Wednesday, February 10, 2016

UNIDROIT Principles and CISG

By Yasser Latif Hamdani

I.                   Introduction: CISG and UNIDROIT

The United Nations Convention on Contracts for International Sales of Goods (“CISG”) is a convention that was signed in Vienna in 1980 (though it was not until 1987 that it had the requisite number of ratifications required to make it a binding multilateral treaty) and has been ratified since then by 83 countries to date. Developed by the United Nations Commission on International Trade Law (“UNCITRAL”), it seeks to harmonize and create unified international sales law.  It was the result of 51 years of collective efforts initiated by International Institute for the Unification of Private Law (“UNIDROIT”).[1] It was in 1968 when UNCITRAL began its efforts that the 1920s proposal of Professor Ernst Rabel, a German Comparativist and thinker, finally began taking shape. The UNIDROIT Principles of International Commercial Contracts (“UNIDROIT Principles”) were drawn up by the efforts of UNIDROIT in 1994 and subsequently enlarged in 2004. A third edition of the UNIDROIT Principles was drawn up in 2010. Both the CISG and UNIDROIT Principles are part of the Lex Mercatoria or the “merchant law” and in particular the merchant law as it applies internationally.  One could imagine the CISG as a codification of principles and the UNIDROIT Principles as international common law of contracts.  It may be stated here, however, that even though UNIDROIT Principles were drafted with CISG very much in the background, UNIDROIT Principles have a wider application than simply sales of goods and covers a broader field of contracts and law, including for example Lex Sportiva (Sports law).  For the purposes of this research paper, however, I will only consider applications of UNIDROIT Principles as they relate to international sales of goods and in particular the CISG.

While CISG is an international treaty which binds its contracting states to the language of the convention.  UNIDROIT Principles on the other hand are principles that were drawn up by a body of professional international lawyers, jurists and thinkers with the express purpose, inter alia, “they may be used to interpret or supplement international uniform law instruments”.[2] Nevertheless there were many people who had participated in both endeavors. Therefore in many ways the UNIDROIT Principles filled up those gaps in the CISG that were but the obvious result of diplomacy and compromise required to arrive at a complex multilateral treaty such as CISG. Therefore the UNIDROIT Principles can be seen an aid and a supplementary device by which CISG can be applied.  This has basis in CISG itself as I will argue in some detail below in light of case law now before us. To answer the question broadly however, the nexus between CISG and UNIDROIT is to be found in the application of UNIDROIT Principles to the interpretation of the CISG and corresponding domestic law (in to which arbitrators and courts are duty-bound to read CISG).  The basis of this is Article 7 of the CISG which states its international character [3] and leaves room open for application of general principles and private international law.[4] Article 7(1) of the CISG states:

“…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.”[5]

Article 7(2) of the CISG states:

“Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.”[6]

Professor Michael Joachim Bonell, one of UNIDROIT’s leading legal consultants and one of the people who helped frame the UNIDROIT Principles, has written in some detail on the issue of UNIDROIT Principles being supplementary to the CISG.  In one of his seminal papers on the nexus between the two, he points out that CISG was the best that could be achieved by way of legislation, while UNIDROIT Principles are the restatement of international contract law.[7] While explaining the formulation of UNIDROIT Principles, he explains that CISG was an obligatory point of reference for the framers of the CISG. The UNIDROIT Principles, therefore, were designed to explain unclear language and to fill those gaps that were left by framing of CISG. This being the explicit intent of the UNIDROIT Principles, as evidenced by Professor Bonell’s aforesaid paper, I will attempt to analyze the nexus between the two by listing and explaining the case law (both through arbitral awards and through national courts) that has read into, for all practical purposes, the UNIDROIT Principles into the CISG as far as the two are compatible.


II.                 Examples of how UNIDROIT Principles have been used to supplement CISG (Non-exhaustive list of cases and arbitral awards)


A.    Determination of Interest Rate in accordance with UNIDROIT Principles while applying CISG

Some of the earliest cases or arbitral awards that referred to UNIDROIT Principles applied Article 78 of the CISG in conjunction with Article 7.4.9 of the UNIDROIT Principles. Article 78 of the CISG does not clarify what the applicable rate of interest should be and therefore requires Article 7.4.9 as an aid. The first case in this regard comes in form of an arbitral award from 1994 by Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft – Wien in which the arbitrators laid down that the matter of interest rate was governed but not “expressly settled” by the CISG. Therefore the Arbitrators referred to Article 7.4.9 of the UNIDROIT Principles which stated that the average prime rate in the buyer’s country would apply.[8] We see the application of the same Article 7.4.9 of the UNIDROIT Principles in a decision by ICC International Court of Arbitration in 1995.[9]  Since then arbitral courts around the world have repeatedly referred to the Article 7.4.9 of the UNIDROIT Principles to settle the question of interest rates in international commercial contracts. 

