International disputes fro?)!

soup to nuts—or in this casCy pickles to jams —are included within the orhit ofthe CISC (Contracts for the Inte'niational Sale of Goods), a source of general contract principles and trade usage in world arbitration.

Resolving International

Contract Disputes
By Larry A. DiMatteo
The author is an assistant professor of business and international law at the University of Miami Scbool of Business. He holds a law degree from Cornell Law School atul has published several articles and a book

entitled, Contract Theory: The Evolution of Contractual Intent.

The author examines the effect the U.N. Convention on Contracts for the International Sale of Goods (CISG) has had on international arhitration. He reviews the general principles of good faith and fairness, and explains how these provide the framework for arhitrators to apply CISG provisions as evidence of general principles of international contract law.

T

he impact of the United Nations Convention on Contracts for the International Sale of Goods (CISG)' on international arhitration has heen felt in two areas. First, its adoption as the domestic contract law of the individual signatories will require its application hy arhitrators under conflict of law rules.Courts and arhitral trihunals will he required to apply its rules when it is determined that it is the law of the case. Second, it may he \'()luntarily applied as evidence of customary international law. Arhitration trihunals are more likely than courts to recognize it as a source of customary international contract law. It is the product of compromise hetween three of the world's major legal systems— common law, civil law, and socialist law.' Thus, it possesses a universal appeal that many arhitrators will find appealing in their search for a lex mercntoria-type of justification for their awards. It is this second use of die CISG hy arhitral trihunals—as evidence

of customary international contract law— that this article is directed. Basis in International Contract Law General principles of international law often play pivotal roles in international dispute resolution. "Modern judges and arhitrators tend more to seek to interpret and supplement instruments according to autonomous and internationally uniform principles."^ The CISG, as with most codes, reflects a recognidon of generalized principles of law. Professor Clive Schmitthoff, former lecturer at the City of London University, in making reference to the development of an international trade law code, noted that it should possess "principles which should apply to all international trade transactions." A code is most likely to he successful if it recognizes and harmonizes existing general principles of law. The following is a hricf review of the general principles of national contract laws and those found in the

