ICC Arbitration Case No. 5713 of 1989
Yearbook Comm. Arb'n XV, Albert Jan van den Berg, ed. (Kluwer 1990), p. 70. Copyright owner: The International Council of Commercial Arbitration (ICCA). Reprinted with the permission of ICCA.
Issues Present
Applicability of CISG
- Applicability of CISG to cases outside its stated sphere of application.
Trade Usages, evidence of
- CISG provisions on non-conformity as evidence of international trade usages.
Non-conformity of Goods, notice of
- Time available for inspection and notice of non-conformity (Arts. 38, 39).
- The two-year cutoff, proper interpretation of (Art. 39(2)).
- Seller's knowledge, significance of (Art. 40).
Synopsis
Stating that "there is no better source to determine prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods", the arbitration tribunal in ICC Case No. 5713 of 1989 applied the CISG to a case outside the Convention's stated sphere of application. This is consistent with the reference to the provisions of the CISG in ICC Case No. 7153 of 1992 as "generally characteristic of [the law of] sales in all judicial systems" (see footnote *).
On the other hand, it is questionable whether the door to the application of the CISG ought to have been opened as wide as it was by the tribunal in ICC Case No. 5713 of 1989. This is the essence of the accompanying case commentary by Richard Hyland which argues that the arbitral tribunal, in this case, mistakenly applied the Convention to the matters at issue. Had the CISG applied, Hyland also questions the tribunal's application of its provisions on notice of non-conformity of the goods.
Data on the award
Parties: Claimant/counterdefendant: Seller
Defendant/counterdefendant: Buyer
Place of Arbitration: Paris, France
Published in: Unpublished
Subject matter:
- applicable law
- Art. 13(3) and (5) ICC Rules
- Hague Convention of 1955 on the Law Applicable on the International Sale of Goods
- Vienna Sales Convention of 1980
- international trade usages
- set-off
[...]
Facts
In 1979, the parties concluded three contracts for the sale of a product according to certain contract specifications. The buyer paid 90% of the price payable under each of the contracts upon presentation of the shipping documents, as contractually agreed.
The product delivered pursuant to the first and third contracts met the contract specifications. The conformity of the second consignment was disputed prior to its shipment. When the product was again inspected upon arrival, it was found that it did not meet the contract specifications. The product was eventually sold by the buyer to third parties at considerable loss, after having undergone a certain treatment to make it more saleable.
The seller initiated arbitration proceedings to recover the 10% balance remaining due under the contracts. The buyer filed a counterclaim alleging that the seller's claim should be set off against the amounts which the buyer estimates to be payable to the buyer, i.e., the direct losses, financing costs, lost profits and interest.
Excerpt
[1] "The contract contains no provisions regarding the substantive law. Accordingly that law has to be determined by the Arbitrators in accordance with Art. 13(3) of the ICC Rules (see footnote 1). Under that article, the Arbitrators will 'apply the law designated as the proper law by the rule of conflicts which they deem appropriate'.
[2] "The contract is between the Seller and a Buyer [of different nationalities] for delivery [in a third country]. The sale was f.o.b. so that the transfer of risks to the Buyer took place in the [country of the Seller]. [The country of the Seller] accordingly appears as being the jurisdiction to which the sale is most closely related.
[3] "The Hague Convention on the law applicable to international sales of goods dated 15 June 1955 (Art. 3) regarding sales contracts, refers as governing law to the law of the Seller's current residence . . . (see footnote 2). [The country of the Buyer] has adhered to the Hague Convention, not [the country of the Seller]. However, the general trend in conflicts of law is to apply the domestic law of the current residence of the debtor of the essential undertaking arising under the contract. That debtor in a sales contract is the Seller. Based on those combined findings, [the law of the country of the Seller] appears to be the proper law governing the Contract between the Seller and the Buyer.
[4] "As regards the applicable rules of [the law of the country of the Seller], the Arbitrators have relied on the Parties' respective statements and on the information obtained by the Arbitrators from an independent consultant. . . . The Arbitrators, in accordance with the last paragraph of Art. 13 of the ICC Rules, will also take into account the 'relevant trade usages'."
II. Admissibility of the Counterclaim
(a) Under [the law of the country of the Seller] [. . .]
(b) Under the international trade usages prevailing in the international sale of goods
[5] "The tribunal finds that there is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods of 11 April 1980, usually called he Vienna Convention'. This is so even though neither [the country of the Buyer] nor [the country of the Seller] are parties to that Convention. If they were, the Convention might be applicable to this case as a matter of law and not only as reflecting the trade usages.
