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INTERPRETATION AND GAP-FILLING UNDER THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS

Nives Povrzenic
University of Zagreb Faculty of Law
Zagreb, Croatia

Introduction

Because of its nature, uniform international law presents special challenges to those who interpret it. Uniform international codes have been created at Diplomatic Conferences attended by experts from all parts of the world. As stated in its preamble, the United Nations Convention on Contracts for the International Sale of Goods (CISG) was created to "contribute to the removal of legal barriers in international trade and promote the development of international trade". The 1980 Vienna Sales Convention is an important document. To accomplish its objectives it is important to interpret it properly. The development and meaning of CISG Article 7 is the subject of this paper.

1. History of the Uniform Law of International Sales

In the medieval age there was the lex mercatoria, a set of rules which knew no boundaries in its application. Parallel with the development of the modern notion of sovereignty, national legislators commenced the localization of the law of trade. Differences between laws of countries have created barriers to international trade and added to the expense of such trade. Lack of mutual understanding of the national laws of trading partners presented added complications. Standardizing the law of international trade became an important objective.

The beginning of the unification process dates back to the late twenties. In 1929 the noted German jurist, Professor Ernst Rabel suggested to Vittorio Scialoja, the then president of the International Institute for the Unification of Private Law (UNIDROIT) to initiate work on the formation of a uniform law of international sales. UNIDROIT accepted this challenge.

A Committee to which the elaboration of future uniform law on the sale of goods was entrusted, submitted a preliminary draft in 1934. The revised version of that draft was approved by the Governing Council of UNIDROIT in 1939 but a plan to submit it to a Diplomatic Conference was disconcerted by the outbreak of the Second World War.

In 1951 the Government of the Netherlands convened a Conference at The Hague. Its achievement was formation of a Special Commission which produced two drafts: one in 1956 and, following comments made by Governments and interested international organizations, another draft in 1963. Encouraged by the favorable reactions the draft uniform laws received, a Diplomatic Conference was convened at The Hague in 1964. It led to the adoption of two Conventions: the Uniform Law of International Sale (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF).[1]

From 1966, the leading role in the creation of a uniform law of international sales that would be acceptable to a larger segment of the world trade community was taken over by United Nations Commission on International Trade Law (UNCITRAL). The general climate to promote the Hague Conventions was unfavorable. Member States of the United Nations described them as too dogmatic, complex, predominantly of the European civil law tradition and unclear, but perhaps the biggest objection was lack of global representation in the rule-making.[2] The need for a more acceptable set of trade rules encouraged UNCITRAL to undertake and advance the codification process.

The United Nations Conference on Contracts for the International Sale of Goods was held in Vienna from March 10 to April 11, 1980. It was attended by representatives of 62 states and 8 international organizations. The final outcome of the Vienna Conference was the adoption of the United Nations Convention on Contracts for the International Sale of Goods. After 50 years of work, the main document of the New Law Merchant was created.

2. History of Article 7 - Impact of the Relevant Provisions of The Hague Conventions

ULIS contained two provisions which are connected to the problems of interpretation and filling of lacunae iuris of uniform law.

Art. 2 ULIS
"Rules of private international law shall be excluded for the purposes of the application of the present Law, subject to any provision to the contrary in the said Law."

Art. 17 ULIS
"Questions concerning matters governed by the present Law which are not expressly settled therein shall be settled in conformity with the general principles on which the present Law is based."

These provisions indicate that ULIS was intended to become a self-contained body of law for international sales. It was to be construed and applied autonomously, i.e., without any reference to or interference with national laws. Such a "revolutionary" approach met with both approval and criticism.

Those who approved this formulation stressed that such a provision emphasizes a distinctive feature of the uniform law: the need for uniform interpretation and application. Furthermore, it brings more certainty into international sales because it restrains the application of the rules of private international law which are not uniform and are often unclear. That could lead to different determinations as to which national law should be applied.

On the other hand, those who did not favor Article 17 argued that referring to "general principles" in the interpretation of the Uniform Law is inadequate because it is doubtful whether general principles existed at all, since the uniform law does not specifically declare them. There are also those who believed that having a body of uniform law separated from national law was unacceptable.[3]

At the First Session of the UNCITRAL Working Group in 1970 several proposals for the revision of ULIS Article 17 were submitted. On the one hand, it was suggested that the text should be redrafted as follows:

"The present Law shall be interpreted and applied so as to further its underlying principles and purposes, including the promotion of uniformity in the law of international sales."

