THE INTERSECTION OF CISG AND ARBITRATION AGREEMENTS: A HOLISTIC UNDERSTANDING

-Vrinda Chaturvedi and Ashlesha Pandey*

Honourable Mention, 1st RGNUL Arbitration Essay Writing Competition

Introduction

The current capital scenario is mediated via various routes across the globe, yet its fundamental essence rests in its contractual nature. The existence of contracts in buyer and seller agreements, especially, render a multi-dimensional view of the transaction. As much as domestic laws stand to uphold the validity and sanctity of such trade agreements within national borders, they may fall short of the worldwide paradigm. To accommodate such agreements, thus, it is vital to have a cohesive set of regulatory laws which govern transactions of the sale of goods nature- and exhaustively so. The CISG stands as a relevant example of such a law.

However, the dimensions of law itself are changing over time and contracting states may opt out of traditional litigation systems. One of the various alternative routes available is arbitration.

What needs to be highlighted here is that these two titular topics are not traditionally studied as branches of the same root of law. Instead, they sprout out in entirely unique ways, creating a novel understanding of contracts and their clauses and how far remedies can exist as provisions or as independent agreements. The following essay, thus, expounds on these same lines of thought and creates a holistic understanding of arbitration agreements and their relation and relevance with CISG.

Basic contentions and provisions of the Contracts for the International Sale of Goods [“CISG”]

With the dynamic evolution of international trade and commerce in the increasingly economically independent world, the formulation of a uniform governing system necessitated the creation of the UN Convention on Contracts for the International Sale of Goods [“CISG”]. The international treaty, developed by the UN Commission on International Trade Law, has been governing its signatories for almost half a century now. It regulates member states with an independent legal language[1] concerning the contractual obligations of buyers and sellers under cross-border contracts. Its application is confined to merchant-trade agreements instead of producer-consumer contracts. The parties to the contracts have the liberty to include, exclude, or modify the applicability of CISG on a case-to-case basis.

Admittedly, CISG has garnered worldwide acceptance and application due to its garb of uniformity, especially if the costs and labour analysis, interpretative difficulties, and high margin of error contentions of domestic laws in international contracts are considered. There also exists a constant trepidation in developing and under-developed nations when contracting with the global West, owing to extensive influence and coercive methods they may employ. This further strengthens the position of CISG as a document of global, uniform substance.

Nonetheless, the document has garnered substantive criticism owing to some of its prejudicial clauses. For instance, the document’s ambiguity becomes glaring if the terms “reasonable” or “validity” is considered. Further, it is pertinent to highlight how uniform application and availability do not translate into uniform interpretation, despite various opinions highlighting the lingua franca nature of CISG or its translation into various languages. Furthermore, upon magnified interpretation, it becomes evident that the document focuses more on a breach than a damages approach. This leads to participating states facing a lacuna concerning possible tortuous awards they may be entitled to, pushing them towards independent applications of respective laws.

Furthermore, the document has been labelled too seller-friendly[2], exemplifying the influence of the formulating nations at the ICC. Lastly, CISG focuses on manufactured goods and their trade and rules out commodities, which proves detrimental to under-developed states whose economic structure primarily rests on the trade of unfinished materials. However, various scholarly, legal and juristic opinions hint that the essence of CISG lies in its flexibility and may prove quintessential in accommodating modern legal solutions.

Arbitration contracts and clauses: their status under the CISG

The modern legal solutions previously mentioned can best be posited by the increasing dominance of alternate dispute resolution mechanisms instead of classical litigation practices. The rise of arbitration is a subset of the changing global perspective toward jurisprudence and legalism and stands as evidence of the dynamism of law.

However, when viewed under CISG, arbitration strikes as an aberration. CISG lays down normative principles for sale-purchase contracts, not arbitral contracts. However, its merit of applicability lies when the contract has an arbitration clause. According to some, usage of CISG stands unassailable since CISG always has to be taken into consideration (even though its scope of application is open to debate) because it either represents a trade usage or forms part of the lex mercatoria or constitutes a generally accepted principle of international trade[3]. Thus, despite its procedural character, CISG boils down arbitration clauses to the level of any other contractual provision, upholding the idea that Articles 19(3)[4] (the lex compromissi nature of CISG) and 81(1)[5] were formulated upon. As a result, these provisions garner the strength of contracts while rendering dispute resolution mechanisms as “effectors” rather than “results”.

