CISG CASE PRESENTATION

FOOTNOTES

1. The following excerpts . . . were originally published in French in 4 JOURNAL DU DROIT INTERNATIONALE [J.D.I] 1005 (1992). Case No. 7153, International Chamber of Commerce, International Court of Arbitration (1992) . . .

2. This Journal of Law & Commerce case translation was prepared by Vivian Curran, Legal Writing Instructor, University of Pittsburgh School of Law (B.A. University of Pennsylvania; Ph.D., J.D. Columbia University). Any reader who intends to rely on this case must consult the original text.

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• Hascher commentary

• Callaghan commentary

Reproduced with permission from 14 Journal of Law and Commerce (1995) 220-224

FOOTNOTES

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3. Commentary by Dominique Hascher, Conseiller Général et Secrétaire Général Adjoint, International Court of Arbitration, International Chamber of Commerce, 4 J.D.I. at 1007, supra note 1. [Footnote explanations provided by Vivian Curran.]

4. DIP is the legal abbreviation for droit international public ("public international law") and for droit international privé ("private international law.").

5. The New Law of the International Sale of Goods.

6. International Markets.

7. The International Sale of Goods.

8. LGDJ is the legal abbreviation for Librairie Générale de Droit et de Jurisprudence.

9. U.N. Conference on Contracts for the International Sale of Goods, Final Act, U.N. Doc. A/Conf. 97/18 (1980) [hereinafter "CISG"], reprinted in S. Trcaty Doc. No. 98-9, 98th Cong., 1st Sess. and 17 INT'L LEGAL MAT. 668 (1980). Article 25 defines fundamental breach and Article 74 deals with the calculation of damages for breach of contract, without restricting its application to fundamental breaches.

10. "Interest Accruing From the Commencement of Actions, Compensatory Damages -- Interest and Punitive Damages Before the International Arbitrator."

11. Under French law, "domicile" is the place where a citizen has his or her principal establishment rather than actual residence. See CODE CIVIL, Domicile, art. 102-111 (edition of 1 January 1983); see also JEAN BALEYTE, ALEXANDRE KURGANSKY, CHRISTIAN LAROCHE, JACQUES SPINDLER, DICTIONNAIRE ÉCONOMIQUE JURIDIQUE (3d ed. 1992).

Reproduced, with permission, from 14 Journal of Law and Commerce 183-200 (1995)

A. Facts [75]

In 1989, a contract was entered into by the Seller, an Austrian national, and the Buyer, a Yugoslavian national (Croatian),[76] for the furnishing and assembling of materials to be used in the construction of a hotel in Czechoslovakia. The Seller maintained that it delivered all of the goods required by the contract but received only a portion of the payment. After unsuccessful attempts to obtain the outstanding payment, the Seller demanded arbitration seeking the remaining balance along with interest on that balance. Although the Buyer was served with notice of the impending arbitration, it failed to respond. Notwithstanding the Buyer's failure to respond in accordance with Article 4 of the ICC Rules,[77] the arbitration was implemented in front of a sole arbitrator by the ICA. Article 15(2) of ICC Regulation states that:

"[i]f one of the parties, although duly summoned, fails to appear, the arbitrator, if he is satisfied that the summons was duly received and the party is absent without valid excuse, shall have the power to proceed with the arbitration, and such proceeding shall be deemed to have been conducted in the presence of all parties."[78]

Although the contract between the parties contained an article called "Litigation and Applicable Law," the parties nevertheless had failed to reach an agreement on this matter.[79] The Court, pursuant to Article 13, paragraph 3, of the Regulation of Conciliation and Arbitration, "must apply that law which is designated by the law of conflicts which it deems appropriate."[80] Accordingly, the ICA applied CISG.

B. Analysis of the ICA's Application of CISG

The issue in this case is what rate of interest should be used in determining the Seller's damages. There is no question that the Seller is entitled to the outstanding balance of the contract price for the delivered goods (absent some claim by the Buyer of which we are unaware due to the Buyer's refusal to participate in the proceedings). Article 53 of CISG, if CISG is indeed applicable here, states simply that "[t]he buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention."[81] The first stage of the analysis then is to determine whether it was appropriate for the ICA to apply CISG.