On the other hand, it was proposed that the provision should be deleted or modified in order to state expressis verbis that "private international law shall apply to questions governed but not settled by ULIS". Another suggestion was to combine the two proposals by adding to the first a formulation such as, "otherwise, the rules of private international law shall apply". None of these proposals was supported by a majority of the Working Group.

At the Second Session in 1971 the Working Group decided to recommend the adoption of a new version of Article 17:

"In interpreting and applying the provisions of this Law, regard shall be had to its international character and to the need to promote uniformity [in its interpretation and application]."

The Working Group decided to delete the reference to the "general principles on which the present Law is based" declaring this provision too vague. Also, it was felt that this redrafted article should express more clearly two considerations not mentioned in the original Article 17: the international character of the law and the need for uniform interpretation and application.

At its Fourth Session in 1971 the Commission adopted the above provision proposed by the Working Group. At the same time it was suggested that this language should be supplemented by an additional paragraph dealing with gaps in the uniform law, but since opinions were divided between those who prefered the approach as indicated in the newly adopted Article 17 and those who favored recourse to the rules of private international law, it was decided to defer final decision on this matter. At subsequent sessions the only proposal referring to Article 17 was to omit the words within square brackets, since they were regarded as redundant.

At the Seventh Session in 1976, the Sales Draft adopted by the Working Group contained Article 13 which read as follows:

"In the interpretation and application of the provisions of this Convention, regard is to be had to its international character and to the need to promote uniformity."

The Working Group also considered a Formation Draft. During the revision of ULF, at its Ninth Session in 1978, the Working Group adopted a new provision, not contained in ULF. It was embodied in Article 5 according to which:

"In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith."

This article was the subject of lengthy discussion. Those who favored its deletion pointed out that standards of fair dealing and good faith, although highly desirable in international trade, were too vague. They also observed that the application of such a provision by national courts would be influenced by their own legal and social traditions and therefore the uniformity of the international law would be endangered.

A number of alternatives were presented. It was suggested that the substance of Article 5 be conveyed in a preamble of the Convention. Another proposal was to incorporate the observance of good faith into the rules for interpreting the statements and conduct of the parties. The third and most acceptable solution was to incorporate the principle of the observance of good faith into the article on the interpretation and application of the provisions of the Convention.

Consequently, the new consolidated text of the UNCITRAL Draft Convention as adopted at this same session no longer contained a provision corresponding to Article 5 of the original Formation Draft. Instead, Article 6, which corresponded to Article 13 of the former Sales Draft was revised to read:

"In the interpretation and application of this Convention regard is to be had to its international character and to the need to promote uniformity and the observance of good faith in international trade."

At the Vienna Conference several amendments were submitted. Some were merely of a drafting character, while others were substantive intending to add a new paragraph dealing with the problem of gaps in the Convention. Several solutions were proposed. They had in common resort to national law to settle problems created by gaps in the text of the Convention. The amendment of Bulgaria[4] suggested that unsettled questions should be decided according to "the law of the seller's place of business", i.e., by applying the point of contact of characteristic performance, since the seller is usually believed to be a party whose obligation is deemed characteristic. According to the amendment of Czechoslovakia,[5] gaps should be settled in conformity with "the law applicable by nature of the rules of private international law". On the other hand, the proposal of Italy was more detailed and subtle. It provided that:

"Questions concerning matters governed by this Convention which are not expressly settled therein shall be settled in conformity with the general principles on which this Convention is based or, in the absence of such principles, by taking account of the national law of each of the parties."

These proposals were resisted. As to the Bulgarian amendment, it was pointed out that even if one intended to accept the idea of filling the gaps on the basis of domestic law, it was not advisable in every case to refer to the law of the seller's place of business. Problems would undoubtedly arise when both parties should exercise a characteristic performance, as well as in cases in which both are monetary debtors. Since it is a question of private international law, it should be stressed that the principle of characteristic performance is only one, although the most important, for a subsidiary determination of the applicable law. In international commercial law one can find other points that should be considered. The most important, not only in international commercial law but in the law of contracts in general, is the principle of party autonomy. This, as stated in the legal doctrine, is "perhaps one of the most widely accepted private international rules of our time",[6] "a common core of the legal systems",[7] a "coutume international".[8] The Bulgarian amendment tried to establish a more unambiguous solution ignoring at the same time an internationally accepted principle. Regarding the Italian proposal, the last part of it ("the national law of each of the parties") was argued to be far from clear. Moreover, it was likewise unclear what would be the result if, concerning a particular issue, the national laws of the seller and of the buyer provided irreconcilable solutions. Finally, a compromise was found in a combination of the Italian and the Czechoslovakian proposal. The compromise language was:

"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."