[6] The Vienna Convention, which has been given effect to in 17 countries [a 1997 update of this statement would report 48 countries], may be fairly taken to reflect the generally recognized usages regarding the matter of non-conformity of goods in international sales. Art. 38(1) of the Convention puts the onus on the Buyer to ["examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances" (see footnote 3)]. The Buyer should then notify Seller if the non-conformity of the goods within a reasonable period of the moment he noticed or should have noticed th e defect; otherwise he forfeits his right to raise a claim based on the said non-conformity. Art. [39(2) (see footnote 4) specifies in this respect that:
["In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee." (see footnote 5)]
[7] "In the circumstances, the Buyer had the shipment examined within a reasonable time-span since [an expert] was requested to inspect the shipment even before the goods, had arrived. The Buyer should also be deemed to have given notice of the defects within a reasonable period, that is eight days after the expert's report had been published.
[8] "The Tribunal finds that, in the circumstances of the case, the Buyer has complied with the above-mentioned requirements of the Vienna Convention. These requirements are considerably more flexible than those provided under [the law of the country of the Seller]. This law by imposing extremely short and specific time requirements in respect of the giving of the notices of defects by the Buyer to the Seller appears to be an exception on this point to the generally accepted trade usages.
[9] "In any case, the Seller should be regarded as having forfeited its right to invoke any non-compliance with the requirements of Arts. 38 and 39 of the Vienna Convention since Art. 40 states that the Seller cannot rely on Arts. 38 and 39, if the lack of conformity relates to facts of which he could not have been unaware, and which he did not disclose'. Indeed, this appears to be the case, since it clearly transpires from the file and the evidence that the Seller knew and could not be unaware [of the non-conformity of the consignment to] contract specifications.
[11] "The Tribunal awarded the Seller the full amount of its claim and set it off against part of the counterclaim filed by the Buyer."
FOOTNOTES [the footnotes are editor's additions to the text of the award]
* [G]énéralement
caractéristiques de la vente dans tous les systèmes juridiques" (ICC Arbitration Case No.
7153 of 1992, Chambre de Commerce Internationale, Sentences Arbitrales J.D.I.4 (1992), p.
1008). Brand & Flechtner go so far as to state "ICC Award No. 5713 has dual lessons in
regards to the Sales Convention. First, where a contract providing for arbitration fails to
contain a substantive choice of law clause, the international nature of a transaction may be
enough in itself
to lead arbitrators to the rules of the Convention, even if CISG technically
does not apply to the contract. Second, where the choice of law rules applied by
arbitrators to determine the applicable substantive rules include reference to sages of trade', the
provisions of the
Convention may be applied, not as controlling substantive law, but rather as
the best available evidence of international usages of trade in sale of goods transactions.
Either lesson is
a natural and logical conclusion for arbitrators faced with a transnational
transaction gone
bad. The two taken together indicate possibilities for dramatic expansion
of the Convention's rules beyond its own Article 1 scope provision" (Arbitration and Contract
Formation in International Trade: First Interpretations of the UN Sales Convention", 12
Journal of Law & Commerce 258-59 (1993)).
1. Art. 13 of the ICC Rules of 1975 (not
amended by the 1988 amendments) reads in relevant part: "3. The parties shall be free to
determine the law to be
applied by the arbitrators to the merits of the dispute. In the absence of
any indication by
the parties as to the applicable law, the arbitrator shall apply the law
designated as the proper law by the rule of conflict which he deems appropriate. [. . .] 5.
In all cases the arbitrator shall take account of the provision of the contracts and the
relevant trade usages."
2. Art. 3 of the Hague Convention on the Law
Applicable to the
International Sale of Goods reads in pertinent part: "In default of a law
declared applicable by the parties under the conditions provided in the preceding article, a
sale shall be governed by the domestic law of the country in which the vendor has his
habitual residence at the time when he received the order. . . ."
3. Corrected text of Article 38(1)
substituted for translation
provided in quoted rendition of the award.
4. Corrected reference to cited article.
5. Corrected text of Article 39(2)
substituted for translation
provided in quoted rendition of the award.
February 1994
Introduction
This is the final award from an ICC arbitration
concerning a seller's suit for the unpaid portion of the purchase price and the buyer's
counterclaim for damages caused by nonconformity of the goods. Though neither party to
the sales contract had a place of business in a country that had ratified or
acceded to the United Nations Convention on Contracts for the International Sale of
Goods ("CISG" or the "Convention"), and though the CISG was not otherwise applicable by
its terms, the arbitrators applied the CISG provisions concerning the time within
which the buyer must give notice of nonconformity. The arbitral tribunal concluded
that those provisions of the CISG represent international trade usages.
