04 Feb 2021
Abstract: This article analyzes the relationship between the Vienna Convention on the International Sales of Goods and arbitration. It aims to identify whether the arbitrator is bound by the CISG and for what reason, specially when parties choose the law of a Contracting State as substantive law. The duty to apply the Convention – if there is one – arises out of the text of the Convention or due to an implicit choice of law? Moreover, what is the consequence of the disregard of the CISG by the arbitrator? This study demonstrates that arbitrators, while they are not bound by Article 1 of the CISG, must apply the Convention in some circumstances, if the parties have expressly or impliedly chosen the Convention to govern substantive issues of the dispute. This obligation, contrary to what is commonly believed, does not derive from Article 1(1)(b) of the CISG. The failure to apply the Convention, when parties have chosen the law of a Contracting State, may lead to unenforceability of the award for excess of power.
Introduction
The Vienna Convention on the International Sales of Goods (“CISG” or “Convention”) gained special importance in international arbitration. We know that, at least, half of the cases involving the CISG were decided by arbitrators [2]. There are research pointing out that more that 70% of the cases involving the CISG are decided by arbitrators [3].
The Convention is an international treaty that binds the state courts of Contracting State to apply it in the hypothesis set out in Article 1 of the CISG. The judge of a Contracting State must apply the CISG as an international obligation.
However, as arbitration is a private system for dispute settlement entirely based on party autonomy, doubts arise as to when an in what circumstances the arbitrator must apply the Convention.
If the arbitrator is not bound by the CISG anyhow, that means the Convention, in Contracting States, is a domestic law that regulates international contracts. However, the Convention only binds the state courts, which are not the protagonists of the international dispute settlement. That is the arbitrator. And the applicability of the Convention by the arbitration is still an obscure matter in doctrine in jurisprudence.
Therefore, the objective of this paper is to identify whether the arbitrator is bound by the Convention and for what reason. More specifically, if the arbitrator is bound to apply the Convention, when the parties choose the law of a Contracting State to govern the substantive issues of a dispute. The duty to apply the Convention – if there is one – arises out of the text of the Convention or due to an implicit choice of law? Moreover, what is the consequence of the disregard of the CISG by the arbitrator?
The arbitrator must apply the choice of law made by the parties [4]. The law applicable to the substantive issues of the dispute is the law chosen by the parties or, in the absence of a choice, the one designated by arbitrators [5].
The arbitral tribunal has the duty to apply the law chosen by the parties to solve a dispute. That is evidenced by Article V(1)(d) of the New York Convention [6], which foresees that recognition and enforcement of the award may be refused if the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.
According to Moses, if the arbitrators fail in applying the law chosen by the parties to the substantive issues of the contract, this may serve as a reason for refusing the enforcement of the award on the basis of excess of authority or the irregularity of the procedure, that was not in accordance with the parties’ agreement [7].
In arbitration, party autonomy constitutes the “supreme source of law”, and the Contracting Parties of the New York Convention must respect the choice of law made by the parties [8]. The arbitral tribunal is bound to follow the instructions of the parties; otherwise, it exceeds the power that the parties have conferred to it [9].
Furthermore, UNCITRAL Model Law on Commercial Arbitration of 1985, which is adopted in more than 70 countries [10], provides on its Article 28 that “the arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute”. Article 28 of the UNICTRAL Model Law confers the parties the freedom to choose the applicable substantive law, which is of upmost importance in cases where the national law does not clearly state such right [11].
In arbitration, party autonomy is practically immune to state intervention, being limited only by public order [12]. Some argue the arbitrators can disregard the choice of law made by the parties in order to apply mandatory rules [13]. According to Blessing, “on the one hand, the international arbitrator is not the guardian of the interests of foreign States […]. On the other hand, the international arbitrator is not simply the “obedient servant” of the parties [14]”.
Thus, in general, if the parties expressly choose the CISG as applicable law, such choice must be respected [15]. A more difficult question arises when the parties choose the law of a Contracting State. Are arbitrators bound to apply the CISG in this case? Assuming arbitrators are bound to apply the CISG, what are the consequences if the CISG is disregarded?
2.1. Structure of Article 1 CISG: state courts as addressees
The Vienna Convention on Contracts for the International Sales of Goods establishes its scope of applicability on Article 1. Accordingly, two main requirements must be met for the applicability of the Convention under Article 1(1)(a) [16]: the Convention applies to contracts of sale of goods between parties whose places of business are in different States (“internationality” element) when the States are Contracting States (“automatic applicability”) [17].
Article 1(1)(b) of the CISG provides that the Convention must be applied when the rules of private international law lead to the application of the law of a Contracting State. This approach is called “indirect applicability” [18] or “classic approach” [19], and it is said to broaden the Convention’s scope of applicability [20].