This text was added as a second paragraph to Article 6 of the UNCITRAL Draft Convention and, although some delegations prefered the original text of Article 6, the proposal was adopted by 17 votes to 14, with 11 abstentions.[9] During the Vienna Conference appropriateness of referring to the principle of good faith in the Convention's interpretation and application was debated again. The prevailing view was against reopening this discussion. Article 6, which became Article 7 of the Vienna Sales Convention, was thus adopted without further change. In addition, the same formulation of provisions on interpretation and gap-filling has been adopted in other recent conventions concerning private law issues such as the Convention on Agency in the International Sale of Goods of February 17, 1983,[10] the Convention on International Financing Leasing of May 22, 1988[11] and the Convention on International Factoring of May 28, 1988[12] adding to the importance of a common understanding of the meaning of this language.

3. Interpretation of the Convention

When there is a question of interpretation of an international instrument on the sale of goods, a preliminary issue to consider is whether public international law rules on interpretation or those of the law of contract (i.e., rules for interpretation of private law) are to be applied. The answer depends on the legal nature of the rules to be interpreted. Part IV of the Vienna Sales Convention (i.e., its final clauses, Articles 89-101) creates rights and duties among Contracting States themselves. These rules are undoubtedly to be interpreted in accordance with the principles of public international law. All other provisions of the Convention deal with the rights and duties of the individual parties to a sales transaction for the interpretation of which the Convention contains its own rules which can be found in Articles 7 and 8.

The Convention distinguishes between two levels of interpretation. Article 7 concerns the interpretation of the rules of contract law contained in the Convention, whereas the subject of Article 8 is the interpretation of specific statements or conduct of the individual parties to a transaction. Since the interpretation of "statements made by and other conduct of a party" opens another dimension of the interpretation problem, this paper will only dwell upon interpretation of the Convention as a whole.

3(A) International character and the need to promote uniformity in its application

According to Article 7(1) of the 1980 Vienna Sales Convention, in interpretation of this Convention, "regard is to be had to its international character and to the need to promote uniformity in its application..." The second part of this provision is a logical consequence of the first part. Article 7(1) also emphasizes that the interpretation of the Convention includes "the observance of good faith in international trade". This part of the provision will be the subject of further elaboration hereinafter.

The aim of Article 7(1) is clear but the manner in which it is implemented opens the possibility of different approaches.

When applying the Convention, there is the risk that judges from different cultural and legal backgrounds are apt to rely upon individual national legal heritages. As an example, many common law judges are more inclined to stick to a plain meaning and grammatical structure of a text, while civil law colleagues are apt to give greater recourse to preparatory materials and the legal history of a statute.[13] Diverse interpretation of uniform rules can, however, lead to ambiguities and contradictions as to the concept of a uniform international sales code.

To understand the importance of a common shared interpretation of the Vienna Convention a reference to its legal character should be made.

"The Convention is a piece of legislation which has been prepared and agreed on at an international level. It remains an autonomous body of law even after its formal incorporation into the different national legal systems. This is the case not only when such incorporation is the result of a simple act of ratification by which the Convention is given direct force of law, but also when a special national legislation embodying its rules has been promulgated."[14]

The intention of the Convention, once adopted, is to replace all provisions of a particular legal system previously governing matters within its scope. By the act of promulgation, the Convention does not get as an attribute "the domestic law". It is a uniform international commercial code. This characteristic should never be forgotten. To make it a uniform law of international sales, its mere adoption by the states is not sufficient. A uniform interpretation of its provisions and their application in different countries is the goal that led to the creation of this law and its adoption by States that account for a large proportion of all world trade.

Regard to the "international character" of the Convention demands first of all, to restrain from rules or techniques promulgated for the interpretation of domestic legislation. To achieve "uniformity in its application", methods and techniques of the Convention's interpretation should overcome national borders and try to find a world-wide acceptable form. To this end, courts are expected to take a more liberal and flexible attitude and to look to the underlying purposes and policies of individual provisions as well as of the Convention as a whole.[15] One should not underestimate the importance of travaux préparatoires, scholarly writings, judicial decisions and arbitral awards which contribute to the harmonization of attitudes due to international conventions. Uniform interpretation of the Convention is an important instrument in minimizing "forum shopping" since it calls for tribunals to consider interpretations established in other countries. Judicial decisions and arbitral awards on the 1980 Vienna Sales Convention are commencing to emerge in volume[16] Praxis of different States creates the body of international case law which should have a persuasive value if not a force of binding precedent.