The published text of the award illuminates little of the
context of the dispute. We do not know the names of the parties or the countries
where
they do business. We also know nothing of the kind of product that was
bought and
sold, the nature of the defect, or the amount of the damages. Nonetheless,
reading
the award produces a firm conviction that the result reached by the
arbitrators was a just one. The reason is that the tribunal sidestepped a number of
serious legal obstacles in order to permit the buyer to recover on the counterclaim.
Although,
in the end, the tribunal's maneuvers are not convincing, the award
demonstrates one reason for lawyers to become familiar with the provisions of the CISG --
and that
is that the Convention may be applied virtually anytime an arbitrator
believes that it produces the proper result (see footnote 1).
Two issues are particularly troubling about this award:
first,
the holding that, even outside of its stated sphere of application, the CISG
can displace the proper law of the contract, and second, the manner in which the
CISG's conformity provisions were applied to the facts of this dispute.
The applicability of the CISG
Because the parties did not choose a law to govern their
contract, the tribunal's first task was to ascertain the applicable law. The
arbitrators
began appropriately by consulting Art. 13(3) of ICC Rules of Arbitration,
which provides that the arbitrator is to choose the proper law by reference to those
conflicts rules that are deemed to be appropriate. The ICC Rules seem to mandate a
two-step procedure: first, the determination of the appropriate conflicts rules,
and then
the application of those rules to determine the proper law of the contract.
That,
of course, is the appropriate procedure when a court is involved, but there
has been much discussion about whether an arbitrator need follow the same steps
(see footnote 2). In contrast to the judiciary, an arbitrator is not generally
bound
by any particular lex fori. The place of arbitration may have little
or no
relationship to the economy of the contract, and the choice of a different
set of conflicts rules already requires a conflicts-law decision. As a result, many
commentators have concluded that the arbitrator should be given great latitude in
the method to be used in determining the applicable law (see footnote 3).
In this case, the tribunal's choice was well-reasoned and
traditional. The arbitrators noted that, since the sale was designated in the
contract to be FOB [place of shipment], the transfer of the risk of loss took place in
the country of the seller. This factor, chosen expressly by the parties,
established an
important link between the contract and seller's law. The arbitrators also
noted that, absent agreement, the modern trend in conflicts law is to attach the
sales contract to the law of the seller's place of residence. In support of this
proposition, the arbitrators cited Art. 3 of the Hague Convention on the Law
Applicable to International Sales of Goods (1955), but might equally have referred to the
recently
adopted German conflicts law (see footnote 4).
The choice of seller's law, though in general
unobjectionable, posed a serious problem in this case, one that the arbitrators were able to
overcome
only by an extremely creative use of the legal sources. The problem was
that seller's law imposed what the tribunal considered to be "extremely short and
specific time requirements" as far as the buyer's notice of defects was concerned,
time requirements which the buyer had not met. Since the parties had not chosen a
governing
law, and since there was no lex fori to dictate the conflicts rules,
the arbitrators might easily have escaped the difficulty. For example, though the
arbitrators correctly noted that the transfer of risk took place in the country of
the seller, it is also true that final inspection took place upon arrival. Thus,
the particular question involved in the dispute, namely the time available for
inspection and notice of defects, seems to have had even closer contacts with the law of
the destination of the goods. In fact, under the Hague Convention, the law of the
jurisdiction where the inspection is to take place governs the timing of
notifications (see footnote 5). Moreover, it must be assumed that the buyer at least
met the deadlines imposed by the law of the destination of the goods -- otherwise
the equities would be entirely in favor of the seller. Thus, by choosing the law
of the place of the destination of the goods to govern the notification question,
the arbitrators may have been able to reach the desired result.
After choosing seller's law, the arbitrators wished to
escape its rigorous consequences. This they achieved by deciding that the CISG
provisions in the matter of the nonconformity of goods correspond to international trade
usages
and, as such, displace the proper law of the contract. This aspect of the
opinion
raises two difficult issues. The first concerns whether the CISG's
nonconformity
provisions can be considered to represent international trade usages. The
second is the question of timing, for the tribunal interpreted a contract concluded
in 1979
on the basis of the CISG provisions that did not become law anywhere until
1988.
CISG as representing international trade usages
The arbitrators found that "there is no better source to
determine the prevailing trade usages" than the terms of the CISG. Specifically,
they found that, since the CISG had been ratified by seventeen countries, it "may be
fairly
taken to reflect the generally recognized usages regarding the matter of
the nonconformity of goods in international sales."
In order to evaluate the tribunal's holding on this
issue, the first question to ask is this: What law is to be used to determine the
relevance of
trade usages? Since the CISG was not applicable, the CISG provision on
usages (Art. 9) did not apply. Rather the arbitrators should have looked to the
proper law of the contract -- in this case, seller's law. Unfortunately, they did not
discuss
the criteria which seller's law uses to decide how to recognize trade usages
and how to determine when they become part of a sales agreement. An examination
of comparative law reveals that none of the criteria currently used either in
international
or in domestic sales law can justify the tribunal's conclusion that the
CISG provisions on this point represent international trade usages.
