Turkish Law Blog
What is the Best Dispute Resolution Mechanism for International Sales Contracts?
The world has never been as globalized and as integrated as it is today. The integration has and is still forcing systems on all levels of society to go through change. The legal systems and laws across the globe have had their fair share in keeping “up to date” in this new era of integration, which has resulted in the necessity to draft uniform laws. Within this framework, the United Nations has been engaged with the unification of laws for a few decades now. A successful instrument that has been enacted in the field of international trade is the United Nations Convention on Contracts for the International Sale of Goods (“CISG”).
The CISG consists of conflicts of law rules concerning the applicability and substantive law rules to be applied to international sales contracts involving goods. The CISG was drafted to unify and promote international trade. As such, one of the most important provisions of the CISG is the one that emphasizes its international character. Article 7(1) of the CISG not only deals with good faith, but it also deals with the uniform and autonomous interpretation of contract law concepts. It reads as follows: “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.”
Many scholars have stated that Article 7 is one of the most crucial provisions of the CISG. Moreover, it is a provision that courts and arbitral tribunals/ arbitrators should always bear in mind when they render judgments. Article 7(1) of the CISG emphasizes the need to understand the unique international character of transactions subject to the CISG; it prescribes arbitral tribunals and courts in various jurisdictions to take this unique characteristic into consideration and reach a uniform application beyond traditional boundaries of domestic laws.
Initially, in the early years of the CISG, uniformity, as foreseen under Article 7(1), had not been implemented effectively. However, international case law has evolved and today, more courts have come to appreciate the international characteristic of the contractual disputes subject to the CISG. Many courts have ruled that due consideration should be given to arbitral tribunals or courts in other jurisdictions. For example, Dutch courts which render many decisions based on the CISG each year have ruled on exactly this matter; the Dutch (Den Haag) Appellate (Gerechtshof) court has ruled as follows in a decision rendered in 2014: “…the judge that has to interpret the CISG should take into consideration decisions of courts and arbitral tribunals in other countries, as far as these rulings have persuasive authority.” [wording was taken from the translation found at https://iicl.law.pace.edu/cisg/case/netherlands-hague-appellate-court-feinb%C3%A4ckerei-otten-gmbh-co-kg-v-hdi-gerling-industrie] Another example of the uniform interpretation and application of the CISG comes from recent Swiss jurisprudence. The Swiss (Basel) Appellate court (Appelationsgericht), in a decision rendered on August 24, 2018 [https://iicl.law.pace.edu/cisg/case/switzerland-august-24-2018-appellationsgericht-appellate-court], which was affirmed by the Swiss Supreme Court (Bundesgericht) on May 28, 2019 [https://iicl.law.pace.edu/cisg/case/switzerland-may-28-2019-bundesgericht-federal-supreme-court] has cited many cases from various jurisdictions across the globe to interpret CISG concepts. The Swiss courts have gone beyond traditional interpretation of legal concepts and used international CISG case law to reach an autonomous meaning reflecting the international “spirit” of the CISG. [see Schroeter, U. (2019). Grenzfragen des Anwendungsbereichs und international einheitliche Auslegung des UN-Kaufrechts (CISG). Internationales Handelsrecht, 19(4), pp. 133-136].
On the contrary, U.S. courts tend to adopt a more reluctant approach compared to European courts. The U.S. district court (Idaho) ruled as follows in August 2019: “Article 7 of the CISG provides that a court may consider case law applying the UCC when interpreting corresponding provisions of the CISG. On the other hand, "UCC case law is not per se applicable." Chicago Prime, 408 F.3d at 898”. [https://iicl.law.pace.edu/cisg/case/united-states-august-8-2019-district-court-sunrise-foods-international-inc-v-ryan-hinton] Moreover, sometimes courts have failed to accurately apply the CISG principles. For example, in a U.S. District Court (New York) case of 2016, the court did not take into consideration the contract law concepts of the CISG; within this context, it directly applied the common law parol evidence rule barring extrinsic evidence. [https://iicl.law.pace.edu/cisg/case/united-states-september-21-2016-district-court-cooperativa-agraria-industrial-naranjillo] Fortunately, the U.S. Court of Appeals (Second Circuit) vacated this judgment in 2018. In its ruling, the court emphasized that New York law could not be used to substitute the CISG and that interpretation should be made based on general principles. [https://iicl.law.pace.edu/cisg/case/united-states-may-9-2018-circuit-court-transmar-commodity-group-ltd-v-cooperativa-agraria]
While it can be challenging for courts to interpret contract law concepts under the CISG in an autonomous and international manner, international arbitral tribunals have less of a challenge. Despite the fact that women are assimilated in the world of arbitrators, generally, the nature of arbitral tribunals is international, they compromise of arbitrators from diverse backgrounds and jurisdictions. Therefore, they are better equipped to apply the CISG in a truly uniform manner beyond domestic interpretations. Nevertheless, it has been identified that arbitral tribunals have at times failed to contribute to the uniform and autonomous interpretation of the CISG. [For an elaborate analysis see Petra Butler, CISG and International Arbitration - A Fruitful Marriage, 17 Int'l Trade & Bus. L. Rev. 322 (2014)]
However, a practical major challenge that arbitral tribunals have come across in the context of the CISG is not concerning autonomous interpretation or internationality. It is the application of Article 11 of the CISG in light of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“NY Convention”). Article 11 of the CISG foresees that a contract “need not be concluded in or evidenced by writing and is not subject to any other requirement as to form”. On the other hand, in order to seek enforcement or recognition of an international arbitral award, Article II of the NY Convention states that an arbitration agreement is to be executed in writing. The different approach of the CISG and the NY Convention has been discussed thoroughly in legal literature; although there are different views, essentially, all agree that at the very least, Article 11 of the CISG will not apply to arbitration agreements. [for more on this matter see Andre Janssen, The Relationship Between the CISG and International Arbitration: A Love with Obstacles?, Contratto e impresa / Europa 24 (2015)]
In short, international arbitration is a dispute resolution mechanism arising from the necessity to effectively and neutrally resolve disputes of “international character”. Similarly, the CISG has been adopted to promote international trade by providing uniformity and autonomous “international” interpretation. Thus, the ultimate aim of the CISG and international arbitration is to offer solutions that meet the needs of an international and diverse, yet integrated world.