3(B) The observance of good faith in international trade

The second part of Article 7(1) states that "in the interpretation of this Convention regard is to be had ... to the need to promote ... the observance of good faith in international trade". Reference to good faith represents a hard-won compromise between two factions. One group of the Convention's drafters favored the imposing of a duty to act in good faith directly on the parties to an international commercial transaction, the other was opposed to any explicit reference to the principle of good faith in the Convention.

Since the principle of good faith is a legal standard and one of the (expressly declared) general principles of the 1980 Vienna Sales Convention, its importance in the application of the Convention has a manifold meaning.

The first question to be dealt with is how to understand a reference to good faith in connection with the interpretation of the Convention as such.

Some of the scholars insist on the literal meaning of the provision claiming that the principle of good faith is simply an additional criterion adopted solely as a help for judges and arbitrators when interpreting the Convention itself. This is too narrow an interpretation. Those who adhere to it overlook the fact that the subjects of the commercial law are parties to a commercial transaction. Good faith is one of the leading principles in the field of commerce. Commercial law lays down higher standards for the parties to particular transactions and makes them more strictly responsible for each action they take. There is a greater need for this in international trade.[17] Within the 1980 Vienna Sales Convention one can find a number of provisions that represent a particular application of the principle of good faith, thus confirming that it is also one of the "general principles" underlying the Convention.[18] As such, it imposes obligations of a positive character. The provision "the need to promote ... the observance of good faith in international trade" should be given a broad interpretation in the sense that it is addressed to the parties to each individual contract of sale as well as to the Convention itself.

The further inevitable question is the meaning of the term "good faith" in international trade.

Good faith is an important principle of every legal system but it can be treated differently within the common law and the civil law. In certain common law countries its relevance is formally limited to performance of the contract,[19] but it can as well have the same meaning in France, which represents a civil law family.[20] Most of the civil law systems, however, expressly apply the principle of good faith to not only performance, but also to formation and interpretation of the contract.[21] Therefore, specific applications of the principle in practice may differ substantially.

Even putting other issues aside, we should mention the example of culpa in contrahendo. Taken from the legal point of view, a contract is formed when an offer is accepted. The formation of a trade contract is usually preceded by negotiations. The negotiations do not impose a duty upon the parties to enter a contract, but they oblige them to conform to certain standards of behavior during the negotiation process. The negotiations and involvement of the parties bind them to a mutual behavior in accordance with good faith (bona fides) and to inform the other party about usual facts which cannot be noted otherwise. A violation of those duties is termed culpa in contrahendo and is followed by the right of the injured party to claim damages. This concept is well-known in civil law, especially in those systems based on the German legal system. In England and United States (representatives of well developed common law legal systems) the doctrine of culpa in contrahendo is not expressly known, although similar solutions have been achieved employing other constructions.[22] We should also mention the principle of good faith and its connection with issues of, e.g., abuse of rights, hardship, unconscionable contract terms and compare its role within judicial practice of different countries.

It is more than obvious that reference to "good faith in international trade" means that recourse to national standards should be allowed only to the extent that it is proved to be accepted at a comparative level. Otherwise the "international character" of the Convention and "the need to promote uniformity in its application" would be endangered.

4. Gap-Filling Under the 1980 Vienna Sales Convention

No code that has ever been written in the field of commercial law manages to contain provisions for all situations within its scope of application, nor describe all that is necessary for its understanding. This should be taken into consideration particularly when dealing with trade law in general, civil law and many other fields of law.[23]

In an international sales contract, questions may occur which, although falling within the scope of the 1980 Vienna Sales Convention, are not expressly settled by any of its provisions. We are dealing with the problem of gaps in the Convention (lacunae iuris). Article 7(2) states that such questions should be settled "in conformity with the general principles on which [the Convention] is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."

There are two prerequisites to the application of Article 7(2): a question must concern "matters governed by ... Convention" and must not be "expressly settled in it".

The scope of the Convention as defined in Article 4 relates only to "the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such contract." The same article expressly excludes from the Convention's scope issues associated with the validity of the contract and the effect which the contract may have on the property in the goods sold. Express exclusions may also be found in Articles 2, 3(2) and 5 of the Convention. Other situations such as the capacity of the parties, the authority on a third person to conclude the contract on another person's behalf, and limitations of action or prescription issues are not mentioned and are outside the scope of the Convention.

