas in contract law where some degree of further harmonization may be useful. If we take uniform law in its widest sense, including the promotion of a better understanding of certain common contractual arrangements and the development of standards and best practices, contract farming represents today one of the most interesting fields of work and research, as witnessed by Unidroit’s project towards the preparation of a Legal Guide on Contract Farming (Legal Guide), in cooperation with the two UN international agricultural development agencies based in Rome: the Food and Agriculture Organization (FAO) and the International Fund for Agricultural Development (IFAD).1 With regard to the subject matter of the panel, contract farming is undoubtedly connected to issues of fairness under various perspectives, as will be seen in more details below.2 On a different plan, presenting such a project will offer the opportunity to look, however, briefly, into some more general issues of law making by intergovernmental organizations. The Legal Guide falls into the category of non-binding instruments containing a description of emerging contractual practices and discussion of critical legal problems arising in their * 1

2

All web pages were last accessed in September 2015. The setting up of a study group for the preparation on an international guidance document on contract farming arrangements in cooperation with FAO and IFAD was authorized by the Unidroit Governing Council at its 91st Session in 2012 (joint meeting of the General Assembly (70th Session) and the Governing Council, Rome, 7-9 May 2012, Unidroit 2012 C.D. (91) 15, at 97) and is now part of Unidroit’s 2014-2016 Work Programme (available from ); see also below, Para. 2 for more information on the history and development of the project. Para. 6.

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concrete operation and in the interaction with existing regulatory frameworks. It also aims at giving soft directions and advice to build a sound and balanced contractual relationship. A question may arise in this connection as to what are the conditions under which such an instrument may indeed fulfill its intended purpose and concretely contribute to the enhancing of benefits for all parties.

20.2

History and Development of the UNIDROIT/FAO/IFAD Project

In 2009, Unidroit put on its Triennial Work Programme for the first time a new line of research specifically devoted to the interplay between private law and economic and social development, with particular regard, inter alia, to agricultural production and regulation.3 Following an exploratory colloquium held in Rome in November 2011,4 as well as preparatory research within the organization and consultations with the two UN agencies FAO and IFAD that were already involved in field work in contract farming operations in various parts of the world, the idea of preparing a Legal Guide in this area took form. Unidroit set up a Working Group bringing together international scholars, the two partner organizations as well as representatives of the interests of farmers and agribusiness companies.5 The Working Group met for four sessions,6 the latter of which, held in November 2014 and preceded by a round of Internet consultations that reached out to a variety of interested stakeholders, including governments,7 discussed a first complete draft of the Legal Guide. In addition to the meetings of the Working Group and the Internet consultation, several regional workshops were held in key areas of the world (South America, in cooperation with the World Farmers Organization,8 South-East Asia9 and Africa,10 with

3 4

Unidroit 2009 – C.D. (88) 17, Paras. 87-98. Promoting Investment in Agriculture: Private Law Aspects, Rome, 8-10 November 2011. The Acts of the Colloquium were published in Uniform Law Review, Vol. 17, Issue 1-2, 2012, pp. 1-400. 5 For a list of the participants in Working Group, see the Reports of the Group meetings, available from . 6 First meeting, Rome, 28-31 January 2013; second meeting, Rome, 3-5 June 2013; third meeting, Rome, 36 March 2014; fourth meeting, Rome, 17-20 November 2014. The Reports of the meetings are available from . 7 The Internet consultation process took place from 24 September to 31 October 2014. Interested stakeholders were invited to submit comments on the Zero Draft of the Legal Guide, which was made available on the Unidroit Web site. 8 Contract Farming Today, The Right Equilibrium…, Buenos-Aires, 25 March 2014 (Report available from ). 9 The Legal Dimension of Contract Farming. Promoting Good Contract Practices between Producers and Buyers in Contract Farming Operations in the Asian Context, Bangkok, 26 September 2014 (Report available from ). 10 The Legal Dimension of Contract Farming, Promoting Good Contract Practices between Producers and Buyers in Contract Farming Operations in the African Context, Addis-Ababa, 31 October 2014 (Report available from ).

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the support of an IFAD grant) as well as in Rome (the latter focusing in particular on the private sector),11 in order to gather comments and inputs from stakeholders representing diversified interests. The finalized text of the Legal Guide was submitted for consideration and approval to the Unidroit Governing Council in May 2015 and released jointly by Unidroit FAO and IFAD on 28 July 2015.12 Mindful of the importance of making the Legal Guide as accessible as possible to the intended users, the sponsor organizations will continue their cooperation and develop implementation documents and guidance instruments ready to be used in practical operations.13

20.3

The Scope of the UNIDROIT/FAO/IFAD Legal Guide on Contract Farming

One of the preliminary issues discussed within the Working Group was, not surprisingly, the description of the contractual arrangement commonly referred to as ‘contract farming’, or ‘agricultural production under contract’, for the purpose of defining the scope of the Legal Guide. Contract farming is usually described, from an economic perspective, as a ‘value chain management system’ that allows a more efficient organization and coordination of production, processing and marketing of agricultural commodities.14 In this wider meaning, it encompasses several stages from production to final consumption that are usually organized through a series of interrelated contracts or through other means of legal and economic integration and/or coordination. The Legal Guide is, however, primarily concerned with the specific bilateral contract farming relationship between a ‘producer’ (a farmer producing agricultural commodities, either as an individual or through a cooperative or other associative venture) and a ‘contractor’ (a purchaser, investor, exporter and/or food processor, typically – though not necessarily – an agribusiness company

11 Good Corporate Practices in Contract Farming – Consultation Workshop, Rome, 10 October 2014 (Report available from . 12 The final text of the Legal Guide was released both in book format and electronically in July 2015 and is available on the Unidroit Web site from . 13 See Legal Guide, supra note 12, Preface, p. xvi. 14 See, e.g. the definition in C. Da Silva, The Growing Role of Contract Farming in Agri-Food Systems Development: Drivers, Theory and Practice, Agricultural Management, Marketing and Finance Service, FAO, Rome, 2005: “A form of supply chain governance adopted by firms to secure access to agricultural products, raw materials and supplies meeting desired quality, quantity, location and timing specifications, whereby the conditions of exchange are specifically set among transaction partners by some form of legally enforceable, binding agreement.” A common way to define contract farming is also as a middle ground between spot contracts and full vertical integration, see, among others, P. Vavra, Role, Usage and Motivation for Contracting in Agriculture, OECD Food, Agriculture and Fisheries Working Papers No. 16, OECD Publishing, 2009, p. 5.

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Anna Veneziano included in an international value chain).15 Such a relationship presents certain original features that are remarkably uniform wherever it is used, though the impact of domestic laws and practices as well as the different economic environment may introduce important variations and additional layers of complexity. In order to be able to encompass the variety of forms that these arrangements can assume, the Legal Guide refrains from a strict definition and describes the typical obligations that would generally be considered part of agricultural production under contract. Typically, the farmer undertakes to produce and deliver to the contractor at a future time agricultural commodities (such as seeds, crops, livestock, aquaculture products, forestry, either to be used for human or animal consumption or for industrial purposes) in accordance with contractor’s specifications. In its turn, the contractor commits itself not only to acquire or in any case take delivery of a specified part or the entire production, most commonly against payment of a predetermined sum, but also, generally, to provide some level of input or control during the production process.16 Such an engagement may consist in the supply of physical agricultural inputs (e.g. seeds, fertilizers, pesticides, plants, animals, feed, medicines or other veterinary products), in the provision of technology (know-how and use of patents and intellectual property rights), in the supply of services connected to production or post-production activities or in other interventions (provision of instruction and training, supervision, monitoring and evaluation of compliance). Furthermore, the contractor may in certain circumstances provide direct financing to the producer, especially where large capital investments are needed but access to credit for producers is limited (e.g. because a security over land cannot be offered), and there are no specialized credit institutions for agriculture.17 The agricultural production agreement may well be integrated in a more complex structure involving other parties, including third-party input providers, third-party financiers or insurers, public entities. The Legal Guide focuses, however, on the bilateral agreement as such and takes additional players into account only in so far as their presence affects the rights and obligations as well as the remedies of the parties involved in the primary agreement.