DlSl'UTE RESOLUTION lOURNAL

and good faith in the termination of contractual relations."'^and therefore was not unconscionahle despite the disparity in the bargaining positions ofthe pardes."" The court held tbat a termination provision in a dealership agreement was "not atypical in the local husiness community... Ardcle 1. Fairness concerns and good faith can also he applied hy jurists and arbitrators through the vehicle of trade usage and custom. Lord Mustill more recently attempted to list 20 rules that help make up the uncodified lex mercatoria. its articies provide ampie opportunity for an arbitration panel to exercise flexibiiity in the interpretation of a contract The notion of fairness of the exchange has heen traced to the natural law philosophy of Hugo Grodus and Samuel Pufendorf in the 17tb century. It has heen predicted that arhitration panels and courts will imply a minimal standard of good faith — that heing "an affirmative ohligation to communicate during perfonnance and to cooperate in the cure of defects and tbe modification of obligations for unforeseen circumstances.. and gap-filling. From the medieval lex mercatoria to the present. [Tbere bas heen] a major shift towards relationalism and a recognidon of equitable considerations." The norm of fairness became a justificadon for the development of a numher of contract law doctrines. "Tbe business practices-of-the-community test asks whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place. and the principle of H( res magis valcat qiitmi pereiit (contracts should be interpreted in order to give them effect and not to destroy them). good faith was ruled as a general principle pertaining to all internadonal contracts. the doctrine oi' mipa in contrahendo (bad faith hargaining). These include tbe principle that a contract should he performed in good faith.. For example.' The general principles include the duty of good faith and suhstandve fairness concerns. renegotiation." or what is hroadly referred to as the lex mercatoria.^ Bad faith in the negotiation or performance of a contract will void a provision in a contract that was produced hy the had faith act/ Expansive interpretations of contractual good faith include good faith in negotiations. The non-hreacbing party must take all necessary steps to minimize damages. Tbese general principles are consistent with arbitral tribunals deciding international contract disputes using "non-national norms.internationalization of contract law in general. They believed that contractual fairness was a relevant factor in the enforceahility of contracts. In one ICC award. Though the principle of sanctity remains strong.. most specific rules of business can he traced to the norms ot good faith and fair dealing. It."^'' CISG as Lex Mercatoria A secondary concern of this article is tbe place and importance of the CISG within the general m(tvement towards the internationalization of contract law and the creadon of a new NOVEMBER sought out the usage and customs of a particular trade in order to determine if a term was unreasonahle. therefore. Although tbe VASG does not possess an explicit good faith provision. The civil law's notion of just contract'' and the common law doctrine of unconscionahility" come within this fairness penumbra. its articles provide ample opportunity tor an arbitration panel to exercise flexibility in the interprctadon of a contract. the duty to cooperate. an arhitration panel can reduce the amount of an award if it helieves that the claimant failed to cooperate or to avoid damages. the duty to adjust from the express terms of the contract. The ohligation of good faith is fonnd in most national legal systems. The International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts" can he seen as a supplementary set of principles to be used in conjunction with the CISG."'' Fairness in the exchange or substantive fairness concerns have increasingly been accepted as a major norm or principle of contract law at tbe supranational level. Atlantic Richfield Co. a tribunal .'" Arhitral tribunals at dmes will look to the concept of good faith wben assigning Iiahility and damages in a contract dispute. The doctrines of good faith and fair dealing are integral parts of contract law. it is certainly its underlying basis and one of its major objecdves.'" Althougfi the CISG does not possess an explicit good faith provision."''Article 77 adopts the good faith concept of the duty to mitigate. reladonal elements are on tbe rise. A numher of those listed are reflected in the imderlying principles often given for the CISG. including the negodadon process.'^ expressly applied the lex mercatoria in holding that "good faith must presideover the formadon and performance of contracts. if unforeseen difficuldes intervene in tbe performance of a contract.7 of these principles "indicates that the parties' hehavior must conform to good faith and fair dealing throughout the life of the contracts. can be concluded that. The court in Titzloii-itzki V."' In short. the "rule that unfair contracts and clauses should not he enforced. Thus. the parties shouid negotiate in good faith. though fairness might not he tbe sole aim of contract law. the statements and conduct of the pardes are to be "interpreted according to the understanding of tbe reasonable person.. One commentator on international commercial contracts predicts a continuing shift from the strict enforcement of contracts to fairness in the exchange and good faith norms. Principles of equity have heen fully recognized with respect to the dudes of good faith.