If the Convention contains a provision dealing with the case at hand, there is no need to invoke the application of the gap-filling rule. If, however, the Convention contains no such provision although the matter at hand lies within its scope, the second prerequisite for gap-filling is fulfilled and one may start looking for an appropriate solution.

Examining Article 7(2), we come to the conclusion that the Convention permits three methods which should be applied subsidiary:

A. Application of its specific provisions by analogy;

B. Application of general principles on which the Convention is based;

C. Application of law determined by the rules of private international law.

A. APPLICATION OF SPECIFIC PROVISIONS OF THE CONVENTION BY ANALOGY

The first attempt to be made in a case of a gap in the Convention is to find a solution for a case at hand on the basis of provisions established for similar cases. As well as in the case of ambiguities or obscurities of the text, in the case of true gaps of the Convention the interpreter should above all try to find a solution within the Convention itself, primarily by analogical application of corresponding provisions. This approach is not inherent only to this Convention. It can as well be found in Civil Codes of many countries. The Croatian Code of Obligations thus provides in Article 25(3):

"Provisions of this Code relating to contracts are to be applied accordingly to other legal matters as well."

As an example of judicial application of this approach, we refer to a decision of the Commercial Court of the Canton of Zurich (Switzerland) under the 1980 Vienna Sales Convention.

Case A/1

The case involved an Italian seller of furniture who sued the Swiss buyer for payment of the purchase price. The buyer claimed that the furniture was defective, but neither accepted the seller's offer to remedy any defects nor paid the purchase price. The court held that it is implicit in the Convention that the buyer must prove the existence of defects and that it give notice of lack of conformity within a reasonable time (Arts. 7(2), 38 and 39 CISG). According to the buyer's obligation to prove non-conformity of goods with the contract provided in Arts. 38 and 39 CISG, the court found that the buyer is also obliged to submit evidence to which he refers. In view of the court's finding that the buyer had failed to meet this burden of proof, it was held that, even if the buyer had the right to rely on lack of conformity of the goods, he had lost that right. For this reason the court ordered the buyer to pay the purchase price with interest.[24]

B. APPLICATION OF GENERAL PRINCIPLES ON WHICH THE CONVENTION IS BASED

The difference between application of special provisions of the Convention by analogy and recourse to "the general principles on which [the Convention] is based" is: for the former, there exists a much closer relationship between the case at hand and a provision established for similar cases, whereas general principles can be applied on a much wider scale. Applying general principles is a civil law tradition. It is adopted in the Civil Codes of Austria, Italy, Spain, Egypt and in the Private International Law Act of Croatia.[25] The Swiss Civil Code goes even further stating that, if neither the statute nor the customary law provides a solution to a given case, "the judge shall decide according to the rule which he would establish as a legislator... In doing so he shall base himself on sound scholarship and tradition"[26] In some countries, such as France and Germany, this approach is not formally imposed by statute but it is taken for granted that one should consider a statute as more than a sum of its particular provisions. However, in common law systems the situation can be quite different. Common law statutes often contain more detailed rules for specific situations. It is important to note that they do not necessarily contain general principles. To this end one often looks to the case law to play the role of the Codes on the Continent. The contrast may be illustrated by setting the 1980 Vienna Sales Convention beside a domestic common law counterpart, Article 2 of the U.S. Uniform Commercial Code. That common law sales statute, however, also has civil law overtones as its Section 1-102 states, "This Act shall be liberally construed and applied to promote its underlying purposes and policies."

The Convention states expressis verbis some of its general principles such as good faith (Article 7(1)), the principle of party autonomy (Article 6), the lack of form requirement (Articles 11 and 29), the dispatch rule (Article 27), the rule that delay in payment creates an obligation to pay interest (Article 78), the principle of reasonableness (e.g., Articles 8(2) and (3), 18, 25, 33(c), 34, 35(2)(b), 37, 48, etc.). There are also other general principles mentioned inter linea. Among these are pacta sunt servanda (e.g., Articles 30 and 53), favor contractus (e.g., Articles 19(2) 25, 26, 34, 35, 64, 71, 72 etc.), one may not contradict a representation on which the other party has reasonably relied (Articles 16(2)(b), 29(2)), the duty to cooperate and inform the other party (Articles 32(3), 48(2), 60(a), 65), the duty to take reasonable measures to mitigate the loss resulting from a breach of contract (Articles 77, 85-88).