Further, the CISG governs basic concepts of contract law that are relevant for substantive validity of arbitration agreements, such as formation (Articles 14-24), interpretation (Article 8) and remedies for breach[6]. The flexible nature of CISG, thus, allows arbitrators to formulate contracts following the global norm. This allowance, however, is purely based on the choice of the contracting parties and the law they choose to apply to their agreement.

Parties contracting internationally and pursuing arbitration as a dispute resolution mechanism have three possible routes ahead of the- application of CISG directly, application of the law of contracting state leading to the application of CISG or opting out[7]. The direct application of CISG, if accepted by the parties, precludes non-applicability since arbitration laws and rules attribute great importance to the parties’ choice and will apply the CISG if the parties agree that their contract is to be governed by it[8]. Article 6[9] also allows parties to consider CISG in a parallel or combined approach[10].

 The non-applicability of the Convention in contracts or during arbitration procedures (if there are no contractually specified obligations) owes no repercussions since arbitrators follow private dispute resolution systems, and are not bound to follow the treaty. Thus, Article 9 (1)[11] allows the culmination of CISG with the arbitration, if agreed upon.

Scholarly opinion varies, however, on the existence and usage of arbitration mechanisms in international commercial settings concerning CISG. The arbitrators, if they choose, can apply CISG even if the contract does not implicitly mention it- if they feel it stands in the best interest of the contracting parties. This may lead to arbitrators acting with brazen liberties or extensive apprehension. The position under CISG, thus, leads to undefined grey areas where the application of Article 1(1) itself acts as a backdrop for arbitrators to collate an approach where the applicability of CISG includes arbitral tribunals. The mesh of unbridled freedom and the lack of cohesive structures to include private mechanisms in commercial settings may lead to gross violations during arbitral awards, especially if the contracting parties are not pari passu.

Approaches to determine arbitral standing – lex loci arbitri, lex contractus and law by proximity

The international arbitration scenario exhibits various choice-of-law analyses when weighing the validity of any international arbitral award. The most prominent ones are- lex contractus, lex loci arbitri and, more recently, the law with the “closest connection” or “most significant relationship” to the arbitration agreement in question. Each of the analyses moves a step closer to achieving the harmonious and uniform objective of the Convention on the Recognition and Enforcement of Foreign Arbitral Award, popularly known as the “New York Convention”, and calls for a coherent and comprehensive application of the Convention along with the UNCITRAL Model Law.

The embrace of Lex contractus and lex loci arbitri stems from the more considerable abandonment of the law of the judicial enforcement forum that also considered the substantive validity of the agreement itself. These uncharted and often uncertain waters make inconsistency and unpredictable inefficiencies common in arbitration settlements in transnational disputes.

A closer assessment of the question of validity demands a dive into the doctrine of separability underlying International Arbitration contracts. This doctrine suggests that an arbitration clause or agreement is (presumptively) separate from the contract or through which it arises. This doctrine further secures the standing of an arbitral award/decision when the contract is under scrutiny for invalidity of specific provisions or as a whole. Prevalence of the concept of separability affords us the liberty to opt into different procedural laws to govern the contract and the arbitral sphere as two separate holdings.

Article 16 of the Model Law[12] conversely states that any decision to nullify the validity of the entire contract shall not ipso jure imply that the arbitral contract stands nullified as well, thus setting apart the stance and consequences of the parent contract from their arbitration agreements and concretizing the independence of the arbitration contract.

The arbitrator vested with the responsibility of handling the conflict between the two parties is expected to hold such authority legitimately. To regulate and grant such legitimacy, some laws must operate the decisions and actions of the arbitrator. International Commercial law recognises two such concepts that could come into play- Lex Contractus (the law chosen by parties to govern their contract) and Lex Loci Arbitri (law of the place where the arbitration is taking place).

There often prevails a clash over these two standings whenever a dispute is referred for arbitration in the international or transnational scenario. This clash can partly be attributed to an inherent inconsistency in the CISG by way of Article 4[13] that excludes the validity of such contracts from its ambit questions. The question over such validity leads to the excuse of not resolving the roots of authority resting in arbitrators or the virtue by which their decisions are rendered valid.

Lex Arbtiri can be found in the domestic laws or rules of the nations themselves.

Such rules are usually procedural in nature and address issues of competence such as jurisdictional challenges between domestic systems and arbitral tribunals; they also decide the expanse of the powers of arbitrators, the grounds for challenging their decisions and the scope of domestic judicial assistance that can be rendered to service evidence-taking during such dispute.