CISG's own provisions on usages provides a convenient
starting point. It provides that the parties are bound by any usages to which they
have agreed, either expressly or by implication (Art. 9)
(see footnote 6). An
agreement may be implied only when the usage "is widely known to, and regularly
observed
by parties to contracts of the type involved in the particular trade
concerned" (Art. 9(2)). In the contract at issue here, there was neither an express
agreement concerning the time available for inspection and notice of defects nor a
course of dealing between the parties (see footnote 7). Thus, as judged by
CISG's own provision on usages, its conformity provisions can be considered to reflect
trade usages only if they can be incorporated by implication into the sales
agreement.
The fact that CISG has barely been in force for a lustrum
does not, at least as a theoretical matter, disqualify its conformity provisions
from representing international commercial usage. Some commentators have
specifically suggested that, in arbitration, CISG may serve as a source for international
usages (see footnote 8). Moreover, there is no suggestion in the text of Art.
9 that
only "ancient" or "long established" usages may be held to be binding (see
footnote 9).
Nonetheless, there are at least three reasons why CISG's
inspection and notice provisions should not be take to represent commercial usages.
First, they do not fulfill the requirement of being widely known and regularly
observed.
Second, usages are generally the spontaneous creation of merchants and
not, as was CISG, the product of an international conference. Finally, it may be
problematic
to consider CISG's inspection and notice provisions to represent commercial
usages
in a case in which they conflict with an important policy of the proper law
of the
contract.
Under the Convention, only usages that are both "widely
known" and "regularly observed" may be held to be binding on the parties. As the
commentators have emphasized repeatedly, this language includes only those patterns
of conduct that are so well known and widely practiced that, when considered
objectively, they can be assumed to represent the expectations of both parties (see
footnote 10). In order for a practice in international trade to be considered a
usage, "a distinct majority of the relevant merchants must follow it." (see
footnote 11).
CISG has by now been ratified by over thirty nations.
Its provisions may therefore be considered to represent an emerging consensus about
what an
international sales law should include. Nonetheless, the limitations
aspects of its conformity provisions cannot be said, in this case, to represent standard
usage.
The reason is simple -- neither party could possibly have expected those
provisions to be applied when the CISG was not the governing law.
Comparative law would come to a similar result. In
American law, a practice can be considered to be a usage of trade only if it can
"justify an expectation that it will be observed with respect to the transaction in
questions" (see footnote 12). German law is in agreement -- "as a rule, the legal
order
protects those who expect, and have the right to expect, that their
contractual partner will respect the customs and usages" (see footnote 13).
The second problem is that commercial usages are not
typically created of whole cloth by the lawgiver. Modern legal systems tend to
respect as a
usage only what can be considered to be an actual industry practice. In
American law, for example, the test of a usage is its regularity of observance, as
demonstrated either by repeated application or by industry-wide recognition and
acceptance (see footnote 14). As far as the question of the time for inspection
and notice is concerned, American courts permit delay only when the buyer
establishes a uniform industry practice (see footnote 15). Before a German court may
find that a particular practice has become a legally enforceable usage, there must
be "a binding rule that reflects a continuous, uniform and voluntary
practice in the trades concerned over an appropriate period of time" (see footnote 16). Under French law. "[a] usage presupposes a collective practice, a practice of
the masses. It is born of the repetition of the same acts, from a similar
attitude. The
case law emphasizes the requirement of generality" (see footnote
17). As is well known, the source of CISG's conformity provisions was not a uniform
commercial practice, as found, for example, in standard terms frequently employed in
international commercial contracts (see footnote 18). Rather, those
provisions represent a careful political compromise between those States that demanded
much shorter periods for inspection and notice of defects and those States that had
hoped that the CISG would permit even longer periods (see footnote
19). In
other words, there is no reason to believe that the CISG rules on this question rest
on generalized trade practice. As a result, they do not fit into the category of
trade usage.
There is a third reason why the category of trade usage
is problematic in this type of case. The reason is that the CISG's inspection and
notice provisions offer a vision of the economy of the sales contract that is
clearly at odds with the vision implicit in the proper law of this contract. Before a
trade usage should be permitted to displace a statutory provision, there should be
some assurance that the usage does not conflict with one of the fundamental values
implicit
in the applicable law. "Customs and usages of trade can be respected only
to the extent they are in harmony with the values of the legal order. . . ." (see
footnote 20). For example, one American court refused to substitute for the
UCC's inspection and notice provisions a usage that subverted the goal of the
statute, name
ly the final resolution of claims (see footnote 21). In the arbitral
award
noted here, for example, the short notice period mandated by seller's law
may be ba
lanced by significant advantages in terms of proof and presumptions for a
buyer who
claims that the goods are defective. Unfortunately, the arbitral tribunal
chose not to raise the issue.