Article 1(1)(a) provides for the application of CISG if the contract for the sale of goods arises between parties whose places of business are in different states and where both states are signatories of CISG.[82] Buyer and Seller have their places of business in different states, Buyer in (the former) Yugoslavia and Seller in Austria, and both of these states are signatories of CISG.[83] Since the parties did not adequately provide for choice of law or forum in the article of the contract entitled "Litigation and Appropriate Law," as discussed in the previous section, the ICA applied CISG as the law designated by the law of conflicts.

There is, however, the question of whether the mixed nature of the contract, i.e., the fact that it involves both the furnishing of the goods and their assembly by the Seller, affects the proper application of CISG. As the Hascher Commentary on this case points out, Article 3(2) of CISG is applicable here. Article 3(2) states that "[t]his Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services."[84] The ICA treated this question as a factual issue finding that it was clear from the text of the contract that the provision of assembly services was secondary to the sale and the transaction could thus be treated as a contract for the international sale of goods.[85]

Notice the similarity between the issue of the nature of the contract here and that in Ytong. Here at least, there is evidence in the contract that the parties intended to subordinate the assembly obligation to that of the obligation of the Seller to deliver the goods. In Ytong, there was no written indication of the nature of the contract and the French Court was forced to make a factual determination, which ultimately led to the application of CISG.

"[q]uestions 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."

The Hascher Commentary notes that arbitrators generally determine the rate of interest according to the law applicable to the contract, or they adopt the rate of the country of the creditor, or the state of the contractually agreed currency for payment.[87] The Hascher Commentary goes on to note that despite this common practice, the ICA chose to adopt the law of the place of payment. Since the parties did not provide for a place of payment in the contract, the ICA applied Article 57 to determine its location.[88] The ICA applied Article 57(1)(b), which states that "if the payment is to be made against the handing over of the goods or of documents, [then payment of the price should be made] at the place where the handing over takes place."[89] The ICA held that the partial payment made by the Buyer, which occurred upon the handing over of the goods, placed the obligation to pay under Article 57(1)(b).[90] The contract does not mention that payment is to be made upon the handing over of the merchandise.[91] However Article 9(1) of CISG provides that "[t]he parties are bound by any usage to which they have agreed and by any practices which they have established between themselves."[92] The Seller alleged at the hearing that payment was to be made at the handing over of the goods in Prague.[93] Since the Buyer did not participate in the hearing, the ICA accepted the Seller's position and applied 57(1)(b). This makes a significant difference because if the ICA had applied 57(1)(a), the place of performance of the obligation would have been Austria, the location of the Seller's place of business. It appears that there must have been a more favorable rate of interest in Czechoslovakia since the Seller was so eager to convince the ICA that the place of payment was located there.

The Hascher Commentary criticizes the ICA's reasoning on this matter because of a growing tendency of arbitral jurisprudence to determine directly, without recourse to any particular state's law, a rate of interest which, taking into account the circumstances of each particular case, indemnifies against the harm due to the delay in payment.[94] A further anomaly of the ICA's holding is that the New Czech Commercial Code provided no firm position on the rate of interest either. The Czech embassy in Paris provided a figure of a minimal rate of 12% to be customary.[95] However, the Hascher Commentary seems to dispute this finding stating that Article 502 of the Czech Commercial Code (which took effect on January 1, 1992) provides that, "in the absence of an agreement of the parties, the rate of interest payable on the unpaid balance is that of credit extended by banks in the debtor's place of business at the time of entering the contract," i.e. Croatian banks.[96]

