Applying the CISG to international commercial arbitration

By Kevin Cong, Yao Liang Law Offices
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The United Nations Convention on Contracts for the International Sale of Goods (CISG), which came into effect on 1 January 1988, is recognized as one of the most important international conventions in the field of the international sale and purchase of goods.

The CISG is used in commercial arbitration in various countries, but in some countries it may not be applicable. The question then arises of whether and when the CISG is directly applicable to arbitral proceedings.

Not directly applicable

Kevin Cong
Kevin Cong
Associate
Yao Liang Law Offices

According to article 1(a) of the CISG, the convention applies to sales contracts entered into between parties whose places of business are in signatory states.

When this is the case, the CISG is “directly” or “automatically” applicable and there is no need for recourse to the rules of private international law.

This is also consistent with the spirit of the United Nations Commission on International Trade Law (UNCITRAL). The UNCITRAL digest of case law states that the CISG should take precedence over the rules of private international law.

However, this only applies to the courts of signatory states. The CISG does not necessarily apply to arbitration, the other major method of resolving international commercial disputes.

This is because of the contractual nature of arbitration, and the fact that arbitral institutions vary widely in character. Unlike courts, arbitral institutions are under no obligation to comply with international treaties entered into by the state in which they are located.

If a buyer and seller from different CISG signatory states select a state which is not a CISG signatory as the place of arbitration, can the arbitral tribunal directly invoke the CISG?

It appears not. In such circumstances, even if the places of business of the contracting parties are located in signatory states, the arbitral tribunal cannot directly apply the CISG by invoking article 1(a) of the convention. It should first apply the rules of private international law. Only if the rules of private international law lead to the application of the laws of the signatory states can the CISG be invoked.

Conversely, if the rules of private international law lead to the application of the laws of non-signatory states, the CISG will not apply.

Indirect application

The CISG may be applied indirectly, however, under the provisions of article 1(b) of the convention. This article comes into play where the laws of a particular state apply as a result of the application of the rules of private international law.

This provision is aimed at expanding the scope of application of the CISG. However, at the time of ratification of the convention, six states, including China and the United States, expressed reservations about article 1(b).

If both parties contractually agree on the place of arbitration, could uncertainty about the applicability of the CSIG in the state where that place is located affect the arbitral ruling?

As mentioned above, an arbitral tribunal is born out of the agreement of two parties, and is not a state institution. Thus, unlike a court, it is under no obligation to uphold the public policy of the state in which it is located. The governing law contractually selected by the parties is not the same as the law of the place of arbitration or the law governing the arbitral procedure.

Therefore it does not matter whether the state where the arbitration takes place has reservations about the CISG. Only when the state of the governing law of the contract is one that has reservations about the convention do the reservations expressed by that state constrain the arbitration.

The position in China

In China, because of the provisions of the PRC Civil Law and the PRC Arbitration Law, the people’s courts may review any arbitral award made in the face of China’s reservations about article 1(b), no matter whether that review comprises a substantive review of a domestic award or a procedural review of a foreign-related award. The courts can set aside the award on the grounds that there are “errors in the application of the law” or alternatively because it is “contrary to the public interest”.

Thus, arbitration tribunals operating in China should, just like the people’s courts, take account of the country’s reservations with regard to the CISG, even if both parties have expressly agreed or clearly indicated willingness to apply the convention.

This is illustrated by case SG2000-025 handled by the Shanghai branch of the China International Economic and Trade Arbitration Commission (CIETAC). After a Chinese buyer and a South Korean seller signed a contract for the sale of goods, a dispute arose over quality. The parties submitted the matter to CIETAC in Shanghai. At the time of arbitration China was a signatory to the CISG but South Korea was not. During the hearing, without prior agreement, both sides invoked the CISG.

The tribunal took the view that, according to article 1(a), the convention applied only to international contracts for the purchase and sale of goods entered into by parties whose places of business were located in signatory states.

Proximate connection

At the same time, the reason cited by China for its reservations about article 1(b) of the CISG was its reluctance to extend the convention to contracts for the sale and purchase of goods entered into between Chinese enterprises and parties whose places of business were in states that were not signatories to the convention.

Therefore, the tribunal found that although both parties had used the CISG to support their claims, it was unable to apply the CISG in the resolution of their dispute. Instead it determined the governing law according to the principle of proximate connection.

Kevin Cong is an associate in the Shanghai office of Yao Liang Law Offices

701/702 Huaxia Bank Tower

256 Pudong Nan Road
Pudong New Area

Postal code: 200120

Tel: + 86 21 5155 0338

Fax: + 86 21 5155 0051

www.yaolianglaw.com

E-mail:lilla.guo@yaolianglaw.com

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