In sum, I conclude that, in this case, the arbitral
tribunal incorrectly found that the CISG conformity provisions could be invoked as
international trade usages for the purpose of displacing the inspection and notice
provisions included in the proper law of the contract. I do not thereby wish to suggest
that CISG's provisions can never assist an arbitrator who is called on to decide a
case outside of CISG's specified sphere of application. In fact, the CISG
solution may prove quite useful in certain situations. One of them, for example is where
neither
the agreement nor the proper law of the contract provides an answer to the
question at hand. Another is where the judge or arbitrator is called on to suggest
a reasonable term. In other words, CISG may recommend itself as a gap-filler or
as the result of long and informed deliberation. Usages have occasionally
fulfilled this
function in American law (see footnote 22).
The CISG was approved at an international conference held
in Vienna in 1980. By December 1986, eleven states had either ratified or acceded
to it.
The Convention went into force among those eleven states on January 1,
1988.
The contract at issue in this case was concluded in 1979,
before
the CISG took final shape in Vienna and almost a decade before the
Convention became binding law anywhere. It therefore goes without saying that the CISG
could not
possibly govern this contract. There are at least two reasons for this.
First, by
its own terms, the CISG applies only to contracts concluded after it enters
into force as applicable law (Art. 100(2)) (see footnote
23). The second
point is
more general. Developed legal systems generally apply to a contract the
law that
was in force at the time the contract was concluded. As the United States
Supreme
Court explained long ago and has constantly repeated, `the laws which
subsist at the time and place of the making of a contract, and where it is to be
performed, enter into and form a part of it, as if they were expressly referred to or
incorporated in its terms.'' This principal presumes that contracting parties adopt the
terms
of their bargain in reliance on the law in effect at the time the agreement
is reached (see footnote 24). French law too prohibits retroactive
legislation (see footnote 25). In the field of contractual obligation, the law in
force at
the moment the contract is concluded generally continues to govern the
contract throughout its life, except when subsequent legislation specifies that it is
to be effective immediately or when there is a compelling need for uniformity (see
footnote 26). The German courts take the matter of non-retroactivity so
seriously that they have decided to apply the former law to govern the continuing
effects of contracts concluded between East German firms under the previous regime (see
footnote 27).
In comparative law, there is thus relatively little
controversy
about questions relating to the law applicable to contractual relations
ratione temporis. The notion of freedom of contract is thought to mandate that,
absent
very good reasons, the law in force at the time the contract is concluded
will continue to govern that contract despite modifications in the applicable law.
Thus, the CISG could not be applied, even by analogy, to the contract at issue in
this case.
Of course, that is not the end of the matter, for the
arbitrators in this case did not purport to apply the CISG directly. Rather they
referred to the CISG as reflecting generally recognized usages. The issue then is
whether the CISG can be said to reflect the relevant trade usages at the time the
contract was concluded. As Judge Skelly Wright once observed, the mere fact that a
statute is
promulgated subsequent to the conclusion of a contract does not mean that
the law
was otherwise before the enactment (see footnote 28). Nonetheless,
"usages
can be taken into account only if they were actually controlling at the time
the contract was concluded" (see footnote 29). Whatever the final
decision, there
should at least be some pleading and proof on the question of the usages at
the time of the conclusion of the contract. The burden of proof on this issue
should be
on the party that seeks to rely on the usage (see footnote 30).
Given the complex negotiations that took place at Vienna concerning the question of the
notice
of defects, those CISG provisions, especially the two-year cutoff, almost
certainly do not represent a prior consensus.
Applying the CISG
When the buyer counterclaimed for damages due to
defective delivery, the seller apparently responded that the buyer's claim was barred
because the
inspection and the notice of defects had not been timely. The arbitrators
found that both the inspection and the notice were carried out in a commercially
reasonable
manner and held that the counterclaim was admissible. It is worth
repeating that
this result may well be appropriate to the facts of the case.
Nonetheless, there remains something troubling about the
way the
tribunal reached this result, and particularly about the arbitrators'
approach to
the CISG. They implicitly suggested that the CISG offers a set of rules of
virtually unlimited flexibility that permit the decision-maker to reach whatever
result is
desired. In effect, the arbitrators seemed to pick and choose among the
Convention's provisions instead of constructing them into a rigorous analytic
framework and
applying them as a whole.