C. Conclusion

There appear to be four possible methods of determining the rate of interest to be paid on the outstanding balance in this case. The first does not involve CISG and is the position the Hascher Commentary suggests is the growing trend in arbitrational jurisprudence. Using this method, the arbitrator considers the circumstances of each particular case to determine the appropriate rate. The second method involves applying Article 57(1)(a) of CISG, which would locate the place of the Buyer s obligation to pay the Seller in Austria, and Austrian interest rates would apply. The third method is the one chosen by the ICA. Applying Article 57(1)(b), the ICA found the place of performance of the Buyer's obligation to pay the Seller was Czechoslovakia since the partial payment of price was made upon the delivery of the goods. CISG allows parties to be bound by usage and established practices between them, but there is no concrete evidence that payment was to be made upon the handing over of the goods, and the ICA relies on the Seller's allegations. In addition, the ICA was unable to find a satisfactory solution under Czech national law and had to rely on a 12% customary figure. The fourth and final possibility involves applying section 502 of the New Czech Commercial Code instead of the customary figure applied by the ICA. In this case, the rate would be determined by the banks of the debtor's place of business, i.e., Croatia.

The foregoing illustrates the uncertain outcome where the parties to a contract for the international sale of goods do not adequately provide for defaults. Although CISG provides an aggrieved seller the remedy of interest on the unpaid balance, it does not provide for an applicable interest rate, thus subjecting the parties to the uncertainties common to private international law. CISG cannot be expected to fill all the gaps in all contracts for the international sale of goods, but serious problems, as well as anomalous decisions, can arise when courts and arbitrators are forced to fill the gaps in CISG itself.

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FOOTNOTES

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75. The following is a summary of the relevant facts from the translated case published along with this Note. Please refer to the translated case for the unabridged facts.

76. The names of the parties are not provided by the Court and will be referred to hereinafter as "Seller" and "Buyer."

77. INTERNATIONAL CHAMBER OF COMMERCE RULES OF CONCILIATION AND ARBITRATION (in force from 1 January 1988) [hereinafter ICC RULES], reprinted in W. LAURENCE CRAIG ET AL., INTERNATIONAL CHAMBER OF COMMERCE ARBITRATION, app. II (2d ed. 1990). Article 4 provides the procedures for the defendant's answer to the plaintiff's request for arbitration.

78. Id. app. II, at 9.

79. The ICA does not state the content of the article on "Litigation and the Law," but only that it was insufficient to provide the ICA with the applicable law to be applied in the conflict.

80. ICC RULES, supra note 77, app. II, at 3. Art. 13(3) states:

"[t]he parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbiter shall apply the law designated as the proper law by the rule of conflict which it deems appropriate."

The Commentary following the case, written by Domonique [sic] Hascher, notes that when parties to a contract have not chosen the law applicable to the controversy, arbitrators generally use three different methods to determine which law applies. See Hascher Commentary, supra note 18. The first method consists of applying cumulatively the systems of conflicts of laws of the states interested in the litigation. The second method consists of having recourse to the general principles of private international law, such as the rules contained in international conventions, e.g. CISG, and the third method consists of directly choosing trial rules, avoiding rules of a conflictualist nature. Id., citing Derains, Legitimate Expectation of the Parties and Applicable Law to the Substantive Issue in International Commercial Arbitration, TRAVAUX COMITÉ DIP, 81, 1984-1985.

81. CISG art. 53.

82. Id. art. 1(1)(a).

83. Declarations Table, supra note 55, at 237, 244.

84. See Hascher Commentary, supra note 18, at 1009.

85. See ICA Case, case No. 7153, at 1007. The Hascher Commentary notes that this conclusion is further supported by a bill addressed to the Buyer which stated that the price for the assembly of the materials was of a completely secondary order of magnitude compared to that of the purchase of the materials. See Hascher Commentary, supra note 18, at 1009.

86. CISG art. 78.

87. See Hascher Commentary, supra note 18, at 1009 (citing Derains, Intérêts Monetaires, Dommages-Intérêts Compensatoires et Dommages Punitifs Devant l'Arbitre International, Mélanges Bellet, LITEC, p. 101).

88. See Hascher Commentary, supra note 18, at 1009.

89. CISG art. 57(1)(b).

90. ICA Case, case No. 7153, at 1007.

91. See id.

92. CISG art. 9(1).

93. See ICA Case, case No. 7153, at 1007.

94. See Hascher Commentary, supra note 18, at 1009-10 (citing Derains, supra note 87).

95. See ICA Case, case No. 7153, at 1007.

96. Id. at 1010

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