According to Petrochilos, Article 1(1)(b) deals with a hypothesis of applicability of the Convention that does not depend on the subject that is applying it, as Article 1(1)(b) renders the Convention applicable every time the conflict of laws provisions applied by any tribunal – be it a court of a Contracting State, a court of a non-Contracting State or an arbitral tribunal – point to the law of a Contracting State [21]. However, this is questionable, as arbitral tribunals are not obliged by international law to assess the Vienna Convention applicability to a dispute. Arbitral tribunals are primarily obliged to apply the law chosen by the parties.
Courts of Contracting States are obliged by Public International Law to apply the CISG ex officio, where the requirements for its applicability are met [22]. Such courts must apply the Convention directly, before analyzing the conflict of laws provisions traditionally applied [23].
On its turn, the courts of non-Contracting States are not subject to this obligation [24]. However, when the conflict of laws provisions applied by these courts render the Convention applicable, the court must apply the CISG just as the court of a Contracting State would apply [25].
For interpreting the Convention’s scope of applicability, resort is to be had to the Vienna Convention on the Law of Treaties, which regulates the interpretation of international treaties [26]. And, according to Article 26 of this Convention, the treaties oblige the parties to it. Consequently, only the Contracting States and its organs are bound by the international treaty. That is to say that only the state courts of the Contracting States are bound by Article 1 of the CISG [27].
Consequently, as arbitrators are not state organs bound by international treaties assumed by countries, they are not bound by the Vienna Convention, if the parties have not manifested the intention to apply it.
2.2. Article 1 CISG and arbitral tribunals
Arbitration is a different system from traditional litigation, and, consequently, when analyzing the applicability of the CISG in arbitration, one must take into account this system’s particularities.
In international arbitration, parties are free to choose the applicable law to the procedure, to the substantive issues, the forum, and even opt for the dépéçage, where parties choose more than one applicable law to each issue of a dispute [28]. Also, as it was already referred, arbitrators are not bound by international treaties.
The relationship between the CISG and arbitration has been analyzed by authors and it is possible to identify two main positions. The first is more restrictive and advocates the absolute independency between the arbitral tribunal and the Convention. The second is more flexible, as it visualizes hypothesis in which the arbitral tribunal would have to apply the Convention.
The first group of authors correctly state that arbitral tribunals are not bound by Article 1 of the Convention and the issue of applicability of the CISG is treated differently when compared with state courts [29]. Professor Schwenzer mentions arbitrators are not bound by the Convention or by international law obligations, as arbitration is a private dispute settlement system [30]. Similarly, Janssen and Spilker argue that due to its nature, arbitrators are not bound by Article 1 of the Convention, even when the arbitration is seated in a Contracting State, since arbitrators have no connection with the legal system of a country [31].
According to Huber and Mullis, arbitrators must determine the applicable law in accordance with the procedural law, the intention of the parties or the lex arbitrii [32]. In this sense, arbitrators are not bound to directly apply Article 1 of the CISG. However, the authors mention that, when parties have their places of business in Contracting States, it is likely that the applicable law will be the law of one of these states, and, therefore, the Convention would apply [33].
Petrochilos mentions the Convention could be applied by arbitral tribunals, but as a faculty and not as an obligation [34]. However, as it will be demonstrated, there are hypothesis in which an arbitral tribunal have the obligation to apply the CISG. The most obvious one is when parties expressly choose to apply the CISG to the substantive issues of the dispute [35].
The arbitrator will first assess whether the parties have expressly or implicitly chosen the Convention; if they have not, the arbitrator can still apply the Convention, if it understands it is the most appropriate solution [36].
Differently, other authors foresee the possibility of arbitral tribunals to be bound by Article 1 of the CISG. For example, Gary Born mentions being unclear whether the Convention is applicable in arbitration pursuant to Article 1(1)(a) or Article 1(1)(b) of the Convention [37].
Some authors are of the understanding that arbitral tribunals may have to apply the Convention as a consequence of Article 1(1)(b) [38], where the parties have chosen the law of a Contracting State, the Convention will most likely apply [39].
These latter group of authors do not state clearly the reasoning behind the applicability of the Convention. They suggest that arbitrators may be bound by Article 1(1)(b) of the CISG. However, as already mentioned, arbitrators are under no duty to apply international treaties [40].
Therefore, a clear regime establishing the applicability of the CISG by an arbitral tribunal is absent in the doctrine.
When analyzing case law, the reasoning of the decisions demonstrate that the Convention is applied for different reasons by arbitrators. In a nutshell, it was verified that, although most authors are of the opinion that arbitrators are not bound by Article 1 of the CISG, frequently the latter is applied by arbitral tribunals to justify the applicability of the Convention.
The decisions can be divided in two main groups: the first, in which the arbitral tribunal applied the Convention based on its own text (“Applicability a priori of the Convention”); the second, in which the arbitral tribunal applied the Convention due to a choice of the parties (“Applicability of the Convention due to party autonomy”).