Two aspects of the tribunal's approach to the Convention
are particularly problematic. First, the arbitrators read the rigor and
specificity out
of the provisions concerning the timing of inspection and the notice of
defects. Second, by the placement and discussion of the CISG provision concerning the
seller's knowledge of defects, the arbitrators opened the door to an interpretation
of the
Convention that eliminates those timing limits altogether. The tribunal's
approach raises concerns about whether the CISG will be interpreted in a way that
permits
those engaged in international commerce to rely on it. It is therefore
worthwhile
to devote some attention to each question.
The timing of inspection and the notice of defects
As the arbitrators correctly indicated, the CISG imposes
two timing requirements on the buyer who inspects and gives notice of defects.
First, the
buyer must examine the goods, or have them examined, "within as short a
period as
is practicable in the circumstances" (Art. 38(1)) and must give notice of
nonconformity "within a reasonable time" after the buyer discovers or ought to have
discovered the problem (Art. 39(1)). Second, the outside limit for the notice of
defective
performance is set at two years from the date the buyer actually receives
the goods (Art. 39(2)). What is problematic is the tribunal's attempt to construct
and interpret each of these two timing requirements.
In reaching the conclusion that notice was given within a
reasonable time, the arbitrators focused on the fact that the buyer had requested
an expert to inspect the goods even before they arrived and that notice was given
eight days after the expert's report was published. Here two comments are in order.
The first concerns the eight days that seem to have caught the arbitrators' eye.
It is
important to note that there is nothing magic about eight days. There are
numerous
cases in which even greater speed is customary and necessary. Some of the
relevant facts include whether the tools are perishable, whether they will be
resold to third parties, whether the seller has the right to cure, or whether evidence
of their
condition would soon disappear (see footnote 31). In some
circumstances, a
buyer who waits eight days has waited too long (see footnote 32).
"Reasonable, in many cases, will mean giving notice immediately" (see
footnote 33). There is no substitute in sales cases for an analysis of the
specific circumstances. Such an analysis might have been particularly useful with regard
to the
contract at issue here. As a general rule, the timing of notice for
rejection should be significantly more rigorous than when the buyer has decided to accept
the goods and seek damages (see footnote 34). In this case, the buyer chose
to resell rather than reject. Nonetheless, since the buyer chose not to retain
the goods, the speed of the notice may have been important to the seller.
Unfortunately, the arbitrators did not see fit to discuss the issue.
The second problem concerns the use to which the
arbitrators put
the CISG provision regarding the two-year cutoff. They quoted the entire
provision verbatim (Art. 39(2)). Yet that provision is almost certainly irrelevant
to the
case at hand. The arbitrators found that inspection took place upon the
buyer's re
ception of the goods and that only eight days transpired between inspection
and notice. There is then no reason whatever to invoke the two-year rule. The
reasoning
behind the two-year cutoff is that, under the CISG, the reasonable time
within which the buyer must give notice of defects does not begin to run until those
defects have been or ought to have been discovered (Art. 39(1)). Without a cutoff
date, the
seller's liability for nonconformity would be completely open-ended. Since
two years certainly had not run since delivery, the arbitrators must have had
another reason to quote the provision. It is possible that they wished to use the
two-year rule to demonstrate that the CISG is more permissive about inspection and
notice then
are domestic sales laws. Of course, the concept of "reasonableness" is
necessary
in a Convention that is designed to govern a wide variety of sales
transactions. However, in any individual case, the CISG offers no greater flexibility as to
timing
than does any other developed commercial law. The arbitrators noted that
the time limits in seller's law are "extremely short and specific". It is worth
remembering that, in some cases, the CISG timing provisions may be even shorter. The
flexibility that the Convention provides in order to accommodate a great variety
of sales
transactions should not be used as an excuse to expand the normal
commercial under
standing of reasonableness, which is that the goods must be inspected and
notice given "without delay" (see footnote 35). Any necessary correction is
available through the CISG provision (Art. 44) that permits appropriate relief for a
buyer
who presents a valid excuse for failing to meet the notice deadlines.
The seller's knowledge
The most mystifying aspect of the award is its
conclusion. The
arbitrators correctly noted that the rigorous limitations on inspection and
notice
cannot be enforced by a seller who "knew or could not have been unaware" of
the non-conformity and did not disclose it to the buyer (Art. 40). In this case,
the tribunal held, the seller forfeited the protection of the short inspection and
notice periods because "it clearly transpires from the file and the evidence that the
Seller
knew and could not be unaware" of the nonconformity.
What is mystifying is why this paragraph is placed at the
end of
the award. If the seller truly knew of the defects and did not disclose
them, there would have been no need for a close examination of the provisions on
inspection
and notice. Once a finding is made that the seller had knowledge of the
defects, the timing issues vanishes. In other words, the tribunal's discussion of the
CISG's
inspection and notice provisions is dictum -- and totally irrelevant dictum
at that.