15 Unidroit/FAO/IFAD Legal Guide on Contract Farming (see supra note 12), Introduction, Paras. 5 et seq. For a definition of ‘contract farming’ as ‘an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements’; see also C. Eaton & A.W. Shepherd, ‘Contract Farming. Partnership for Growth. A Guide’, FAO Agricultural Services Bulletin, No. 145, 2001, where different economic models for the structure of contract farming are discussed (in particular, the centralized, nucleus estate, multipartite, intermediary and informal models). 16 The provision of some degree of input or control over the production by the contractor is generally considered as a defining element of agricultural production under contract. See C. Pultrone, ‘An Overview of Contract Farming: Legal Issues and Challenges’, Uniform Law Review, Vol. 17, Issue 1-2, 2012, pp. 263-289 at pp. 277 et seq. 17 This may be especially the case when high value and high technology equipment or infrastructures such as irrigation systems are needed for production or for post-harvest operations, see Legal Guide (supra note 12), Introduction, Para. 10.

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This explains why the Legal Guide views contract farming as a sui generis relationship that is characterized by a quest for stability and by reciprocal interactions and need of cooperation between the two main parties. These typical characteristics of agricultural production under contract bear a relevant influence, as will be seen below, on the specific issue of contractual fairness and its treatment within the Legal Guide.

20.4

The Legal Framework for Agricultural Production Contracts: A Complex Interaction of Domestic and International Rules and Standards

While the value chain to which the relationship between producer and contractor is often linked may introduce an element of internationality and may involve the exportation of the raw or processed products, the bilateral relationship itself is typically governed by a domestic contract subject to a specific domestic law. As a result, CISG would generally not come into play as the applicable legal regime. Moreover, many contract farming arrangements are not even characterized as sales but use alternative contractual relationships that do not involve the passing of title from the producer to the contractor against payment of a price.18 The Legal Guide does, however, make reference in several instances to the approach contained in specific provisions of CISG and of the Unidroit Principles of International Commercial Contracts (UPICC)19 as recognized international instruments in the field of contract law. The applicable domestic law provides both the default regulatory framework and the mandatory rules that limit or direct party autonomy in this field. It is important to note in this regard that domestic law is not always characterized by simplicity of legal sources, and this is particularly true in the field of agricultural production when contracts are concluded with indigenous communities or individuals to whom customary rules may apply (e.g. regarding capacity of parties, validity of agreements and formal requirements, dispute resolution mechanisms). Moreover, contract farming is increasingly subject to rules that are developed at an international (or sometimes regional) level for the agri-food trade, concerning in particular intellectual property rights (for example, through WTO agreements), food safety and quality, labelling and certification.

18 See, e.g. with reference to the U.S. livestock market, N. D. Hamilton, Farmer’s Legal Guide to Production Contracts, The National Agricultural Law Center, University of Arkansas, 1995, available from . 19 Unidroit Principles of International Commercial Contracts, 3rd edn, Unidroit, Rome, 2010.

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The legal analysis contained in the Legal Guide takes this complexity of sources into account. It accompanies the reader through the ‘life cycle’ of the contract, from formation to parties obligations, remedies, exemption for non-performance and dispute resolution, referring not only to typical or recommended contractual clauses but also to models of default as well as mandatory rules within domestic law, especially when specific legislation concerning these types of agreements was developed.20 It also considers best practices and minimum internationally accepted industry standards when they offer solutions that are perceived as sound and balanced. This brings us to the issue of contract fairness that is the focus of the present panel.

20.5

Contract Farming and Contractual Fairness

Contract farming, due to its typical structure, has in itself the potential to bring about a more beneficial contractual relationship for both producers and contractors than, for example, simple spot sales in the open market. It may be further conducive to more general benefits, with positive economic but also social implications. The stable, usually long-term nature of the contractual relationship allows producers to rely on the contractor’s commitment to acquire the produce at a predetermined price and enhances predictability of income and protection from market fluctuations. This may be especially advantageous for producers but benefits also buyers or processors and represents an effective way to mitigate enterprise risks. Moreover, the typical feature of the contractor providing some degree of input in the producer’s activity may facilitate technology transfer and innovation, as well as compliance with food safety and environmental standards, be they mandatory or voluntary. This may, in turn, be conducive to increased food security. Finally, a very interesting aspect of this type of agreement concerns its potential role in providing alternative finance for production. The contractor typically commits itself to supply inputs (such as, among others, seeds, fertilizers, feed for animals etc.) or services relating to production and postproduction, as an advance on future deliveries. This becomes particularly important for the producer when obtaining upfront capital is either difficult or entirely excluded. Agricultural production contracts may, however, also involve potential risks. The type and level of such risks may vary depending not only on the specific commodity but also on the economic and social development of the producer’s country and the structure of the agricultural market. It may also depend on the risk allocation determined by the contract itself. While not all agricultural production contracts see parties that have different bargaining power, it is true that many such agreements are concluded between a farmer (or 20 Pursuant to a policy decision of the Working Group, the Legal Guide does not contain references to specific domestic legislative acts or judicial decisions but refers to regulatory models deriving from existing domestic laws.

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a group of farmers) in a developing country and an agribusiness company operating at a global level. In some instances, smallholders in very poor areas of the world are confronted with a counterparty that is much more sophisticated from an economic and legal point of view and is in the position to dictate onerous contractual conditions.21 The Legal Guide, in highlighting the critical problems that certain widespread contractual clauses may create for the weaker party, attempts both to raise awareness as to potential risks and to provide a soft guidance on to how to reach more balanced solutions when entering into a contract farming arrangements. In doing so, it fosters contractual fairness (in its meaning of fairness of express contractual terms as between the parties to the contract). The relatively long-term, stable relationship that represents a characteristic of contract farming arrangements, the interdependency of parties’ obligations and the need for parties to frequently interact with each other play a relevant role in how the Legal Guide addresses contractual fairness issues. The accent throughout the Legal Guide is on enhancing mechanisms of cooperation and risk sharing,22 especially, though not exclusively, effective in the case of problems in contractual enforcement and possibly with involvement of parties’ representative groups or associations. Many examples of this approach can be found in the Legal Guide. I would like to mention here one specific instance relating to the part of the Legal Guide on ‘Excuses from Non-Performance’.23 While all contracts may be affected by supervening events that arise after their conclusion and either prevent the performance of one party or render it more onerous, there are certain specific occurrences that may play a greater role in the case of agricultural production contracts and impact on the producer’s performance.24 Suffice it to mention natural events such as floods, draughts, abrupt climatic changes, insects or other plagues, epidemics. The Legal Guide covers excuses for non-performance in its Chapter 4, focusing in particular on the possibility for the parties to address the problem in advance and to introduce force-majeure or other risk mitigation or allocation clauses into their contract. In addition, the Legal Guide draws parties’ attention to the need to consider the relationship of any such contractual clause with the regulatory environment provided by the applicable law, 21 For a discussion of advantages and disadvantages of contract farming arrangements in the case of smallholders see (also for further references) A. T. Melese, ‘Contract Farming: Business Models that Maximise the Inclusion of and Benefits for Smallholder Farmers in the Value Chain’, Uniform Law Review, Vol. 17, Issue 1-2, 2012, pp. 291-306; see also M. Prowse, Contract Farming in Developing Countries – A Review, Agence Française Développement, February 2012, pp. 61 et seq. (available for downloading in French and English from the website of the AFD: ). 22 Contract farming itself is portrayed as a ‘cooperation model’, see, in particular, E. Rehber, Vertical Integration in Agriculture and Contract Farming, Working Paper No. 46, 1998, Food Marketing Policy Center, University of Connecticut, USA, available from . 23 See Legal Guide, supra note 12, Chapter 4, Excuses for Non-Performance. 24 See Pultrone, 2012, supra note 16, pp. 281 et seq.

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especially with regard to mandatory provisions, as well as the impact of insurance schemes, be they voluntary or imposed by domestic legislation.25 In considering such issues, the Legal Guide points to those contractual practices that are seen as best practices of cooperation between the parties. The inclusion of a notice requirement, for example, within a contractual force-majeure clause, enhances transparency and facilitates risk assessment.26 Other contractual clauses may help parties to continue in their relationship even when unforeseen circumstances impede or severely restrict performance. A clause in the initial agreement may provide for a right or a duty to renegotiate its terms upon occurrence of a specified event. The intervention of a mediation board, when independent or ensuring representation of both parties, or an analogous body may facilitate parties’ task and avoid abuse.27 Moreover, the Legal Guide underlines that in an effort to achieve a fair regulation, contracts may provide mechanisms to redistribute the risk of a force majeure event affecting only the producer, through partial compensation of loss by the other party.28 This may be limited to specific events such as natural catastrophes, or limited in time. Clauses expressly excluding any compensation for the producer, on the other hand, though reported in practice, are not viewed as a preferred route.