Lex arbitri does not respond sincerely as to how arbitration is to be carried out, and that is majorly controlled by the 2013 UNCITRAL Arbitration Rules, the subsequent orders rendered by the tribunals and the contractual arbitration agreement itself. The lex arbitri of various countries usually stem from the 1985 UNCITRAL Model Law on International Commercial Arbitration provisions and its amended 2006 version.

The central role of lex arbitri is to contribute to the resolution of disputes by granting to them a uniform and particular character by applying specific laws of nations that are primarily harmonious and reconciliatory, thus transcending borders and breaches as far as possible.

Lex contracts are the “intended law” or the law that the parties choose to govern the contract from which such arbitration agreement exists. It is substantive in functioning and is concerned with the dispute’s merits, extending to non-contractual and extra-contractual claims.

At a deeper level, lex contractus does appear to be the law “significantly connected” to the agreement, it being explicitly chosen by the parties to the contract to fall under the ambit of said law and be governed by it. However, currently “law by proximity” appears to be a different perspective during the determination of arbitral awards.

Reforms and Regulatory Suggestions

  1. Vague Language- The CISG has been accused of various ambiguous terms, as highlighted previously. Such a contention often poses interpretative issues for lawyers from a common law background. Nonetheless, the continental structure has its advantages. Still, to make the document more holistic, the respective definitional clauses must be appended alongside the statutory provisions, especially for multi-faceted terms like “reasonable” and “valid”. For instance, a subsequent average period may be prescribed concerning a “reasonable period of time” in the case of non-conformity of goods. Currently, the reliance is heavily on precedents, but this method may seem obstacle-ridden because of linguistic loopholes and accessibility issues.
  2. Seller Centric- The document has also been accorded the label of being too ‘seller-friendly”, and to combat the same, the remedial measures available to the buyer should concur with not just breach of contract but also tortious remedies. The lack of accommodation of domestic laws under the CISG has been the primary barrier to such remedies’ availability. However, for a document as versatile as CISG, the accommodation of domestic laws needs to be equitable with its status as an international document. Thus, the accommodation needs to be made more on a contract-to-contract basis, wherein the parties formulate a middle ground for applying a justiciable combination of laws.
  3. Application in Cross-Contracts- Cross-contracts here refer to any sale of goods contract between a member and a non-member state. Moguls like India and the United Kingdom stand apart from the CISG but form a substantial credit in international trade. How can contracts between such countries be mediated with countries like Finland, Norway or Sweden, whose domestic laws are modelled around CISG? In such a scenario, the reliance must be on CISG as an all-encompassing international document. To bracket non-member states to the fore, the focus should thus be on contractual provisions that combine domestic laws of non-member states with concurrent provisions of the CISG, wherein, in case of disputes, the CISG reigns supreme owing to its more flexible nature. Further, precedential studies would act relevant in such cases, and whichever law has dealt with more conscientious awards must be given preference in cases where the other document remains silent.
  4. E-Commerce-Based Sale Contracts and the Scope of CISG

With the predominating prevalence of cyberspace and an increase in e-commerce transactions, an enhancement of the scope and additional amendments are demanded of the all-encompassing CISG. Upon such realisation, a lack of foresight concerning the rapid hold that e-commerce has come to command seems evident from the formulation of CISG. Currently, the CISG has no provision to include transactions concluded internationally in the electronic sphere explicitly. Since trade no more remains restricted to conventional pen-paper approaches, its regulation should not be strictly traditional either.

Determining the location of the conclusion of such a sale also becomes an obstacle for such an application. Moreover, the problem of a lack of knowledge of the location of either party to the other further exacerbates the said situation. Therefore, the CISG needs to come up with pre-requisites that are not limited to internationality and location of contract but that progress according to the prolific advance in cyberspace and e-commerce-based sale contracts. To perform this role, the CISG can refer to conventions like the “United Nations Convention on the Use of Electronic Communications in International Contracts, 2005[14]” that was conceptualised to address this void.

  • International Sale of Goods and Arbitration

A hassle-ridden access to and availability of alternative dispute resolution (ADR) mechanisms have been characteristic of transnational and interstate treaties. The interrelationship between CISG and arbitration agreements must be viewed as a reversible one, too, wherein not only must the CISG apply to arbitration agreements, but arbitration, too, should be a crucial component of conflict riddance in the impugned scenario concerning the international sale of goods. Such a conception would reduce the escalation of disputes from early on. It would also strengthen the significance of CISG itself, given the utility it would recognise and reinforce.