along with widely accepted supranational rules of commerce."-" This is so. Without knowing the languages of the world you can be sure that there have to be words for trade and be applied outside of its these commercial events wherever direct application as domestic law?"^" there is commerce. for CISG into a contract dispute as eviexample. The most profound evidence of the move towards the unification of contract law is the adoption of the CISC The development of a new contracts jurisprudence to interpret and bolster the CISG is likely to have important consequences for the enforcement of international sales contracts by arbitral tribunals. have lead to the creation of a law of business for international transactions. the use of "neutral" country laws. arbitrators called upon to decide questions of "The legal techniques of carrying on international trade are the same everywhere. which states that. ideoiogicai or economic orientation of the countries [invoived]. and non-legal language of the CISG provides arbitrators a source of such In many ways. "in arbitrations involving the application of contracts. The Council of Europe. These sources inchide the increase in economic and legal unions. no better source to detemiine the preauthor of "International Commercial vailing trade usage than the terms of Arbitration. norms. the arbitral tribunal used the CISG as evidence of international trade usage to avoid what it deemed to be an unfair domestic law: "As the applicable provisions of the law of the country where the seller had his place of business appeared to deviatefromthe generally accepted trade usage reflected in the CISG in that it imposed extremely short and specific requirements in respect of the buyer giving notice to the seller in case of defects. and national legal systems. the arbitration panel was able to extend a statute of limitations period in order to allow a purchaser of defective goods to bring a claim. in the ICC case. An international sales law "needs to cut out legal idioms. than on any predisposition towards a domestic law. international comsupranational rules of commerce. arbitrators may use the individual national system of law. has noted that successful sales law unification entails a body of rules that are event-specific and void of unnecessary legalese. the general principles and conditions of international conventions like the CISG are generally regarded as evidence of trade usage. the tribunal applied the CISG. CISG as a vehicle to avoid procedural They are more likely to make deci. of arbitration to settle contractual arbitration tribunals can imply the disputes.'". Thus. Therefore."" The ICC panel reasoned that "there is Professor Zagteb Goldstajn. "started work as early as dence of international custom or trade 1959 on the preparation of a conven.\rbitration Association's (AAA) International Arbitration Rules.lex mercatoria}^ The unification of contract law stems from numerous sources. irrespective of the political. In short. albeit in an uncodified form. tion on arbitration. lan. I cited an and practices that have given tliem the ability to communicate with one International Chamber of Commerce another without the distractions pre. Arbitral Tribunals' Use of CISG Merchants have long developed usage as Trade Usage In a previous article. like the medieval lex ??iercatoria. University of Pennsylvania emeritus. ideological or economic orientation of the countries linvolved]."'^ Thus.obstacles in order to render an award sions based upon pro-arbitration on the merits or equities of the case.In short.the following question: "Can the guage. In the ICC Arbitration Case No." Another commentator stated that the CISG "may be applied virtually anytime an arbitrator believes that it produces the proper result."-^ The European the issue was the amount oftimethe arbitration convention is to "a large purchaser of goods had to give notice extent based on the various legal sys. the CISG can be seen as a "collection of trade usage"" that arbitration tribunals can resort to in international commercial disputes.of defect. such as equity and fairness."-' Commercial of limitations period in favor of the arbitrators are less likely to be con." interpretation will fmd it easier to avoid recourse to rules peculiar to this or that domestic law and to adopt an autonomous and internationally uniform solution.two-year period provided in tbe cerned with the peculiarities of an CISG." (1987) has attributed the CISG. and write the rules in terms of commercial events that happen around the world. This premise is supported by Article 28 of the American .''' The progress of this internationalization of transactional law into domestic legal systems was duly noted by Schmitthoff: "The legal techniques of carrying on international trade are the same everywhere. the tri77 . irrespective of the political. even when the current rise of a supranational neither party is from a country that is commercial law'' to the increased use a signatory to the CISG. 57B of DISPUTE RESOLUTION JOURNAL 1989. mercial law or the lex ?Ne7xatoria can be seen as the world's first uniform law. and the increased recognition of general principles of contract law. These factors.usage. clear."" The use ot international conventions and documents as sources of customary international law was recognized in relation to the non-hinding Principles for International Commercial Contracts sponsored by the UNIDROIT: "With the assistance of the Principles."-' The terse. CISG itself be considered a usage of Professor John Ilonnold.(ICC) arbitration decision in posing sented by the nuances of culture. The arbitration panel disretems involved and on the fruit of garded a domestic law's shorter statute practical experience. most noticeably in Europe.'" For example.