Some of the principles which are clear by their nature and accepted world-wide in the same meaning can be applied directly. In such a context one should mention the principle of party autonomy, favor contractus and the dispatch rule. Other principles, such as reasonableness and good faith, need future specification in order to offer an appropriate solution for a particular case. As explained in our discussion on the interpretation of the Convention, one should primarily try to find a solution within the Convention itself, or subsidiary; should this not be possible, one should use standards which are commonly accepted at a comparative level.

To illustrate the filling of gaps in the Convention by reference to its general principles, we refer to case law.

Case B/1

A German buyer of a knifecutting machine demanded damages for personal injury caused by, and repair costs of, the machine which he had bought from a manufacturer situated in Indiana (USA). To determine the place where damages were payable, the court applied the CISG as part of the law of Indiana, which this court termed applicable under German private international law (Art. 28 of the German PIL Act).

The court held that Art. 57(1)(a) CISG, providing that the purchase price is payable at the place of business of the seller, indicated a general principle that claims for payment of money, including damages for breach of contract arising under Arts. 45 and 74 CISG, are payable at the place of business of the claimant, who in the present case was the German buyer.[27]

Case B/2

An Austrian seller commenced arbitral proceedings against a German buyer demanding payment of the price and damages, including those arising from a sale of goods to a third party which a German buyer refused to accept. The CISG was held applicable as the international sales law of Austria.

The arbitrator found that the seller was entitled to payment of the price of goods delivered but not paid for (Arts. 53 and 61 CISG). Regarding the sale of goods (which the buyer refused to accept) to a third party, the arbitrator held that the seller had the right and the duty to mitigate its losses (Art. 77 CISG) and was entitled to the difference between the contract price and the substitute sale price. The arbitrator further held that interest on the price accrued from the date payment was due (i.e., according to the contract - 10 days after issuance of each invoice). Since the interest rate was a matter governed but not expressly settled by the CISG, this tribunal ruled that it should be settled in conformity with the general principles on which the CISG is based (Art. 7(2) CISG). According to the opinion of the arbitrator, the principle of full compensation, one of the general principles underlying the CISG, should be applied for the determination of interest rate (Arts. 78 and 74 CISG). The arbitrator found that in relations between merchants, it was expected that the seller, due to the delayed payment, would resort to bank credit at the interest rate commonly practiced in its own country with respect to the currency of payment. Such currency may be either the currency of the seller's country, or any other foreign currency agreed upon by the parties. The interest rate awarded was the average prime rate in the seller's country, with respect to the currencies of payment (US Dollars and German marks).[28]

Case B/3

An Austrian seller and a German buyer concluded a contract for the sale of rolled metal sheets. Immediately after receiving the first two deliveries, the buyer sold the goods to a Belgian company which shipped them to a Portuguese manufacturer. The manufacturer found the goods defective. The buyer sent the seller notice of non-conformity of the goods but the seller refused to pay damages, alleging that the notice was not timely. According to the contract, a period for giving a written notice of the defects to the seller was two months after delivery. The buyer's notice was received six months after delivery. The buyer claimed that the seller had waived its right to raise the defense that the notice of non-conformity was not timely since after receiving the notice the seller had continued to ask the buyer to provide information on the status of the complaints and had pursued negotiations with a view to reach a settlement.

With regard to that argument, the arbitrator held that the intention of a party to waive this right must be clearly established, which was not the case here. The arbitrator held that, while estoppel is not expressly settled by the CISG, it forms a general principle underlying the CISG ("venire contra factum proprium"; Arts. 7(2), 16(2)(b) and 29(2) CISG). The arbitator awarded damages to the buyer for lack of conformity of the goods.[29]

Reference to the "general principles on which [the Convention] is based" can minimize the unpredictability that is inherent in choice-of-law rules and avoid uncritical application of domestic law developed without regard for the specific needs of international trade. Since general principles are a legal standard and their main characteristic is their flexibility, they help the Convention live as uniform law that responds to changing circumstances.

C. APPLICATION OF LAW DETERMINED BY VIRTUE OF THE RULES OF PRIVATE INTERNATIONAL LAW

Recourse to "the law applicable by virtue of the rules of private international law" is the last refuge.

"... [I]n international transactions reference to domestic law has special problems - the uncertainties of the rules of private international law, the difficulty of ascertaining foreign law and the possible incongruity between pieces of domestic law and the overall plan of the Convention."[30]

In accordance with the intent of Article 7(1) and 7(2), one should try to find an acceptable solution according to the rules of private international law only in absence of general principles of the Convention. One should first try to fill gaps by analogical application of specific provisions of the Convention, or by application of its general principles. If neither of those methods are suitable, the Convention permits, as the ultima ratio, to consult the choice-of-law rules to determine which law they will address.