20.6 Conclusive Remarks: How Effective Can a Soft Law Instrument Be in Enhancing Contractual Fairness? The development of a soft law instrument such as the Legal Guide raises the more general question of how to ensure that some level of effectiveness is reached and that its goals are achieved in practice. This is of course linked to the purposes of the harmonized rules and to the identification of the potential users of the non-binding law. Generally speaking, a first important step to be taken by drafters of this kind of instrument concerns the involvement of potential users. Addressees of the instrument should be wisely selected, and primary players and stakeholders should be involved in some way or other from the start or at least early on during the preparatory work. For an instrument such as the Legal Guide, that essentially steers parties through the various stages of the contractual relationship with the aim of flagging out possible traps for the unwary and of facilitating the conclusion of balanced contracts, the primary players would 25 The relevance of insurance is addressed in other parts of the Legal Guide, in particular in Chapter 3, Obligation of the parties, Paras. 165-168. 26 See Legal Guide, supra note 12, Chapter 4, Para. 46. The Guide notes that for international commercial contracts, a similar rule is stated in Art. 7.1.7(3) UPICC and for international commercial sales in Art. 79(4) CISG. 27 See Legal Guide, supra note 12, Chapter 4, Paras. 54 et seq. The crucial role of alternative dispute resolution mechanisms and in particular mediation is considered throughout the Legal Guide and specifically addressed in Chapter 7, Dispute Resolution. 28 See Legal Guide, supra note 12, Chapter 4, Para. 45.

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be the parties themselves, their representatives and/or their associations. The need to ensure the input and cooperation of policy makers should, however, not be underestimated. This is especially true if it is envisaged that at least one of the potential practical uses of the instrument be as an aid in the implementation of sound policies in domestic law. Moreover, the participation of other international organizations active in the same field may enhance the chances of developing a successful instrument. In particular, cooperation between sponsor intergovernmental organizations may result in a better product not only because of the interplay of different areas of expertise but also because of the potential ‘division of labour’. Each organization should do what it does best, thus avoiding unnecessary duplication of efforts and waste of the limited available resources. Judging from the preparatory work that has been done so far in relation to the Legal Guide, it appears that those conditions either were already satisfied or have a high probability to be satisfied after final approval of the Legal Guide during its practical implementation. The Legal Guide is primarily meant as guidance to the parties to production contracts that are made aware of the legal implications of certain widespread contractual terms and of how they may interact with local laws and are offered plausible alternatives deriving from best practices, shared industry standards or models found in domestic legislation. This is why early involvement of stakeholders representing both producers and contractors was considered of paramount importance, and a highly inclusive approach was preferred. With particular regard to farmers, it may be questionable whether the actual parties to the contract would be, in many circumstances, the right addressees of the Legal Guide. The existence of a contract farming arrangement does not necessarily imply that the producer is always unable to influence the negotiations. There may be reasonable doubts, however, on the practical impact and effectiveness of any soft law harmonization initiative that aims at raising awareness and modifying the conduct of the parties when one of them does find itself in a – at times dramatically – weaker position. One of the ways to overcome this difficulty was to involve the World Farmers Organisation as an active observer in the Working Group from the start and to make use of its regional branches to reach out to producers around the world. On the other hand, ensuring participation and arousing the interest of contractor’s representatives was deemed to be crucial, especially in the light of recent global efforts towards the establishment of business social responsibility and other best practices initiatives within the industry. In this respect, the Legal Guide could also function as a concretization of those non-binding principles that have been recently developed at an international level and to which companies entering into production contracts may adhere on a voluntary basis,29 such as the Food 29 For an in-depth analysis of the role of contractual agreements in ‘transforming international soft law into binding requirements for private parties’ see F. Cafaggi, ‘The Regulatory Functions of Transnational Com-

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Anna Veneziano and Agriculture Business Principles (FAB) that are part of the UN Global Compact30, and the Principles for Responsible Investment in Agriculture and Food Systems (RAI) adopted by the Committee on Food Security.31 The Legal Guide, however, is not exclusively addressed to the contractual parties (hence the adjective ‘Legal’ instead of ‘Contractual’). Though the Legal Guide does not purport to interfere with mandatory domestic law nor to encourage the adoption of special legislation in this field, policy makers may benefit from the legal discussion contained in it. The drafting process did offer consultation opportunities with governmental agencies that offered valuable feedback and comments. ‘Best legislative practices’ are highlighted throughout the Legal Guide and may therefore function as a model for policy makers interested in reform of domestic law in this or related fields. Moreover, as mentioned above, the project is based on cooperation between Unidroit and FAO and IFAD, the two intergovernmental organizations that already possessed specialized knowledge and practical experience on contract farming operations. The joint sponsorship of the project not only ensured the interaction of interdisciplinary expertise during the preparation of the Legal Guide but will also highly facilitate its future development and implementation. Field work will be needed to disseminate knowledge of the instrument among its addressees in an accessible way (both in terms of language and content) and to further adapt the general Legal Guide to specific legal and economic environments. This type of implementation will be particularly important to channel the potential benefits of the Guide towards the end users, even when, as may be the case, they are smallholders that do not possess sufficient literacy and/or do not enjoy the mediation of a more powerful associative body. It will also be instrumental in raising awareness on the content and potential usefulness of the Legal Guide to adjudicators and particularly mediators, as the Legal Guide promotes cooperative dispute resolution. In this respect, also other international or bilateral agencies or non-governmental entities working in the field of law and development may find in the Legal Guide a useful starting point for own initiatives (for example, in the development of educational tools in training programs geared to specific regions of the world or specific production sectors). These types of formal or even only informal cooperative actions are to be welcomed, as they avoid unnecessary duplications of efforts, with a corresponding net advantage in terms of cost-benefit analysis of uniform or harmonized law. mercial Contracts: New Architectures’, Fordham International Law Journal, Vol. 36, Issue 6, 2013, pp. 1557 et seq. 30 The FAB were launched on 22 September 2014, as a part of the UN Global Compact initiative, available from and on the ten UNGC Principles, available from . 31 The RAI were endorsed by the Committee on Food Security (CFS) on 15 October 2014, available from .

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José Angelo Estrella Faria*

21.1

Introduction

The future of contract law harmonization is likely to be very different from what currently anticipated, much the same way as the context of the legal harmonization process nowadays differs greatly from the conditions under which it started more than a century ago. Both rule making and domestic implementation have become more complex, involving the use of a wide range of tools to formulate and implement uniform rules by an increasing number of organizations – both intergovernmental and private sector representatives. Also, the rise of supranational organizations, of which the European Union provides the ultimate example, has added a new element to the law-making process, with possibly farreaching consequences. As we know, international efforts to unify and harmonize private law date back to the 19th century. The first international organizations responsible for unifying rules of private law and private international law, the Hague Conference on Private International Law (the Hague Conference), was created as early as 1893, followed, in 1926, by the International Institute for the Unification of Private Law (Unidroit), as a special body of the League of Nations. Europe was historically the driver of the legal unification movement, and the activities of the Hague Conference or Unidroit were confined to Europe for a long time.1 The landscape changed considerably after World War II. Not only the number of actors and subjects of harmonization greatly increased, but several specialized agencies and organizations of the United Nations system, including the United Nations Commission on International Trade Law (UNCITRAL), as well as other global or regional organizations entered the field. As more countries outside of Europe joined the Hague Conference and Unidroit, the number of ratifications or accessions to pre-existing treaties and conventions greatly increased, while new instruments were developed and gained worldwide acceptance.2 * 1 2

Secretary-General, Unidroit. J. Basedow, ‘Worldwide Harmonisation of Private Law and Regional Economic Integration – General Report’, Uniform Law Review, New Series, Vol. 8, 2003, pp. 31-49 at p. 32. Of the 78 Member States of the Hague Conference (including the European Union), 34 are outside of Europe. See HCCH Members, available from . Of the 63 Member