CISG and the UNIDROIT Princi. The articles of the C^ISG offer an attractive source of international customary law to be used in support of arbitral awards. its importance will initially lie advanced by its recognition as customary international law by arbitral tribunals. One commentator warned of the expansion of contractual liability in international transactions because of tbe practice of placing discussions in writing at earlier stages of the contract formation process.The primary question becomes wbether tbe relevant community would accord binding force to these [instruments]. Article "Arliitrators can draw comfort from 11 provides that "a contract and its the fact that their understanding of terms may be proved "by any means. Instead of strict rule application. Furthermore. The rules of the CUSCi are expressed in terms of events found generally in international trade.'" This is phisticated . Some commentators regard the recognition of something as custom "as the prior source of international law.'" This broad evidentiary thresbold is akin to most arbitration rules.For example.given during the negotiation stage ally been the Hfeblood of the lex mercan be entered into evidence througb catoria.statute of frauds requirement for ural tor arbitrators to use the CISG as international contracts removes a trade usage because it was drawn formal obstacle in rendering equifrom common commercial practice: table decisions. Despite its enactment as the "domestic" international law of over 50 countries." The lack of a writing requirement and a parol evidence rule for a contract intended as afinalintegration of the parties' agreement is likely to expand the area of pre-contractual liability. For example. Rule 31 of tbe AAA's Commercial Arbitration Rules provides that "parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the arbitrator may deem necessary to an understanding and determination of the dispute.*' The CISCi is the latest attempt at codifying the lex ?nercatona for international sale of goods transactions. This is especially important in international transactions because tbe line between negotiation and contract is often blurred.. Parties are often unfamiliar with the ethical and legal ramifications of the negotiating process in other countries. contract dispute Conclusion International arbitration panels are resoiution. good faith." Arbitration practice is consistent with the United panels applying the CISG may conNations Convention designed to sider all evidence and not just a final reflect international consensus. good faidi. and civility are consistent with tbe approach of arbitral tribunals in international contract dis[)ute resolution."^' They are generally concerned with non-nation specific applications of international principles of equit)' and contract.\merican businessperson especially true when arbitrators are may be trapped if sbe believes that authorized to decide ex aequo et bonos her oral representations or informal or as amiables com posit etirs. the trade applicable to the contract. equity. international commercial law and including witnesses. if not indeed the sole source!"'" The CISG's underlying principles of fairness. Article 7{I) of tbe CISG mandates that matters of interpretation are "to be settled in conformity with the general principles" of the CISCi and of international contract law. arbitrators are often motivated by the equities of the case in rendering fair and equitable decisions. best positioned to apply a general business correspondences are only binding if confirmed in tbe fmal contract. the unsoprinciples have often been directly applied in arbitral decisions. The numerous provisions and jirinciples ot the CISG can be used by arbitrators in tbeir attempt to pro- The CISG's underlying principles of fairness. The CISG is ready-made for sucb an approach because its meaning and terms are to be originally interpreted. The role of arbitrators as providers of business-oriented. The lex inercatoria and its witness testimony. Tbus. tbe Superior Court of Quebec declined to set aside an arbitral award due to the "alleged lack of coberent and comprcbcnsible reasons. when looking to the CISG as customary international law..bunal shall take into account usage of vide fair decisions. will be less constrained in finding liability for representations or principles approach to international contract law."'"The writing in rendering their decisions. For example." The court ruled that "arbitrators cannot be criticized for expressing themselves as commercial men and not as lawj'ers. and civiiity are consistent with the approach Arbitral tribunals recognizing the CISC as customarv' international law ofarbitrai tribunais will be free to impose liability wben warranted in the pre-contractual setin internationai ting.. fair decisions has been recognized. A priori meanings taken from national legal systems are to be aliandoned in favor of tbe independent meanings consistent with the above underlying principles. Arbitrators. Connnercial transactions are increasingly consummated between parties of diverse cultural and legal traditions. equity. assurances given during the negotiation stage of a contract. which may lead the parties to write out their goals at a relatively early stage of the negotiation. For example. Recent cbanges in modern international transactions bave led to an increased reliance on pre-contractual instruments." One CISG's rejection of a writing or commentator concluded that it is nat. a contracting party's ples can be seen as compilations of oral representations and warranties general principles that have tradition. they NOVEMHKR .