B.     Question of Hardship

In the case of Scafom International BV vs Lorraine Tubes s.a.s, the Court of Cassation of Belgium ruled that a contract was silent on the issue of re-negotiation due to hardship. Therefore reference was made to Article 7(2) of the CISG (i.e. use of general principles) and correspondingly to “the general principles governing the law of international commerce, concluded that according to such principles as laid down, among others, in the UNIDROIT Principles of International Commercial Contracts”.[10] Re-negotiation due to hardship was allowed consequently in line with the UNIDROIT Principles. This was upheld by the Supreme Court of Belgium.

C.    Pre-Contractual Negotiation and Common Intention

In the case of Proforce Recruit Limited v. The Rugby Group Limited, the Court of Appeal (Civil Division) of the UK ruled that pre-contractual negotiations and common intention of the parties were relevant to determination of the dispute. In particular reference was made to UNIDROIT Principles, Articles 4.1 to 4.3 read with Article 8 of the CISG which was the governing convention.[11] This was again upheld in the case of The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd[12] and in Chartbrook Limited v. Persimmon Homes Limited.[13]

Another judgment on point came from New Zealand’s Court of Appeals in the case of Hideo Yoshimoto v Canterbury Golf International Limited which while applying Articles 4.1 to 4.3 of the UNIDROIT Principles described them as being “in the nature of a restatement of the commercial contract law of the world [and which] refines and expands the principles contained in the United Nations Convention.”[14]

D.    Place of Performance of Obligation

In the case of SCEA GAEC Des Beauches Bernard Bruno v. Société Teso Ten Elsen GmbH & COKG affirming the principle contained in Article 57 of the CISG, the French Cour d'appel de Grenoble referred to Article 6.1.6 of the UNIDROIT Principles to settle the question of obligation pertaining to payment i.e. place of such payment should be the creditor’s place of business.[15]

E.     Reasonable opportunity to be acquainted with standard terms

Netherland’s Hof 'S-Hertogenbosch applied Article 2.20 of 1994 UNIDROIT Principles to settle the dispute of whether a buyer should have reasonable opportunity to get acquainted with the seller’s standard terms, a question on which CISG was silent. [16]

F.     Limitation Period

In the case of Castellana Inmuebles Y Locales S.A. v. Brunello Cucinelli SPA, Spain’s Audiencia Provincial Madrid SPA noting that CISG was silent on limitation applied Article 10.2 of the UNIDROIT Principles to determine the limitation period. [17]

G.    Formation of Contract

Ruling on a contract between a Finish company and a French company (which in its Russian version invoked Swedish law) and applying CISG by virtue of the CISG’s incorporation in domestic laws of France, Finland and Sweden, the ICC International Court of Arbitration applied UNIDROIT Principles as a supplementary device to CISG and also as the governing principles for contract formation.[18]

III.             The appropriate role for UNIDROIT Principles vis a vis CISG: A contested issue

The upshot of the case law discussed above is that UNIDROIT Principles have been applied in three main ways in conjunction with CISG.

a.       Application of UNIDROIT Principles when CISG is silent on an issue (Gap filler).

b.      Application of UNIDROIT Principles as a supplement to CISG and as universal trade usage.

c.       Application of UNIDROIT Principles independently by way of a contractual clause as an aid to interpret international contracts. This imagines an independent status for UNIDROIT Principles even when they do not directly correspond to CISG or are not moored in CISG.

Of the three, the first two scenarios are directly relevant to the main thrust of the question before us.  The first application i.e. where CISG is silent has a necessary first step and that is the legal basis for reference to CISG. This usually happens by one of two ways. The first way is if the contract is between two parties, either of which is based in a contracting state and the governing law is of the contracting state.  In that case the CISG is to be read into the domestic law, either automatically (in the event the contracting state is monist) or by incorporation into domestic legislation (if the contracting state is dualist).  Once the CISG is considered part of the domestic law, a court taking cognizance of dispute arising out of such a contract must apply CISG to its interpretation. Second way is when a clause in the contract refers specifically to CISG as the governing law. It may be the case that the contract either refers to CISG or both. Professor Bonell recommends the following clause: “This contract shall be governed by CISG, and with respect to matters not covered by this Convention, by the UNIDROIT Principles of International Commercial Contracts.” Once the CISG is found to be silent on a certain point or non-conclusive, the case law above suggests a recourse to UNIDROIT Principles to complement the CISG. 

So how does UNIDROIT Principles interact with the CISG? I have given case law above that elucidates the ratio of various judgments and arbitral awards on specific points. However the application of UNIDROIT Principles when interpreting, complementing or supplementing the CISG is wider.  As mentioned earlier the UNIDROIT Principles were not meant to be a binding document unlike CISG and therefore the leeway available to its drafters was much greater than what was possible in diplomacy, tact and compromise that was required in framing the CISG.  This means that UNIDROIT Principles are a more comprehensive framework and one which in application goes beyond merely CISG.