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The combined production of those and other intergovernmental organizations, but also of non-governmental organizations, such as the International Chamber of Commerce (ICC), includes various highly successful international instruments such as the Brussels Convention for the Unification of Certain Rules of Law Relating to Bills of Lading (Hague Rules);3 the Warsaw Convention on the Unification of Certain Rules Relating to International Transportation by Air (Warsaw Convention);4 the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;5 the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters;6 the United Nations Convention on the International Sale of Goods (CISG);7 the Unidroit Convention on Stolen or Illegally Exported Cultural Object;8 the Convention on International Interests in Mobile Equipment;9 the Hague Convention on the Taking Evidence Abroad in Civil or Commercial Matters;10 the International Chamber of Commerce’s International Rules for the Interpretation of Trade Terms (Incoterms)11 and Uniform Customs and Practice for Documentary Credits (UCP).12 The broad web of global uniform law instruments has been supplemented in recent years by an even bigger framework of regional legal harmonization, particularly in Europe. Until late in the 1960s, Unidroit did the preparatory work for many instruments that later became regionally adopted law in Europe.13 The legal harmonization work done by the then European Economic Community (EEC) in the area of private law was at that time

3 4 5 6 7 8 9 10 11 12 13

States of Unidroit, 28 are outside of Europe. See Unidroit Membership, available from . International Convention for the Unification of Certain Rules Relating to Bills of Lading for Carriage of Goods by Sea, 25 August 1924, League of Nations, Treaty Series, Vol. 120, p. 155. Convention for the Unification of Certain Rules Relating to International Transportation by Air, 12 October 1929, League of Nations, Treaty Series, Vol. 137, p. 11. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, United Nations, Treaty Series, Vol. 330, p. 3. Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, 15 November 1965, United Nations, Treaty Series, Vol. 658, p. 163. United Nations Convention on Contracts for the International Sale of Goods, 11 April 1980, United Nations, Treaty Series, Vol. 1489, p. 3. Unidroit Convention on Stolen or Illegally Exported Cultural Objects, 23 June 1995, United Nations, Treaty Series, Vol. 2421, 2007, p. 457. Convention on International Interests in Mobile Equipment, 16 November 2001, United Nations, Treaty Series, Vol. 2307, 2005, p. 285. Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, 26 October 1968, United Nations, Treaty Series, Vol. 847, 1972, p. 241. International Chamber of Commerce, Incoterms 1990, I.C.C. Publ. No. 460. International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits 1993, I.C.C. Publ. No. 500. Such as the Convention on the Contract for the International Carriage of Goods by Road (CMR), which was adopted in Geneva on 2 July 1956 under the auspices of the Economic Commission for Europe of the United Nations and has been ratified by 55 States, most of which in Europe (United Nations, Treaty Series, Vol. 399, 1961, p. 189).

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limited to a certain number of the draft conventions between the EEC Member States in well-defined areas, on the basis of Article 220 of the Treaty of Rome.14 The deepening European integration process since then, and the constant widening of Community competences, has led to increasing complexity of the administrative and decision-making structure of the European institutions. It has also caused a proliferation of legislative harmonization projects in the area of commercial law or related topics, which nowadays cover a wide range of matters, such as the law applicable to contractual15 and non-contractual16 obligations; jurisdiction and the recognition and enforcement of judgments in civil and commercial matters;17 insolvency proceedings;18 product liability;19 consumer protection in the contracts negotiated away from business premises;20 independent sales representatives;21 consumer credit;22 payment services,23 tourism and travel packages;24 compensation for denied boarding in scheduled passenger air travel;25 unfair

14 They included: European patents; recognition of the companies and legal entities; recognition and enforcement of judgements pronounced in other Member States in civil and commercial matters. 15 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) (Official Journal of the European Union, L 177, 4 July 2008, p. 6). 16 Regulation (EC) No. 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II) (Official Journal of the European Union, L 199, 31 July 2007, p. 40). 17 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (Official Journal of the European Union, L 351, 20 December 2012, p. 1), which replaces Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Official Journal of the European Communities, L 12, 16 January 2001, p. 1). 18 Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (Official Journal of the European Communities, L 160, 30 June 2000, p. 1). 19 Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products (Official Journal of the European Communities, L 210, 07 August 1985, p. 29). 20 Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises (Official Journal of the European Communities, L 372, 31 December 1985, p. 31). 21 Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents (Official Journal of the European Communities, L382, 31 December 1986, p. 17). 22 Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (Official Journal of the European Communities, L 042, 12 February 1987, p. 48). 23 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC (Official Journal of the European Union, L 319, 5 December 2007, p. 1). 24 Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours (Official Journal of the European Communities, L 158, 23 June 1990, p. 59). 25 Council Regulation (EEC) No. 295/91 of 4 February 1991 establishing common rules for a denied-boarding compensation system in scheduled air transport (Official Journal of the European Communities, L 036, 08 February 1991, pp. 5-7).

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José Angelo Estrella Faria terms in consumer contracts,26 unfair commercial practices;27 late payments;28 protection of purchasers in time-sharing contracts;29 cross-border credit transfers;30 investor compensation schemes;31 consumer protection in distance contracts;32 electronic signatures and33 electronic commerce;34 markets in financial instruments;35 company law and financial

26 Council Directive 93/12/EEC of 5 April 1993 on unfair terms in consumer contracts (Official Journal of the European Communities, L 95, 21 April 1993, pp. 29-34). 27 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No. 2006/2004 of the European Parliament and of the Council (‘Unfair Commercial Practices Directive’) (Official Journal of the European Union, L 149, 11 June 2005, p. 22). 28 Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions (Official Journal of the European Union, L 48, 23 February 2011, p. 1). 29 Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis (Official Journal of the European Communities, L 280, 29 October 1994, pp. 83-87). 30 Directive 97/5/EC of the European Parliament and of the Council of 27 January 1997 on cross-border credit transfers (Official Journal of the European Communities, L 043, 14 February 1997, pp. 25-30). 31 Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes (Official Journal of the European Communities, L 084, 26 March 1997, pp. 22-31). 32 Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts (Official Journal of the European Communities, L 144, 04 June 1997, pp. 19-27). 33 Directive 1999/93/EC of the European Parliament and of the Council of 31 December 1999 on a Community framework for electronic signatures (Official Journal of the European Communities, L 13, 11 January 2000, pp. 12-20). 34 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Official Journal of the European Communities, L 178, 17 July 2000, pp. 1-16). 35 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (Official Journal of the European Union, L 145, 30 April 2004, p. 1), as amended by Directive 2008/10/EC of the European Parliament and of the Council of 11 March 2008 (Official Journal of the European Union, L 76, 19 March 2008, p. 33).

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statements;36 copyright,37 patents38 and trademarks.39 This list is by no means exhaustive, since it does not include such heavily regulated areas such as competition40 or transport41 law. The impact of such extensive legal harmonization in Europe can already be felt at the global level. It is undeniable that the demand for global legal harmonization projects from European countries, already sharing a harmonized framework through the EU acquis, may be lower now than in days past and may be of greater interest for the larger EU economies more present in trade and investment outside the region. In the future, regional integration and regional harmonization efforts may affect the international rule-making process in a manner not yet anticipated, including, if organizations from other regions follow suit, by changing ‘the entire institutional framework of international negotiations into inter-regional negotiations’.42

36 Directive 2009/101/EC of the European Parliament and of the Council of 16 September 2009 on coordination of safeguards which, for the protection of the interests of members and third parties, are required by member states of companies within the meaning of the second paragraph of Article 48 of the Treaty, with a view to making such safeguards equivalent (Official Journal of the European Union, L 258, 1 October 2009, p. 11); Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent Text with EEA relevance (Official Journal of the European Union, L 315, 14 November 2012, p. 74); Directive 2011/35/EU of the European Parliament and of the Council of 5 April 2011 concerning mergers of public limited liability companies (Official Journal of the European Union, L 110, 29 April 2011, p. 1); Council regulation (EC) 2157/2001 of 8 October 2001 on the Statute for a European company (SE) (Official Journal of the European Communities, L 294, 10 November 2001, p. 1); Council regulation (EEC) 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG) (Official Journal of the European Communities, L 199, 31 July 1985, p. 1). For a full list of EU instruments harmonizing company law and financial statements, see . 37 Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the information society (Official Journal of the European Communities, L 167, 22 June 2001, p. 10); Directive 2006/116/EC of the European Parliament and of the Council of 12 December 2006 on the term of protection of copyright and certain related rights (Official Journal of the European Union, L 372, 27 December 2006, p. 12). For an overview of all instruments, see . 38 Regulation (EU) No. 1257/2012 of the European Parliament and of the Council of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection (Official Journal of the European Union, L 361 31 December 2012, p. 1). 39 Directive 2008/95/EC of the European Parliament and of the Council of 22 October 2008 to approximate the laws of the member states relating to trade marks (Official Journal of the European Union, L 299, 8 November 2008, p. 25). 40 For an overview of the instruments, see . 41 For an overview of the instruments, see . 42 Basedow, 2003, supra note 1, p. 36.