The path forward – no middle ground but a concrete walk

Although the CISG has been hailed as a messiah in international contract governance, its harmonious construction and holistic dependence on the existence and preservation of an arbitration clause/contract becomes its most immense respite yet its most significant obstacle. Amongst the many reasons identified by global trade lawyers, legal luminaries and law reform institutions and commissions, the one that stands out is the issue of validity and recognition of contracts. This, in turn, is only exacerbated due to the linguistic barriers, translation difficulties and a lacking domestic recognition of the CISG itself. The failure of even signatory nations to embed its provisions in their native codes has led to blunting of awards or solutions due to conflict between public and private international law and civil and common law perspectives.

Due to its international character, it becomes crucial to resolve these disputes or fossilize a shared understanding and outcome by dealing with ambiguous terms and dubious definitions and dressing them as linguistically and conceptually accommodative. Its cursory treatment and “foreign law” status must be fixed and made more severe to pre-empt and address the “local tainting” of an international code of much utilization.

The CISG also requires a devoted body to oversee its functioning and resolve issues in terms of terminology and disposing of a uniform justice to all parties in conflict. The body would also aim at reaching a conclusion that emphasizes the importance of domestic laws applying to parties in an international trade contract and thus, secures their statutory right to domestic remedy while rendering them justice through equity and equality at global forums, including arbitral settings.

The possibility of modern arbitral infrastructures tends to favour the arbitrators’ discretion in applying and choosing the “law” that would operate if the parties choose none. This is when the arbitrators frequently visit the CISG. The significant realization here would be, as Hernandez puts it[15], the fact that the CISG was not primarily formulated to tackle arbitration contracts, as it was presumed that the parent contract would have an arbitral clause within itself in most cases. It might be preferred to develop an explicit clause/provision directed towards arbitration in international trade contracts.

Conclusion

As mentioned above, issues and approaches collectively make or break any code, law or legislation, but its essence lies in the attempts and successes aimed at reconciling the pros and the cons. The same must be done with the CISG and the expectations and outcomes it holds of arbitration contracts under it. Further, as judicial intervention becomes overreaching, it is all the more important to clarify rather than command transactions and their statuses under international regulations. This must be done through a receptive yet constructively specific codification of the acceptance and standing of the need for arbitral proceedings, awards, the extent of arbitrators’ role and the validity of their decisions.

It must also be ensured that the very “neutrality” the law hopes to harbour must not translate into the ambiguity of administration or the extemporaneous resolution of conflicts brought to its threshold but should lead to a well thought out course of action and reaction towards contractual disaccords between parties situated in a transnational milieu.


*Vrinda Chaturvedi and Ashlesha Pandey are students at Hidayatullah National Law University, Raipur. They can be reached at vrindach1320@gmail.com and ashlesha.212421@hnlu.ac.in respectively.

[1] SCHWENZER, INGEBORG, and PASCAL HACHEM. 2009. “The CISG—Successes and Pitfalls.” The American Journal of Comparative Law 57 (2): 457–78. https://www.jstor.org/stable/25652649.

[2] CISG obligates the buyer to examine the goods and notify the seller of any non-conformity. Such a clause renders the position of the buyer precarious, and tips the scales in favor of the seller.

[3] Janssen, André, and Matthias Spilker. 2013. “The Application of the CISG in the World of International Commercial Arbitration.” Rabels Zeitschrift Für Ausländisches Und Internationales Privatrecht / the Rabel Journal of Comparative and International Private Law 77 (1): 131–57. https://www.jstor.org/stable/24540332.

[4] Article 19 (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

[5]  Article 81 (1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

[6]  Examiner, T.T. (n.d.). Arbitration agreements under the CISG – The Treaty Examiner. [online] Available at: https://treatyexaminer.com/arbitration-agreements-cisg/#:~:text=General%20applicability%20of%20the%20CISG.

[7] See supra note 3

[8] Ibid

[9] Article 6 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.

[10] Katerina Georgiadou, “Transposing the CISG into the UK legal order: two legislative models”. Website: http://www.westlaw.co.uk (accessed on 21 May 2022)

[11]  Article 9 (1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

[12] Article 16. Competence of arbitral tribunal to rule on its jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the con- tract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

[13] 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.

[14] A. Assaduzzaman , Legal issues in the application of CISG in online sale (e-commence) contracts, SCIENCE DIRECT (Jul. 31, 2022, 4:04 PM), https://doi.org/10.1016/j.clsr.2016.07.012.

[15] See supra note 6


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