The tribunal's method of analysis subverts the careful
balance achieved at Vienna. By invoking the seller's knowledge of the defects merely
in order to shore up the reasoning, the award creates the impression that such
knowledge
may be presumed, or that complete proof on the issue is not required, or
that the seller's knowledge is simply another factor to be considered in the
reasonableness calculus. In some legal systems, such as under French law, manufacturers and
professional dealers are in fact presumed to be aware of the defects found in
their products (see footnote 36). The French courts created such a presumption
in order to permit an action in damages against all sellers for latent defects, an
action
permitted by the text of the Code only when the seller is aware of the
defects (see
footnote 37). This problem, of course, is not present in the CISG,
which permits damage actions against sellers regardless of the degree of their
knowledge.
It is devoutly to be hoped that arbitrators and courts will not seize on
the CISG
provision concerning the seller's knowledge of nonconformity as a way of
eliminating the carefully worded restrictions on the buyer's remedies.
FOOTNOTES
* Professor of Law, Rutgers University Law School
1. "By applying the CISG as trade usages, regardless of
whether it was applicable as law, the doors for the application of the CISG are wide
open.
It has to be assumed that this is not an exceptional case." Peter
Schlechtriem, Vienna Sales Convention 1980 (recent developments) - Developed Countries"
Perspectives, in Penna, L.R. (ed.), Current Developments in International Transfers of
Goods and Services (6th Singapore Confrence on International Business Law,
September 1992)
Singapore, Butterworths Asia, 1994 (referring to ICC Case No. 5713
(1989)).
2. See J. Lew, Applicable Law in International
Commercial Arbitration 300-47 (1978).
3. See R. David, Arbitration in International Trade
nos. 3
86-87 at 340-42 (1985); De Ly, The Place of Arbitration in the Conflict of
Laws of
International Commercial Arbitration: An Exercise in Arbitration Planning,
12 NW. J. Int'l & Bus. 48, 62-69 (1991).
4. See EGBGB '28
II; see also Hague Convention on the Law Applicable to Contracts for the
International Sale of Goods Art. 8(1) (1986). The idea was theorized by Schnitzler
as "the
law of the characteristic performance." See 2 A. Schnitzler, Handbuch
des Internationalen Privatrechts 639-46 (4th ed. 1958) (translation by
Hyland).
5. See Hague Convention on the Law Applicable to
International Sales of Goods, Art. 4 (1955).
6. See P. Schlechtriem, Uniform Sales Law
40-41 (1986); Secretariat's Commentary to the Draft Convention, Art. 8, comment 2
(1979), in
U.N. Conf. on CISG, Official Records 14, 19 (1981).
7. This is not a case, for example, in which the buyer had
not previously been required to inspect immediately or to give notice of defects
within the statutory period. Cf. OLG Düsseldorf, Nov. 12, 1982, in
Internationale Rechtsprechung zu EKG und EAG 167-69 (P. Schlechtriem & U.
Magnus eds. 1987).
8. See Audit, The Vienna Sales Convention and the
Lex Mercatoria, in Lex Mercatoria and Arbitration 139, 144 (T. Carbonneau ed.
1990).
9. See J. Honnold, Uniform Law for International
Sales no. 117 at 175-76 (2d ed. 1991) (hereinafter "Honnold").
10. See id. no. 119 at 177.
11. Junge, in P. Schlechtriem, Kommentar zum
Einheitlichen UN-
Kaufrecht Art. 9, no. 12 at 104 (1990) (translation by Hyland).
12. UCC '1-205(2).
13. K. Larenz, Allgemeiner Teil des deutschen
Burgerlichen Rechts '1 Ic at 12 (7th ed. 1989)
(hereinafter "Larenz") (translation by Hyland).
14. Posttape Associates v. Eastman Kodak Co., 450
F.Supp.
407, 410 (E.D. Penn. 1978).
15. See, e.g., GNP Commodities v. Walsh Heffernan
Co., 420
N.E.2d 659, 665 (Ill. App. 1981) ("in the meat industry inspection is not
made until the buyer is ready to deliver the pork bellies from the warehouse against
a short sale futures contract on the Exchange"); La Villa Fair v. Lewis Carpet
Mills, 548 P.2d 825, 832 (Kan. 1976) (the industry practice is not to inspect
until a
purchaser is found and is ready to use the goods); La Nasa v. Russell
Packing Co., 198 F.2d 992 (7th Cir. 1952) ("the custom of the industry [is] not
to test
the standard ingredients used in baking prior to their use").