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21.1.1

Harmonization Tools: Advantages and Shortcomings

The combined production of all organizations involved in private law rule making is impressive. Some even fear that, given the multiplicity of harmonization projects, the process may have reached the saturation point.43 However, at a global level, the truly successful binding instruments – measured in terms of actual ratifications or domestic enactments – do not go much beyond those instruments I mentioned before. This paradox has produced some pessimism about the legal harmonization process and calls for a rethink of its goals and methods. There is a widely shared perception that ‘more harmonization of law is useful’ but that ‘in the light of practical difficulties experienced in the past, new ways have to be explored in order to achieve that result’.44 21.1.1.1 Shortcomings of Hard Law The techniques used by formulating agencies operate at different levels and involve different types of compromise or agreement to differ. They fall into three broad categories: legislative (conventions, model laws and model legislative or treaty provisions), explanatory (legislative guides and legal guides for use in legal practice) and contractual (standard contract clauses and rules). Conventions have been the primary vehicle for the international unification of domestic private law. However, the obvious advantages of having a uniform text in force in all contracting states are partly offset by a number of well-known limitations. Depending on the country, the process of ratification may require a number of formal steps, involve various authorities and take several years to conclude. This leads to a long interim period between the adoption of international conventions and their entry into force, as well as a very slow pace of domestic implementation. Another problem is that international conventions are difficult to amend in instances requiring accommodation to economic change or evolution of practice or technology.45 Then, once amendments are agreed upon, there

43 H. Kötz, ‘Rechtsvereinheitlichung – Nutzen, Kosten, Methoden, Ziele’, Rabels Zeitschrift für ausländisches und internationales Privatrecht, Vol. 50, 1986, pp. 2-18 at p. 5: “In fact, one should worry at the prospect that the countless current projects of legal unification and harmonization could come to fruition as complete texts and that the stream of such texts might flow down to the already overburdened mills of national legislative organs. Above all, one must ask whether the ever more intricate patchwork of uniform law might not at the end overwhelm the capacity of practice to process new norms.” 44 A. S. Hartkamp, ‘Modernisation and Harmonisation of Contract Law: Objectives, Methods and Scope’, Acts of the Congress to Celebrate the 75th Anniversary of the Founding of the International Institute for the Unification of Private Law (Unidroit), Uniform Law Review, New Series, Vol. 8, 2003, pp. 81-89. 45 A. Rosett, ‘Unification, Harmonization, Restatement, Codification and Reform in International Commercial Law’, The American Journal of Comparative Law, Vol. 40, 1992, pp. 683-697 at p. 688: “As time changes and the law does not, ‘codifications become the enemy of substantive reform’. In today’s world, any code that does not build a process for prompt and sustained reconsideration into its structure becomes part of the problem, not part of the solution.”

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is also the risk that amending protocols may not be ratified by all the original signatory states, resulting in a sometimes complex patchwork of contracting parties. The rigidity of the treaty-making process, and the lack of flexibility – if any – in adapting to domestic reality, often discourage states from adhering to international conventions.46 But there are also other reasons that explain why the task of promoting adoption of binding international instruments is becoming increasingly difficult. The search for consensus between different legal traditions often means that the preferred rule in a given legal system may be mitigated or abandoned altogether, especially when it is unlikely that it will obtain the support of other legal systems. International conventions then become an easy target for criticism by domestic readers, who point out the superiority of national law over the product of international negotiations.47 Legal unification through binding instruments has also been criticized for producing ‘sub-optimal’, vaguely drafted rules for the purpose of achieving political compromise.48 Some suggest that it would be better simply to allow companies to ‘elect in and out of national commercial law systems’ so that ‘states thus could compete for legal business on the basis of the attractiveness of their rules and dispute resolution procedures, rather than coerce their subjects to follow any one system of commercial law’.49 Despite being – in my view – heavily overstated, the ‘regulatory competition’50 argument remains popular, in particular among law and economics scholars. To these substantive difficulties, we should add low political interest for uniform law instruments. Their sole purpose, as we know, is to facilitate the business activities to which they relate. In most cases, the economic benefit is not easily – if at all – quantifiable. Being useful but – with a few exceptions – not strictly speaking necessary, uniform instruments in the private law area are not typically treated as a priority for domestic adoption. Furthermore, as states usually act according to the principle of reciprocity, and only move forward on certain matters after other key partners have moved in the same direction, international

46 A. D. Rose, ‘The Challenges for Uniform Law in the Twenty-First Century’, Uniform Law Review, New Series, Vol. 1, 1996, pp. 9-25 at p. 13: “At the international level, it is harder to persuade States to accede to a convention if the ‘price’ is so high at the outset. And, if this initial hurdle is overcome and a reasonable number of States do accede, amendment of that original convention then requires agreement from a much larger group of States if uniformity is to be maintained.” 47 See J. S. Hobhouse, ‘International Conventions and Commercial Law: The Pursuit of Uniformity’, The Law Quarterly Review, Vol. 106, 1990, pp. 530 et seq. at p. 533: “These conventions are inevitably and confessedly drafted as multi-cultural compromises between different schemes of law. Consequently they will normally have less merit than most of the individual legal systems from which they have been derived.” 48 S. Walt, ‘Novelty and the Risks of Uniform Sales Law’, Virginia Journal of International Law Association, Vol. 39, 1999, pp. 671-705. 49 P. B. Stephan, ‘The Futility of Unification and Harmonization in International Commercial Law’, Virginia Journal of International Law Association, Vol. 36, 1999, pp. 743 et seq. at p. 789. 50 See A. Ogus, ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’, International and Comparative Law Quarterly, Vol. 48, 1999, pp. 405-418 at pp. 406-407. For more recent interpretation, see A. Marciano & J. M. Josselin, From Economic to Legal Competition: New Perspectives on Law and Institutions in Europe, Edward Elgar Publishing, Cheltenham, 2003.

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conventions may take several years to enter into force or be ratified by a sufficiently significant number of a countries.51 Domestic legislators and policymakers are usually charged with attending to the more immediate needs of their constituencies. They would not be expected to pay a great deal of attention to technical instruments in the commercial law arena which, as a result, often remain dormant for a number of years at various levels of domestic government. In many countries, this risk is compounded by the absence of standing bodies in charge of the periodic review of domestic laws with a view to formulating proposals for reform, modernization and rationalization. Where no such body exists, law reform is often handled in an ad hoc fashion. Specific proposals are made, as particular instances of legal deficiency are brought to the attention of ministries, courts or parliaments. The legislative steps that follow are usually subject to the vagaries of the domestic political process. Looking back at the early days of legal harmonization, one must, in the hindsight, admit that there may have been too much emphasis on the use of conventions. This may be partly explained by the ideal quest for legal codification, which was the intellectual cradle of the unification process. The complexity of today’s world suggests, however, that conventions should be used with parsimony, preferably in areas of mandatory law. Overuse of conventions, leading to a low level of ratification or lack of interest by the major trading nations, carries with it the risk of discrediting the treaty-making process. International organizations active in the field of legal harmonization seem to have recognized that international conventions should be reserved for special cases that clearly require uniformity. This trend should continue. If a greater degree of flexibility is desired and is appropriate to the subject matter under consideration, a different unification technique would, in most cases, be preferable. 21.1.1.2 Alternative Harmonization Methods The harmonization process, to use words of one of its detractors, involves an assessment of four aspects: (i) the diverse elements to be harmonized; (ii) the rationale for or problem to be resolved by harmonization, i.e., whether and how diversity is problematic; (iii) the ultimate goal of harmonization; and (iv) the method by which this goal

51 The pattern followed by the signatory states of the CISG offers an interesting example. From the 19 countries that signed the Convention before 1 September 1981, only three ratified it in less than 5 years (France, Hungary and Lesotho), while most needed between 5 and 10 years (Austria, Chile, China, Denmark, Finland, Germany, Italy, Norway and Sweden). Three countries took between 10 and 15 years to ratify the CISG (Netherlands, Poland and Singapore), and two have not yet done so (Ghana and Venezuela).