The international character of CISG and its deference to general principles and private international law as given in Article 7 mentioned hereinabove, means that judges and arbitrators have had to rely on their own devices to interpret and implement CISG. In this respect UNIDROIT is a veritable guide for interpretation. Professor Bonell points out that fundamental breach of contract for example is better defined and laid out in Article 7.3.1 of the UNIDROIT Principles than in Article 25 of the CISG.[19] He points out that Article 7.1.4 of the UNIDROIT Principles may be used as the complementary device to Article 48 of the CISG where doubts about the right to cure by a non-performing party exist.[20]  Professor Bonell also speaks at length about the application of interest rate under UNIDROIT Principles i.e. Article 7.4.9, which we have seen above in the case law as well.  His view is largely shared by Professor Anna Veneziano, an Italian professor of law, in her paper on “Change of circumstances and the duty to renegotiate according Belgian Supreme Court” where she discusses the Belgian Supreme Court’s decision upholding Belgian Court of Cassation’s decision in the Lorraine Tubes case mentioned hereinabove. She is wholly supportive of the idea of usage of UNIDROIT Principles as a means to elaborate the CISG and its corresponding impact on domestic law and jurisprudence.[21]

 This position is contested to a certain extent by Professor John Y Gotanda who argues that UNIDROIT Principles were not meant to be “gap-fillers” in the CISG. He argues that essential mechanism provided by the CISG to fill the gaps precludes the application of the UNIDROIT Principles as the principal source of authority on whose touchstone the CISG can be interpreted.  He argues that UNIDROIT Principles are not merely the restatement of general principles of international contract law but are intended to be the embodiment of best practices and solutions. Professor Gotanda reads the scope of Article 7(2) of the CISG as being limited to that principle being “moored” to the basic premise of a provision of CISG. He points in particular to the application of Article 7.4.9 of the UNIDROIT Principles in conjunction with Articles 74 and 78 of the CISG as being an overreach by arbitrators and judges and argues that the former actually upends the latter. He argues that by allowing interest at a lending rate (which the UNIDROIT Principles allow), when read in conjunction with the provision of Article 74 which allows for actual damages including any loss from borrowing money, means that an aggrieved party may not borrow against funds owed and may reinvest leading to the ultimate conclusion that application of UNIDROIT Principles may overcompensate the aggrieved party.[22] Professor Gotanda further argues that if CISG is silent on an issue or if there are gaps after application of its literal text, the recourse must be to domestic law. He also argues against the application of UNIDROIT Principles as trade usages by arguing that approach forwarded by UNIDROIT Principles do not constitute “universal trade usage”. Still he believes that they can inform the CISG as solutions that can resolve some unanswered dilemmas left open by the text of CISG.[23]


IV.             Conclusion

The conclusion I draw from the foregoing discussion is that arbitrators and judges have on numerous occasions applied UNIDROIT Principles as gap fillers for CISG by relying on Article 7(2) of the CISG which calls for resolution through application of general principles of private international law. My view is closer to Professor Bonell’s view which sees UNIDROIT Principles being drafted in the backdrop of CISG and therefore, I concur with the view that UNIDROIT Principles are moored in the premises that led to the adoption of CISG by contracting states. I do not wholly agree with Professor Gotanda’s view that the recourse must first be had to domestic law because I believe that the entire purpose of CISG was to harmonize and unify international law on sales of goods. Furthermore one can argue that UNIDROIT Principles are not incompatible with domestic law to begin with. Professor Gotanda’s example using interest rates is too stretched and at best esoteric given the overall thrust behind the effort to harmonize and unify transnational commercial law. UNIDROIT Principles, therefore, in my view are the foremost authority in determining and filling the gaps that may occur in application of CISG. I also agree with the camp that argues that UNIDROIT Principles constitute universal trade usages and therefore are directly applicable. The world needs universal principles for international trade and commerce and UNIDROIT Principles do an admirable job in supplementing conventions like the CISG. This is precisely why arbitrators and judges use them in the manner they have done so in the aforesaid case law on the subject.





[2] See the Preamble to the UNIDROIT Principles
[3] Article 7(1) of the CISG
[4] Article 7(2) of the CISG
[5] Article 7(1) of the CISG
[6] Article 7(2) of the CISG
[8] accessed on 10 December 2015
[9] accessed on 10 December 2015
[10] accessed on 10 December 2015
[11] accessed on 10 December 2015
[12] accessed on 10 December 2015
[13] accessed on 10 December 2015
[14] accessed on 10 December 2015
[15] accessed on 10 December 2015
[16] accessed on 10 December 2015
[17] accessed on 10 December 2015
[18] accessed on 10 December 2015
[20] Ibid
[21]Veneziano, Anna, UNIDROIT Principles and CISG : Change of Circumstances and Duty to Renegotiate according to the Belgian Supreme Court Accessed on December 11, 2015.
[22] Gotanda, John Y, Using the Unidroit Principles to Fill Gaps in the CISG Accessed on December 12, 2015
[23] Ibid

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