In the cases identified as “Applicability a priori of the Convention”, arbitral tribunals applied the Convention due to Article 1(1)(a) or 1(1)(b) the same way state courts do [41]. The arbitrators evoked Article 1 of the CISG without mentioning the reasons why the latter is being analyzed in the first place.
In the cases identified as “Applicability of the Convention due to party autonomy”, two different reasonings are identified. The first group of arbitral awards bases its reasoning on Article 1(1)(b) in order to justify the applicability of the CISG. It is mentioned that the choice of the law of a Contracting State entails the applicability of the CISG, as party autonomy is a connecting factor in international arbitration, fulfilling the requirements of Article 1(1)(b) of the CISG [42].
The second group of arbitral awards identifies the parties’ choice of the law of a Contracting State as an implicit choice of the Convention, since the CISG prevails over non-harmonized domestic law [43]. The latter decisions highlighted the fact that the CISG consists in the segment of the law chosen by the parties (the law of a Contracting State) destined to regulate contracts for the international sales of goods. Therefore, the CISG would apply primarily to the contract for the international buying and selling of goods.
Some decisions mixture both reasonings in order to justify the applicability of the CISG [44].
While the disregard of the Vienna Convention by a state court, when the requirements of Article 1 are met, may entail international liability, the same does not apply for arbitrators. The latter are bound by the parties’ agreement [45].
The enforcement of an arbitral award is regulated, in the majority of countries, by the New York Convention [46]. The reasons for refusing enforcement of an arbitral award are foreseen in Article V of the New York Convention.
The error of law is not a cause for annulment of an arbitral award under the New York Convention [47], as it is impossible to review the merits of an arbitral decision [48]. Notwithstanding, as arbitrator may not exceed its jurisdiction, the applicability of a law not invoked by the parties may, in some cases, lead to the annulment of the arbitral award [49].
According to Moses, the disregard of the choice of law made by the parties by arbitrators can bar the enforcement of an arbitral award under two different reasons: the arbitral tribunal acted exceeding its powers (i) or the arbitral procedure did not occur in accordance with the parties’ agreement (ii) [50]. Both reasonings are found in the New York Convention, Article V(1)(c-d) [51].
As all the powers of arbitrators derive from the arbitral clause, arbitrators are bound by the parties’ will and must follow its instructions [52]. The arbitral tribunal owes its existence to the parties’ will and, for that reason, is bound to its instructions [53].
Cordero-Moss distinguishes two situations: the merits review of the arbitral award (the “correct” applicability of the law, including the Private International Law) and the decision over the jurisdiction of the arbitral tribunal to apply certain law [54]. While the former situation is outside the scope of jurisdiction of a court, the latter can be seen as an excess of power by the arbitral tribunal and, therefore, it is inside the scope of analysis of a court [55].
According to Cordero-Moss, the outcome of the arbitration depends largely on the criteria used to analyze the questions submitted to arbitration [56]. That means the conflict must be resolved under the standards chosen by the parties [57].
Therefore, in principle, the disregard of the CISG, when parties have chosen the law of a Contracting State to govern the substantive issues of the contract, may be reviewed by courts. If the parties implicitly chosen the CISG, the arbitrator should apply the parties’ choice of law.
The second ground foreseen in the New York Convention to refuse enforcement of the arbitral award when the arbitrator does not apply the law chosen by the parties is the irregularity of the procedure. According to Cordero-Moss, this ground may be used to refuse enforcement of unauthorized ex aequo et bono awards [58]. Therefore, when an arbitrator, instead of applying the law chosen by the parties, applies notions of justice or general principles of law, the award may be refused enforcement on the basis of procedural irregularity.
However, not every decision that disregards the CISG is an ex aequo et bono decision. Only when arbitrators apply notions of justice or general principles of law instead of applying the CISG, when parties have chosen the Convention as applicable law, that this ground for refusing enforcement becomes relevant.
Conclusion
The issue of the applicability of the Vienna Convention is still obscure. Authorities diverge as to the binding nature of the CISG when it comes to arbitration. While many authors agree that arbitrators are not bound by the CISG, some argue that arbitral tribunals could be bound by Article 1(1)(b).
Arbitrators tend to apply the CISG just as a state court would apply. However, there may be no consequences for the disregard of the CISG by arbitrators, as they are not bound by an international obligation to apply international treaties.
Some arbitral awards correctly point out that the choice of a Contracting State leads to the applicability of the CISG, since the latter is the segment of the law chosen by the parties specialized in international buying and selling of goods. Therefore, a choice of the law of the Contracting State constitutes an implicit choice of the CISG.
Arbitrators are bound by the parties’ agreement and must decide the dispute trusted to them in accordance with the patterns established by the parties. Therefore, arbitrators must apply the law chosen by the parties – be it expressly or impliedly.
If the parties have chosen the law of a Contracting State to govern substantive issues of the dispute, the arbitrators should apply the CISG as an implicit choice of law. Failing in applying the Convention, one could challenge the award for excess of power.
Vitória Zanotto Farina