Supp.D. "The CISG the Imernatiomil Sale of Goods (1994). quoting R. and I. ingiOct.M. "Different Laws Might facts. "Civil SER.Lex Mercatoria: T h e First Twentyvant statement made in negotiations Five Years." Interna(^mtiifiarial Cantimts (Rome 1994). Guide to Practical Application. A/CONF.iSG will be inviting for arbitrators more concerned with how businesspersons transact business. affirmative disclosure of material Reisman.' " 69 Tulane Law Review Perillo." A / ( : N . n. '" Lord Justice Mastill. the more specif- ic rules found in the CISG can and have been used as evidence of international trade usage. 5713 of 1<>89. par. dat Arhirration 484 (1986). as quoted in supra. 1976). -' Council of Europe. much like die International Chamber of Commerce's Uniform Customs and Practices for Documentary ' United Nations C^onvcnrion on Contracts for the lntL'm^ti()n<il Sale of Goods (April I I . they can be used as an alternative to more harsh national laws." Kastely. ' For the legislative history of the C. Z^ni'(1978) 18. & Jan ing. "Cases on Algoma Steamships Ltd. \-ali(iity of contracts. 19. Docume?itiiry History of the Vnifonn Law for Inteniational Sales (1989).C/ABSTRACTS/1. W . at 142. Vnifomt Conmienial l^nv in the Twmty-Fityt Cmtu. at 38.007. N o . -" Supra. UN Convention for the Internationai Sale of Goods. reprinted in tractual relationships. "Defining ' See generally Lord McNair. ' Micliuel J.V. at . a community's sense of justice. Case No. and assistance to others in '" CISG.quity. See generally. Int'l Comin. as reprint.See generally Raymond de Roover. see "United Nations (Conference on Contracts for the International Sale of Goods. Newman.Arthur Rosett. as quoted in Amy Kastely. 9. Contracts Revisited: A Study in the •-' John Honnold. has lieen enacted as the domestic law of the United States and at least 53 other countries." 119 IHirchasHancock. "Critical 15(1990)70. provide arbitrators a suitable framework for deciding international contract disputes by the application ofthe general principles that underlie both documents." William A.3) See also John Honnold. "The General Principles ot F. of universalized norms of eontraa law "The Generalized Principles of Law "• Ibid." Ohio Contract Fonnadon in International "Precontractual Liahility and the in Equity hi the World's Legal Systeriis Swre Zvni. "'I"he Right to Require Performance in International Sales: Towards an International Interpretation of the Vienna Convention. See also Joseph M. " "[Tlhe arguments of fairness. 134-135. any rele-' C M . (1990) Yale article. '" See I. • ENDNOTES Commission on International Trade. The CISC.SER." 17 Houston Journal of International Law The Convention specifically American Free Trade Agreement La-d' & Cmmiei-ce (1W3) 239. Murray. T h e Black Letter Text and Paulsson. These characteristics of the (. zation. that provide the hasis for the intema. afFd. .1994 ' U N I D R O I T Principles of tionalization of transactional law. Annex I. arhitral tribunals can avoid the intricacies of conflict of law rules and help promote the unification of international contract law. Duty to tracts. 8 .IV. iVashington Lffw Rei'iew (1988) 607. Law & Commercial Law. Brand & Harry (1995)." Q S G at Art 4 (a). "Case Law on tional Encyclopedia of Co?/iparative Legislative Means of Harmoni. v. F.International T r a d e . Denis Tallon. Rapports tional Institute for the Unification of alization of commercial transactions."57y)n7.C. •" Navigation Sonaynar Inc. Hugo Grotius.. U N C I T R A L T e x t s . Commercial '• "Common and civil law juris. Award.Trade are two examples of the gloh. etal at 222-226. 1142. " Id." \2 Journal of Internationa! Transactions. 2m. as reprinted in (2ded.Laurenc-e Craig. 1981) 18-20. 108. along with the UNIDROIT Principles. Legal CoL NIDROli" Principles of Intema'^ Md. "Lex " See generally U. Ga.. 1231. U N DOC. '" "Under the CISG. Fletchner. Economic and Policy." (Vienna: 10 March-11 April 1980). Price: Theory and Economic ahility: L'nintended Contractual " Henri Pirenne.2d413(5diCir. Award. Guide to the Intema. Case No. 9 / "Supra. '" Teklewold Gebrehana. § 2-302 of the other backgn>und infbnnation Mercato^ria: An Arbitrator's View. Trade: First Interpretations of the Duty of Good Faith Negotiation in (1978) .C. reprinted in 19/. 