The Bundesgerichtshof (Supreme Court) of Germany puts it quite well when it states that pursuant to Article 7 CISG, in the interpretation of the Convention recourse to domestic law is, as a rule, not admissible[31]. And, although reaching a different conclusion on rate of interest than in Case B/2, the tribunal in ICC Arbitration Case 7565 of 1994 (Case C/1) similarly regards resort to the rules of private international law as a last refuge, stating that domestic law has no more than a residual role in rare cases possibly not covered by the Convention.

Case C/1

A contract for the sale of cargoes of coke was entered into between a seller from the Netherlands and a buyer from the USA. The dispute arose because of non-conformity of the goods with the contract. The buyer claimed for damages on lost sales and/or losses on sales, additional losses, costs as well as interest. The "governing law" clause stipulated that the contract "shall be governed by and construed in accordance with the laws of Switzerland."

The arbitral tribunal found that it is beyond any doubt that the parties have expressly made the contract subject to "the laws of Switzerland" which means that it shall primarily be subject to the CISG, while Swiss internal law has no more than a residual role to play in rare cases possibly not covered by the Convention. As to the question of interest rate and the method of calculating interest, the Convention remains silent although it is undisputable that in a case of breach of contract the party responsible for the breach is obligated to pay interest (Art. 78 CISG). According to Article 7(2) of the Convention, questions not expressly settled by it shall be determined either in accordance with the general principles on which it is based or by the law which shall be selected according to the rules of private international law. As the general principles of the Convention do not settle the matter and the parties have referred to the laws of Switzerland, it seems justified to refer to Article 73 of the Swiss Code of obligations whereby, in the absence of a determination of the rate of interest by agreement or law or usages, that rate shall be 5% per annum.[32]

Recourse to domestic law emphasizes that the 1980 Vienna Sales Convention, the New Law Merchant, is not a self-sufficient system of rules. In a sense of its further development, recourse to domestic law is not only at times advisable, but under certain circumstances obligatory. Since the uniform law does not contain, e.g., general or mandatory provisions under certain circumstances, there is no choice but to take into consideration the provisions of the domestic law. However, tribunals should limit such applications to the maximum extent practicable.

5. Conclusion

Being in force for eight years, the number of member States of the 1980 Vienna Sales Convention has quadrupled,[33] the number of judicial decisions and arbitral awards exceeds 300, its international bibliography reached well over 2000 pages and its commentaries are published in many languages.[34] The CISG is today the uniform international sales law of countries accounting for over two-thirds of all world trade.[35]

The interpretation of Article 7 directly influences the fulfilment of the Convention's purpose as stated in its preamble: The parties to the CISG have agreed upon the Convention, being of the opinion that the adoption of uniform rules which would govern contracts for the international sale of goods and take into account the different social, economic and legal systems, would contribute to the removal of legal barriers in international trade and promote its development. There are three prerequisites to the fulfillment of the purpose of the CISG.

The first is ratification and promulgation of the Convention. It is made on the public law level. The second is the awareness of the existence of the CISG and its incorporation into international trade. It is brought to life by companies and business lawyers when entering business transactions. The third prerequisite is application of the Convention in proceedings before courts and arbitral institutions of different countries. The last two prerequisites belong to the private law field and deal with the application of the Convention in practice. To maintain its uniform application in different States, regardless of legal systems they belong to, it is important to interpret and apply its provisions in a uniform manner. Article 7 of the 1980 Vienna Sales Convention demands that its interpretation and the filling of gaps be based on globally accepted principles and methods, in order to achieve the underlying purpose of the Convention as shown by its structure and its legislative history.


FOOTNOTES

1. Of 9 states which ratified ULIS and ULF only 2 were non-European: Gambia and Israel, others belonged to EEC: Belgium, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands, San Marino and the United Kingdom.

2. At the 1964 Hague Conference, Latin America was represented only by Colombia, Asia by Japan and Africa by Egypt.

3. Bianca, C.M./Bonell, M.J., Commentary on the International Sales Law, The 1980 Vienna Sales Convention, Giuffre, Milan, 1987, p. 67.

4. A/Conf.97/C.1/L.16.

5. A/Conf.98/C.1./L.15.

6. Weintraub, R. J., Functional Developments in Choice of Law for Contracts, 187 Recueil des Cours, The Hague Academy of International Law, 1984, Vol. IV, p. 271.