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is to be achieved. […]. The justification for such a project, therefore, must be based on a critical analysis of all its component.52 The first three aspects relate to the substance of harmonization, and I shall leave them for the second part of my remarks. As regards the last aspect, one cannot overemphasize how important it is for formulating agencies to recognize the limits of the instruments they produce and the possible shortcomings of their working methods. They must choose wisely the form of the instruments used for legal harmonization and be creative in designing ways in which ‘hard’ and ‘soft’ law may best supplement one another. Model laws are an appropriate vehicle for the modernization and unification of national laws whenever it is expected that states will wish or need to adjust the text of the model to accommodate local requirements that vary from system to system, or where strict uniformity is not necessary. It is precisely this flexibility that makes a model law potentially easier to negotiate than a text containing obligations that cannot be altered. UNCITRAL has had long and largely satisfactory experience with the production of model laws, some of which have become landmarks in their specific areas53 or have become very influential in inspiring domestic reforms to improve the legal environment for business.54 The experience of Unidroit with model laws is so far limited to three instruments: the 2002 Model Franchise Disclosure Law,55 2008 Unidroit Model Law on Leasing56 and the 2011 UNESCO/Unidroit Model Provisions on State Ownership of Undiscovered Cultural Objects.57 Unidroit has, however, greater experience with more flexible, restatement-like instruments, such as Unidroit Principles of International Commercial Contracts and the ALI/Unidroit Principles of Transnational Civil Procedure. The warm reception of both sets of principles demonstrates that ‘the formulation of international rules of general law that are of a higher level of abstraction is best left to scholars’, as governments find it ‘of little interest to engage in a project not intended to lead to a legally operative instrument’.58 In particular, UPICC has proven very successful owing to its adaptability to various uses, to which I shall refer later. Lastly, when it is not feasible or necessary to develop a standard

52 M. Boodman, ‘The Myth of Harmonization of Laws’, The American Journal of Comparative Law, Vol. 39, No. 4, 1991, pp. 799-724 at pp. 708-709. 53 E.g., the 1985 UNCITRAL Model Law on International Commercial Arbitration, the 1996 UNCITRAL Model Law on Electronic Commerce or the 1997 UNCITRAL Model Law on Cross-Border Insolvency. 54 E.g., the 1994 UNCITRAL Model Law on Procurement of Goods, Construction and Services, the 2000 UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects, the 2003 UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects and the UNCITRAL Legislative Guide on Insolvency. 55 . 56 . 57 . 58 H. Kronke, ‘Methodical Freedom and Organisational Constraints in the Development of Transnational Law’, Loyola Law Review, No. 51, 2005, pp. 287-300 at pp. 288-289.

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or model set of contract rules, an alternative may be a legal guide giving explanations in respect of contract drafting.59

21.1.2

Global Harmonization of Contract Law: Status Quo and Perspectives

The criteria for defining success in uniform law are obviously subjective and largely debatable. If ‘success’ is seen as a function of the intrinsic quality of the instrument and its influence on subsequent legislation and legal thinking, many instruments may be seen as successful even if they were never applied by courts as binding law. There may be several arguments to justify this assessment and many examples for it. For the ordinary man, however, this may seem counterintuitive. After all, an international convention is intended to become applicable law; if it never gets that far, or if it does so in a few countries only, it is hard to argue against those who see it as a failure. If we follow this common-sense approach, and consider ‘successful’ those conventions, for instance, that have achieved at least a minimum number of ratifications (for example 30) in various continents and leaving aside judicial cooperation and family law conventions prepared by the HCCH, the only successful international conventions in the area of substantive private law since the adoption of the CISG (that is, in the last 35 years!) resulting from the work of both UNCITRAL and Unidroit are the 1995 Cultural Property Convention60 and the Cape Town Convention and Aircraft Protocol.61 None of the other UNCITRAL62 or Unidroit63 Conventions adopted in the period has yet reached 20 ratifications, and most of them have not even entered into force. It is against this background that I shall now attempt to foresee the future of contract law harmonization.

59 Such as the Unidroit Guide to International Master Franchise Arrangements (Second Edition, 2007) and the Unidroit/FAO Legal Guide on Contract Farming, currently being drafted. 60 36 states parties. 61 62 and 56 states parties, respectively. 62 2005 United Nations Convention on the Use of Electronic Communications in International Contracts (New York): 5 states parties; 1991 United Nations Convention on the Liability of Operators of Transport Terminals in International Trade (Vienna): not yet in force; 1988 United Nations Convention on International Bills of Exchange and International Promissory Notes (New York): not yet in force; 1995 United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (New York): not yet in force; 2001 United Nations Convention on the Assignment of Receivables in International Trade (New York): not yet in force; 2008 United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (New York): not yet in force. 63 1983 Convention on Agency in the International Sale of Goods (Geneva): not yet in force; 1988 UNIDROIT Convention on International Financial Leasing (Ottawa): 10 states parties (United Nations, Treaty Series, Vol. 2321, 2007, p. 195); 1988 Unidroit Convention on International Factoring (Ottawa): 9 states parties (United Nations, Treaty Series, Vol. 2323, 2008, p. 373); 2007 Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Railway Rolling Stock (Luxembourg): not yet in force; 2009 Unidroit Convention on Substantive Rules for Intermediated Securities (Geneva): not yet in force.

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21.1.2.1 Current Status of Contract Law Harmonization In number of ratifications, the CISG is the most successful commercial law convention since the 1958 New York Convention, but considering its wide scope and length, it is fair to regard it as a most remarkable achievement in the history of legal harmonization of private law.64 One of the reasons for this success was the careful preparatory work done at UNCITRAL over a number of years and the admirable quality of the delegates that participated in the negotiations. It is no overstatement to say that the success of the CISG was earned with tenacity and hard work. Indeed, the CISG would have not been possible without the two (fairly less successful) Hague Conventions of 1964, the Convention relating to a Uniform Law on the International Sale of Goods (ULIS) and the Convention relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS), both the result of work started by Unidroit as early as 1930. This means that, altogether, states needed more than 50 years to develop the consensus that is reflected in the careful wording of the CISG. And the price for this consensus, as we all know, was some occasional vagueness or ambiguity, or leaving matters deliberately outside its scope. Yet, despite its outstanding quality and its pragmatic focus on the essentials of international sales contracts, there is still a long way to go before the CISG becomes really universally accepted, and the parties – in particular larger companies – give up the practice of systematically excluding its application. Although recent surveys65 suggest that this practice may now be less frequent than assumed earlier,66 ‘examination of terms and conditions available online do point to a considerable preference for opting out’.67 This tendency is aggravated, in some countries, by lack of familiarity of lawyers and judges with the CISG, which often means that cases that would potentially fall under its scope of application end up being pleaded solely on the basis of domestic law. In the United States, for instance, there have been relatively few reported decisions on the CISG by U.S. courts or involving U.S. parties, in the more than 25 years since international sales involving parties located in the United States have potentially been subject to the Convention.68 The most likely explanation is that the U.S. legal counsel routinely has advised their clients to opt out of the CISG and choose U.S. domestic sales law as the law governing their international sales transactions. Although there seems to be some indication

64 H. Kronke, ‘The UN Sales Convention, the Unidroit Contract Principles and the Way Beyond’, Journal of Law and Commerce, Vol. 25, 2005-2006, pp. 451-466. 65 Such as the Global sales Law Survey conducted only in the Fall of 2009 with the support of UNCITRAL see I. Schwenzer & C. Kee, ‘International Sales Law – The Actual Practice’, Penn State International Law Review, Vol. 29, 2010-2011, pp. 425-447) 66 Id., p. 434. 67 Id., p. 435. 68 For a discussion of the statistics on reported U.S. CISG cases, see M. Reiman, ‘The CISG in the United States: Why It Has Been Neglected and Why Europeans Should Care’, Rabels Zeitschrift für ausländisches und internationales Privatrecht, Vol. 71, 2007, pp. 115-129 at pp. 117-120.