600-608. note 4. F.53(1936).C. The CISG. note 10 at 7. " Supra. admissible into evidence.International Trade." in Proceedings of the Con. 423 (1983)37..81.'\rticle 8(2). note 22. et al." 18 Journal of Economic Liahility in International Business Social History of Medieval Europe Hist. "The New tracts. 1980). Convention on Contracts for the M. material in this paragraph and some California Lm-Reviav (\9S\) 1587. as ( 1 9 9 4 ) 1 . '' Richard Hyland. '. 564F. 668. in Albert H . '" Nagla Nassar. The CISG.UNCITRAL Text. Bonell. International Commercial C o n . 283. «mfjr (1995) 1121." 63.Kelsey 1925). 5713 (1989)." Lecture at the University of Hawaii (May 13. No. Kritzer. Buyer. the moral convention of promis(1995) 1225. E.They include "the goal of com)ieasatracts.Year Book of Commercial Arbitration.Arh." 4 Arhitration Intematiomil Law in a Changing Econmnic Cthnate dictions recognize a principle of prior to signing of the contract are good faith requiring 'fair dealing." International Sale of Goods.tially quoting .. DISPUTE RESOLUTION JOURNAL 79 Reef: Uniform Law for International Trade.. 1977).C.Supp. " T h e Contracts §208 (1981). Lowenfeld. at H38.94. As such. 137-140. 1986).\1 Yearbook of Comn/erInternational Commercial C o n (1975) 1.C. good faith.8(1994).C. "The Concept of the Just and the Presumption of Enlorce.609. Principles of liita'nationul See generally. Michael Reisman. Bonell. "Equality in Elxchange. "Arhitration and *' John Klein & C^arla Bachechi.W. and change of circumstances were generally recognized by natural law Iawyer[s]. and certaint)' in international sales con. note 23. Inrerniitioriai Comvii'vcial relational and coofieration noniis. Restatement (Second) of Arbitration Inteniatioiial 133. "^ Andreas F../. Apply to Foreign Buys Lender the achieving the free henefit of con'" Hancock." Yale Journal of Interna. "Guide to Interna. (ieneral Agreement on Tariffs and reported in U N Commission on ' See U N I D R O I T — I n t e r n a . -' T h e passage of the N o r t h UN Sale Convention. at 143. British Yairhook of hitei'tiatiomil L/ni' Nofsolor S. tional SaleofCio(xls"at 101. 2 2 9 1 / 7 5 (1976)." 63 Pordham Lais Review Arbitration (i')^)7) 20}." 69 tional Lni'(1997) 111. -" Seller v.iS(i. William Park. Sirketi v. 58 (N. U N Document No. The 23. can be used by international arbitration panels as a neutral source for internadonal customary law. Theory and Practice of Long-Term CoNimercial Cmirraas (1995) 234.CyABSTRACTS/3 (1994). the Sphere of Application of the Recognized hy Ci\ilized Nations." John E. " A / C N . The Law of War and Peace (trans. note 10.*: of the United Nations Convention on Contracts for -" Larry A DLMatteo. than with the idiosyncratic rules of nationspecific contract rules.97/18.C. UN Pub. See also Gordon v. ed." 6 in this article were taken from the (1994). note Gordley. Furthermore. ed. Operation in Europe: 2583/ 76 (1977). 19. " N o n . as reported in U N Commission on ['rivatc Law. V i n (1993) 10. By recognizing the CISG as customary international law in cases where it is not directly applicable. mp-a.589.. Credits (UCP 500) and its Incotemis manual.Negotiate: An Element of International Review. Offkial Records." 2 '" Pabalk Ticaret Ltd.^-}. 1641/69 (1974). Case What? How?" 69 Tulane Laiv Crown Central Petroleum Corp. Awaril. I. I I . at 101.are not tied to thematic. f ional Sale of Goods Convention I Reflections on the United Nations '" See Ronald A. 19S7-I982 ijonal C^onuiiercial Contracts: Why? '' Id. as -'• Professor Kastely lists a numljer cited in Franco Ferrari.V(:ONF. (1994)281. Sanctity of Z ^ ' . . at 7. See also James Dealings. (1988) 86. I«W)3O. W . '"• Michael J. 97/19 (E. at 960. "Beyond the gress of the United Nations No. abstract elements of any domestic contract law regime. excludes from governance over "the and the Uruguay Round of the " I C C Case N o . 5713.y{\W^) 38.. as reprinted in Reisman. tion.'>WTO/(1984) 265.l2. ICC Arbitration Case No. 9 / Judiciaires de Quebec (1987).oty (1958) 41H. jr. Schmitthoff. "LTNIDROrr Principles of ed in.C.

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