16. A. Baumbach & K. Duden, Handelsgesetzbuch
'346 no. I at 842 (K. Hopt eds., 28th ed.
1989) (translation by Hyland) (emphasis added) (hereinafter "Baumbach &
Duden").
17. Pedomon, Y a-t-il lieu de distinguer les usages et les
coutumes en droit commercial?, 12 Rev. trim. dr. comm. 335, 345 (1959)
(translation by Hyland).
18. Merchants' custom does not appear to have played as
significant a role in the drafting of the CISG. Proponents of the notice rule, for
example,
do not appear to have based their arguments to any significant extent on
custom.
Reitz, "A History of Cutoff Rules as a Form of Caveat Emptor: Part I--The
1980 U.N.
Convention on the International Sale of Goods", 36 Am. J. Com. L.
437, 471 n. 127 (1988).
19. Mr. DATE-BAH (Ghana) . . . said his delegation wished
to see
article [(39(1)] deleted and the matter regulated by paragraph 2. The
sanction contained in paragraph 2 was too draconian. . . . Mr. TARKO (Austria) said
that, under Austrian law, the time-limit for a buyer to give notice of non-conformity
was eight days. Experience . . . showed that the provision was a good one. His
delegation considered the two-year period specified in article 39(2) unduly long, but
was prepared to accept it as a compromise. U.N. Conf. on CISG, Official
Records 3
20, 322 (1981). For a history of the debate, see Reitz, id. for a
summary
of the different positions, see Eorsi, "A Propos the 1980 Vienna
Convention
on Contracts for the International Sale of Goods", 31 Am. J. Comp. L. 333,
349-51 (1983).
20. Larenz, supra note 13 at id.
21.See Steel & Wire Corp. v. Thyssen Inc.
20 UCC
Rep. Serv. (Callaghan) 892, 896-97 (E.D. Mich. 1976).
22. See Restatement (Second) of Contracts '221 comment a (1981).
23. Another ICC arbitration award, also made in 1989,
expressly held that CISG did not apply to a contract concluded in 1987, even though the
Convention entered into force a few months later in both countries in which the
parties'
places of business were located. See ICC Case No. 281 (Aug. 26 1989), in 15
Y.B. Com. Arb. 96, 97 (1990).
24. United States Trust Co. v. New Jersey, 431 U.S.
1, 19-20 n. 17 (1977) quoting Home Building & Loan Assn. v. Blaisdell,
290 U.S. 398, 429-30 (1934), quoting in turn from Von Hoffmann v. City of
Quincy, 4
Wall, 535, 550 (1867).
25. C. civ. Art. 2.
26. See J. Ghestin & G. Goubeaux.
Traité de
droit civil (Introduction générale) nos. 372-82 at 332-43
(3d ed.
2990).
27. See BGH, Oct. 14, 1992, in NJW 1993, 259,
260.
28. Williams v. Walker-Thomas Furniture Co., 350
F.2d 445,
448-49 (D.C. Cir. 1965).
29. Heinrichs, in Palandt, Bürgerliches
Gesetzbuch
'133 no. 221 (51st ed. 1992)
(translation by Hyland).
30. See J. White & R. Summers, Uniform
Commercial Code '3-3 at 128 n. 42 (3d ed.
1988); Baumbach & Duden, supra note 16, '346 no. 2 at 844.
31. See Honnold, supra note 9, no. 252 at
328-29 and no. 257 at 335-36.
32. See Spudco, Inc. v. Yick Lung Co., 22 UCC Rep.
Serv (Callaghan) 394 (U.D. Dept. Ag. 1977) (Seven days too long for chipping
potatoes); Max Bauer Meat Packer, Inc. v. U.S., 458 F.2d 88, 91 (Ct. Cl. 1972)
(notice given three hours after inspection is unreasonable for flash frozen pork
roasts);
Miron v. Yonkers Raceway, Inc. 400 F.2d 112, 118 (2d Cir. 1968) (delay
of notice for one day after delivery is unreasonable in the sale of a race horse);
Mazur
Bros. & Jaffe Fish Co., 3 UCC Rep. Serv. (Callaghan) 419, 423 (Vet.
Admin.
Contract App. 1965) (five days unreasonable for raw shrimp).
33. F. Enderlein & D. Maskow, International Sales
Law
Art. 39 no. 3 at 159 (1992) (emphasis in original).
34. See, e.g., Sono, in C. Bianca & M. Bonell,
Commentary on the International Sales Law Art. 39, no. 2.4 at 309
(1987).
35. See, e.g., HBG '377 I ("unverzüglich").
36. See, e.g., Civ. 1 Jan. 19, 1965, D.
1965.389.
Case commentary
Pace Law School Institute of International
Commercial Law - Last updated August 16, 2005
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