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that ‘the wisdom of proffering this advice mechanically is now being questioned by U.S. lawyers’, this trend has not yet been reversed.69 While there are several reasons for the practice of excluding the CISG (which incidentally also prevails in other contracting states to the Convention), an informed decision as to the advantages or disadvantages of the CISG, as compared to the substantive law chosen instead, is rarely the decisive factor. It is “sometimes ignorance, sometimes fear, sometimes a reluctance to change existing patterns – and be it for lack of time and resources to concentrate on something new” that in most situations leads to the exclusion of the CISG.70 I shall later revert to what can be done to counter this tendency. Most general contract law matters not covered by the CISG are, as we know, dealt within Unidroit Principles on International Commercial Contracts (the Principles). The idea to formulate ‘principles’ on international commercial contracts resulted from two orders of consideration: one positive; the other one, negative. The positive consideration was the perceived demand for greater harmony in the vast domain of the contracts law, the disparity of which was felt to represent an obstacle to the good functioning of international trade. The negative consideration was the recognition that the extreme difficulty and delay in the arduous process of unification of the law applicable to a rather straightforward contract – the sale of goods made of the idea of a global unification of contracts law a dream too far.71 Indeed, the sensitivity of many of the subjects covered by the Principles (illegality; error; mistake; fraud; duress; third-party rights; hardship; damages) or the diversity of theoretical foundations or particular solutions under domestic law (conditions; set-off; transfer of obligations; assignment of contracts; limitation periods; plurality of obligees) make it highly unlikely that the authors of the Principles would have been able to formulate them in the form of a binding instrument. Finding consensus would have been much harder if the Principles were the subject of intergovernmental negotiations by delegates bound to follow instructions issued by their appointing ministries. The choice of a soft law instrument proved to be wise under all accounts. In its current form, the Principles can be used in different contexts and for diverse purposes: as nonbinding rules capable of incorporation by reference into a contract; as an expression of common legal principles (an international ‘restatement’ of general principles of contract

69 H. Flechtner, ‘Changing the Opt-out Tradition in the United States’, in United Nations (Ed.), Modern Law for Global Commerce: Proceedings of the Congress of the United Nations Commission on International Trade Law held on the Occasion of the Fortieth Session of the Commission, Vienna, 9-12 July 2007, New York, 2011, pp. 249-252, available at . 70 E. J. Brödermann, ‘The Practice of Excluding the CISG: Time for Change?’, in United Nations, supra note 69, pp. 245-248. 71 [T]he Unidroit Contract Principles […]address a wide range of topics of general contract law which neither the CISG nor any other existing or future convention devoted to a specific type of transaction would ever venture to touch upon. See Kronke, 2005-2006, supra note 64, pp. 245-248.

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law which domestic or arbitral courts to base their decisions); as a set of norms to which the parties may submit voluntarily; as subsidy for the interpretation of international conventions, or as model to inspire the national legislator in the reform of domestic contract law. Without pretending to supplement or interpret the CISG in any way, Unidroit Principles offer uniform language to complete the landscape of harmonized contract law both to contract parties and to adjudicators. The material scope of application of the CISG is limited to certain types of international sales contracts. The Unidroit Principles, in turn, cover general contract law rules but do not address specific contracts, which remain largely unregulated at global level. Apart from the various conventions dealing with carriage of goods by road, by sea or by air, uniform law governing other specific contracts is in practice either absent or limited to model contracts and legal guides. Indeed, the success of international binding instruments dealing with specific contracts has been rather modest. The 1983 Unidroit Convention on Agency in the International Sale of Goods has not yet entered into force, while the two Unidroit Conventions adopted in Ottawa 1988 (on International Financial Leasing and on International Factoring) have only 10 and 9 States parties so far, respectively. The record of UNCITRAL is equally sobering: of six conventions dealing with contractual matters in the last 25 years, one has so far attracted five accessions,72 the other five have not even entered into force.73 The reasons for this situation may here and there relate to intrinsic problems of the one or the other instrument, and some of them may have no plausible chance of ever entering into force. Conversely, it cannot be excluded that in one or the other case the instrument is not being neglected and that only the accession process is slow. Be that as it may, there is a strong argument for suspecting that the actual demand for uniform law or the practical difficulties resulting from its absence may have been overestimated at the time UNCITRAL and Unidroit decided to work on those instruments. This may be one of the reasons why some commentators believe that the future of harmonization of contract law will consist of some kind of interaction between the binding law of international conventions or directives/ordinances on the one hand and the new phenomenon of Principles of Contract Law on the other hand.74 The interplay between the CISG, as ‘hard law’, and widely used ‘soft law’ instruments, such as the INCOTERMS, and the UCP500, is a good example of how this complementarity

72 United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005). 73 United Nations Convention on International Bills of Exchange and International Promissory Notes (New York, 1988); United Nations Convention on the Liability of Operators of Transport Terminals in International Trade (Vienna, 1991); United Nations Convention on Independent Guarantees and Stand-by Letters of Credit (New York, 1995); United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001) and United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea (New York, 2008). 74 Hartkamp, 2003, supra note 44, p. 82.

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seems to work in practice, allowing a ‘positive spiral’ of increased trade and further legal harmonization.75 21.1.2.2 Domestic Implementation and Promotion of Texts The preceding remarks speak for a prudent approach for evaluating the desirability and feasibility of further harmonization of contract law through binding instruments. This does not mean, however, that there is no room for improvement in the existing international contract law framework. Quite on the contrary, deeper regional contract law harmonization on the basis of universal standards may be useful to support regional economic integration. Furthermore, the application of those universal standards themselves, including the CISG in the forefront, can be greatly improved by more information and technical assistance activities, better teaching and better support to uniform interpretation. At the regional level, contract law harmonization may benefit from greater use of variants and alternative solutions in legal harmonization so as accommodate particular concerns of different legal traditions. Future model laws could indeed contain partial variants for adoption in different legal systems. Alternatively, where the negotiation of a global instrument does not seem to be feasible, formulating agencies could co-operate more closely with regional organizations in developing regional models, along the lines of assistance provided by Unidroit in the preparation of the OHADA draft Uniform Act on Contract Law or the current joint project of Unidroit and the European Law Institute to develop model regional rules for the implementation of the ALI/Unidroit Principles of Transnational Civil Procedures in an European context. Such coordination between global and regional initiatives assistance would be of significant value even for regions showing greater legal uniformity (such as the MERCOSUR or Andean regions), as it could avoid the crystallization of regional solutions that drift away from international trends. As regards the universal standards, such as the CISG, there is still ample room for improving their application. A uniform law instrument is of little value if it is not implemented in practice. Several obstacles may impede this objective. The application of uniform law may depend on domestic administrative instances or structures. Deficient institutional design, poor regulatory machinery, insufficient resources and lack of training, among others, are known for frustrating the objectives of law reform. In other areas, uniform law instruments may be incorrectly applied or may even be avoided due to lack of knowledge by judges and practitioners. Criticism of the harmonization process often cites the absence of courts especially dedicated to the interpretation of uniform law as one reason for the limited progress made 75 “[…] we can already recognise and acknowledge the important contribution the CISG has made and continues to make to international trade. One must also acknowledge the role of instruments like PICC and INCOTERMS, and last but not least, international arbitration. All of these enhance predictability, which in turn saves costs and increases trade.” See Schwenzer & Kee, supra note 65, p. 447.

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in international legal harmonization. It is true that the experience with widely diverging case law on earlier uniform law texts76 demonstrates how quickly an international instrument can be deconstructed by legal practice and judicial precedent. However, it is unlikely that states would agree to surrender jurisdiction to international courts anywhere in the near future. A more realistic option to mitigate the possible negative consequences of diffuse judicial reading of uniform texts is to promote uniform interpretation. Formulating agencies have recognized this and have started very useful initiatives with a view to disseminating information on the application of uniform tests, for example through the UNILEX database maintained by Unidroit, or the CLOUT system, and the CISG Digest developed by UNCITRAL. The existence of authoritative commentaries, like the Schlechtriem/Schwenzer Commentary on the CISG and Vogenauer/Kleinheisterkamp Commentary on the Unidroit Principles is also invaluable for uniform interpretation and deserves the support of the organizations concerned. These initiatives should be expanded and further advanced in the future, with a view both to widening their coverage, supplementing each other without duplicating efforts, and enhancing their accessibility in a userfriendly manner. Additional measures to promote uniform interpretation might include supporting programmes for training judges (but possibly also for arbitrators or lawyers) in the interpretation and application of uniform law. This might take the form of seminars specifically dedicated to them or the elaboration of training programmes, a common syllabus or other forms of teaching materials that might be used for training purposes or be incorporated in the curricula of domestic academies or schools dedicated to the training or continuing education of judges.77 Co-operation with universities and, in particular, with other international organizations with expertise in technical assistance and training for lawyers from developing countries might be explored with a view to developing joint programmes. Conceivably, standard teaching materials or a teaching plan for uniform law could be provided for inclusion in the curricula of law schools around the world. These findings underscore the importance and the need for information and training activities by formulating agencies. Incidentally, the experience of the European Union with academic exchange programmes seems to support the idea that early contact with foreign law and uniform law makes it unlikely that those future practitioners ‘will interpret international instruments and community law from a purely national perspective at a later stage’.78 The Vienna Willem C. Vis International Commercial Arbitration Moot (‘Vis 76 Such as under the 1924 International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading and Protocol of Signature (Brussels) (‘The Hague Rules’) or under the 1930 Convention on Providing a Uniform Law for Bills of Exchange and Promissory Notes (Geneva). 77 C. Giovannucci Orlandi, ‘Legal Harmonization in Practice: Teaching and Learning Uniform Commercial Law’, in United Nations, supra note 69, pp. 91-95. 78 J. Basedow, ‘The Renascence of Uniform Law: European Contract Law and Its Components’, Legal Studies, Vol. 18, No. 2, 1998, pp. 121-145 at p. 132.