7. Lando, O., Contracts, in: International Encyclopedia of Comparative Law, Vol. III - Private International Law, Chapter 24 (ed. Lipstein, K.), J.C.B. Mohr (Paul Siebeck) Tubingen, 1976, p.3; idem, The Conflict of Laws of Contracts - General Principles, 189 Recueil des cours, The Hague Academy of International Law, 1984, Vol. VI, p. 237.

8. Foyer, J., L'avant projet de Convention C.E.E. sur la loi applicable aux obligations contractuelles et non-contractuelles, 103 Clunet (1976) 3, p. 594.

9. Official Records, II, 257.

10. Art 6(2) of the named Convention (published in: Rev. dr. uniforme 1983 I-III, p. 133-137).

11. Art 6(2) of the named Convention (published in: RabelsZ 51, [1987], p. 730).

12. Art 4(2) of the named Convention (published in: RabelsZ 53, [1989], p. 733).

13. Volken, P., The Vienna Convention; scope, interpretation and gap-filling. In International sale of goods; Dubrovnik lectures, P. Sarcevic and P. Volken, eds. New York, Oceana, 1986, p.39 et seq.

14. Bianca, C.M./Bonell, M.J., Commentary on the International Sales Law, The 1980 Vienna Sales Convention, Giuffre, Milan, 1987, p. 73.

15. Id.

16. International Sales Law under CISG, The First 222 or so Decisions, 1985-1995 (ed. Will, M.R.), Schriftenreiche deutscher Jura Studenten in Genf, 10, 1995.

17. Goldstajn, A., Trgovacko ugovorno pravo - medjunarodno i komparativno, Narodne Novine, Zagreb, 1991, p. 42.

18. Articles 14(2), 19(2), 27, 35, 44 and 60 of The 1980 Vienna Sales Convention.

19. Uniform Commercial Code, Sec. 1-203: "Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement."

20. French Code Civil, Art. 1134(3): De le fait des obligations: "Elles doivent être executées de bonne foi."

21. German Burgerliches Gesetzbuch, para. 157: "Vertrage sind so auszulegen, wie Treu und Glauben mit Rucksicht auf die Verkehrssitte es erfordern."

Croatian Code of obligations, Art. 12: "In the formation of obligations and enforcement of rights and duties resulting therefrom, parties to the transactions are bound by the principle of good faith."

22. For a review of common law approaches in the United States, see Farnsworth, E. A., Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Columbia L. R. 217-294 (1987)

23. See Goldstajn, A., Trgovacko ugovorno pravo - medjunarodno i komparativno, Narodne Novine, Zagreb, 1991, p. 75.

24. Handellsgericht Zurich, Switzerland, No. HG930138.U/HG93, September 9, 1993, CLOUT No. 97.

25. Act concerning the resolution of conflicts of laws with the provisions of other countries in certain matters, Art. 2: "If in this Act there is no provision concerning the law to be applied in respect of one of the cases of Article 1 paragraph 1 of this Act, the provisions and principles of this Act, principles of the legal order of the Republic of Croatia and principles of private international law are to be applied accordingly."

26. Swiss Civil Code, Art. 1.

27. OLG Düsseldorf (Germany), No. 17 U 73/93, July 2, 1993, CLOUT No. 49.

28. Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft - Wien (Austria), SCH-4366, June 15, 1994, CLOUT No. 93.

29. Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft - Wien (Austria), SCH-4318, June 15, 1994, CLOUT No. 94.

30. Honnold, J., Uniform law for International Sales, Kluwer, Deventer, 1991, p. 153.

31. BGH [S.Ct] (Germany), No. VIII ZR 51/95, April 3, 1996, Unilex database (1996).

32. ICC International Court of Arbitration, No. 7565 (1994), Bull. ICC, Vol. 6/No. 2, November 1995, p. 64-67.

33. Members of The 1980 Vienna Sales Convention are: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Canada, Chile, China, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Guinea, Hungary, Iraq, Italy, Lesotho, Lithuania, Luxembourg, Mexico, Moldova, Netherlands, New Zealand, Norway, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, USA, Uzbekistan, Yugoslavia and Zambia (source: UN Treaty Section).

34. CISG W3 database, Pace University School of Law, March 1997.

35. See Kritzer, A. H., The Convention on Contracts for the International Sale of Goods: Scope, Interpretation and Resources, Cornell Review of the Convention on Contracts for the International Sale of Goods (1995) 147-207.


Pace Law School Institute of International Commercial Law - Last updated February 6, 1998
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