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Moot’) and the various regional editions inspired by it have played an undeniable role in furthering knowledge of international commercial arbitration and the CISG. Formulating agencies have their role to play, in co-operation with universities, representatives of the bar and the judiciary in forming tomorrow’s international practitioners.

21.2

Conclusions

The high-speed economic integration in the past two decades has made us impatient about the slow progress of formal legal harmonization. A more realistic view, however, assumes that ‘laws tend not to be the engine room of an economy; rather they follow some steps behind’.79 Instead of thinking of a fully codified global commercial law, I prefer to accept the natural pace of events and recognize the value of the complex and multi-layered transnational commercial law. Whether ‘a truly global sales law that satisfies the needs of global trade will ultimately emerge’, and indeed ‘whether it would be entirely desirable’, is definitely ‘something we can debate’.80 It would be interesting to investigate more closely what are the new problems of general contract law that might be adequately addressed in a new set of default rules. General contract law seems to have been admirably flexible to adapt to modern times without radical reform. The real noteworthy legal developments of recent times have taken place elsewhere: intellectual property, antitrust, privacy protection, biotechnology, consumer protection, family law. At the same time, technological and logistics evolution, rather than making changes in the law more pressing, have made the contractual allocation of rights and obligations within the confines of existing law much more efficient than in earlier days, thus reducing the demand for legislative intervention: payments are easier, transport is faster, communications nearly instantaneous and dispute settlement readily available. In other words, today’s business world manages much better the imperfections of the world’s patchwork of sovereign states and territorially limited regulation and enforcement mechanisms than the merchants of the past. This does not mean that contract law is static and that there are no new international aspects to it. In fact, the interplay at the international level between public law (including both administrative and criminal law) and private law (both contract and company law) has become exceedingly complex and not always satisfactory, as demonstrated by violations of human rights or labour standards through global value chains, or the abuse of corporate structures for money laundering or the financing of terrorism. But the answer to these challenges may be more in the nature of promoting a better understanding and application of existing law, rather than new biding instruments. A clearer realization of how private 79 Schwenzer & Kee, supra note 65, p. 447. 80 Id.

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law concepts and structures may undermine or jeopardize the realization of public law goals, compounded with targeted intervention to ease the interrelation among various sources of law in the sense of a meaningful ‘dialogue des sources’81 is called for. That neither excludes nor necessarily assumes more new ‘hard’ law. If the current pace of international trade and investment is maintained, it is quite possible that one day the volume of cross-border contracts other than sales that are negotiated by the types of contract partners who may need default rules on matters not already covered by the CISG through a new international mandatory instrument82 may indeed justify the time and effort required for its preparation, negotiation and implementation. If a consensus in that direction emerges, Unidroit would be ready to contribute with its own experience and expertise in the area of contract law to the success of such an ambitious project. For the time being, however, we may better serve the cause of predictability in international trade by concentrating our efforts on improving the functioning of the existing rules on contract law, disseminating knowledge about them and promoting their uniform interpretation. In so doing, we may perhaps pave the way for a new round of harmonization when its time comes.83

81 I borrow here the concept developed by E. Jayme in his contribution at the Hague Academy of International Law; see ‘Identité culturelle et intégration: le droit international privé postmoderne’, Recueil des Cours de l’Académie de Droit International, Vol. 251, 1995, pp. 9-268. 82 I.e. ‘parties from countries where different languages are spoken’, dealing ‘at arm’s length with one another’ so that ‘neither of whom has the economic power to impose its own law upon the other party’; see I. Schwenzer, ‘Who Needs a Uniform Contract Law, and Why?’, Villanova Law Review, Vol. 58, 2013, pp. 723732. 83 Indeed, as notes Jan Ramberg, “[…] the gradual acceptance of general principles of commercial law as evidenced by UPICC and the CISG would at least enhance the chances of success [of a Convention on International Commercial Contracts] to such an extent that efforts should indeed be made. Even if states would be slow in accepting a global convention on international commercial contracts, the project as such may have a considerable effect to unify and consolidate at least the fundamental principles on a global level. Nevertheless, it may be questioned whether it is wise already to proceed directly to launching the project. In any event, it may be worthwhile to consider, in addition to the endorsement by UNCITRAL, further measures in order to encourage judges and arbitrators to use the principles of UPICC whenever appropriate.” See ‘CISG and UPICC as the Basis for an International Convention on International Commercial Contracts’, Villanova Law Review, Vol. 58, 2013, pp. 681-690.

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International Commerce and Arbitration (Series editor: Ingeborg Schwenzer) Volume 1: Mariel Dimsey, The Resolution of International Investment Disputes: Challenges and Practical Solutions, ISBN 978-90-77596-52-4 Volume 2: Sarah E. Hilmer, Mediation in the People’s Republic of China and Hong Kong (SAR), ISBN 978-90-77596-74-6 Volume 3: Christina Knahr, Christian Koller, Walter Rechberger and August Reinisch (eds.), Investment and Commercial Arbitration – Similarities and Divergences, ISBN 97890-77596-81-4 Volume 4: Markus Jäger, Reimbursement for Attorney’s Fees, ISBN 978-90-77596-98-2 Volume 5: Olivier Luc Mosimann, Anti-Suit Injunctions in International Commercial Arbitration, ISBN 978-90-77596-99-9 Volume 6: Edgardo Munoz, Modern Law of Contracts and Sales in Latin America, Spain and Portugal, ISBN 978-94-90947-03-3 Volume 7: Pascal Hachem, Agreed Sums Payable upon Breach of an Obligation, ISBN 978-94-90947-04-0 Volume 8: Ingeborg Schwenzer and Lisa Spagnolo (eds.), Towards Uniformity, ISBN 97894-90947-10-1 Volume 9: Natia Lapiashvili, Modern Law of Contracts and Sales in Eastern Europe and Central Asia, ISBN 978-94-90947-20-0 Volume 10: Lara Pair, Consolidation in International Commercial Arbitration – The ICC and Swiss Rules, ISBN 978-94-90947-27-9 Volume 11: Ingeborg Schwenzer and Lisa Spagnolo (eds.), State of Play, ISBN 978-9490947-46-0 Volume 12: Ingeborg Schwenzer and Lisa Spagnolo (eds.), Globalization versus Regionalization, ISBN 978-94-6236-020-4 Volume 13: Marie-Camille Pitton, Le rôle du jugement étranger dans l’interprétation du droit conventionnel uniforme, ISBN 978-94-90947-81-1 Volume 14: Andreas F. Müller, Protecting the Integrity of a Written Agreement, ISBN 978-94-6236-073-0 Volume 15: Ingeborg Schwenzer, Yeşim M. Atamer and Petra Butler (eds.), Current Issues in the CISG and Arbitration, ISBN 978-94-6236-097-6 Volume 16: Alain Hosang, Obstructionist Behavior in International Commercial Arbitration: Legal Analysis and Measures Available to the Arbitral Tribunal, ISBN 978-94-6236100-3 Volume 17: Alissa Palumbo, Modern Law of Sales in the United States, ISBN 978-94-6236439-4 Volume 18: Ingeborg Schwenzer and Lisa Spagnolo (eds.), Boundaries and Intersections, ISBN 978-94-6236-441-7

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