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International disputes fro?)!

soup to nutsor in this casCy pickles to jams are included within the orhit ofthe CISC (Contracts for the Inte'niational Sale of Goods), a source of general contract principles and trade usage in world arbitration.

Resolving International

Contract Disputes
By Larry A. DiMatteo
The author is an assistant professor of business and international law at the University of Miami Scbool of Business. He holds a law degree from Cornell Law School atul has published several articles and a book

entitled, Contract Theory: The Evolution of Contractual Intent.

The author examines the effect the U.N. Convention on Contracts for the International Sale of Goods (CISG) has had on international arhitration. He reviews the general principles of good faith and fairness, and explains how these provide the framework for arhitrators to apply CISG provisions as evidence of general principles of international contract law.

he impact of the United Nations Convention on Contracts for the International Sale of Goods (CISG)' on international arhitration has heen felt in two areas. First, its adoption as the domestic contract law of the individual signatories will require its application hy arhitrators under conflict of law rules.Courts and arhitral trihunals will he required to apply its rules when it is determined that it is the law of the case. Second, it may he \'()luntarily applied as evidence of customary international law. Arhitration trihunals are more likely than courts to recognize it as a source of customary international contract law. It is the product of compromise hetween three of the world's major legal systems common law, civil law, and socialist law.' Thus, it possesses a universal appeal that many arhitrators will find appealing in their search for a lex mercntoria-type of justification for their awards. It is this second use of die CISG hy arhitral trihunalsas evidence

of customary international contract law that this article is directed. Basis in International Contract Law General principles of international law often play pivotal roles in international dispute resolution. "Modern judges and arhitrators tend more to seek to interpret and supplement instruments according to autonomous and internationally uniform principles."^ The CISG, as with most codes, reflects a recognidon of generalized principles of law. Professor Clive Schmitthoff, former lecturer at the City of London University, in making reference to the development of an international trade law code, noted that it should possess "principles which should apply to all international trade transactions." A code is most likely to he successful if it recognizes and harmonizes existing general principles of law. The following is a hricf review of the general principles of national contract laws and those found in the


internationalization of contract law in general.' The general principles include the duty of good faith and suhstandve fairness concerns. From the medieval lex mercatoria to the present, most specific rules of business can he traced to the norms ot good faith and fair dealing. The ohligation of good faith is fonnd in most national legal systems.^ Bad faith in the negotiation or performance of a contract will void a provision in a contract that was produced hy the had faith act/ Expansive interpretations of contractual good faith include good faith in negotiations, the duty to cooperate, the duty to adjust from the express terms of the contract, and good faith in the termination of contractual relations. The International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts" can he seen as a supplementary set of principles to be used in conjunction with the CISG. Ardcle 1.7 of these principles "indicates that the parties' hehavior must conform to good faith and fair dealing throughout the life of the contracts, including the negodadon process."'' Fairness in the exchange or substantive fairness concerns have increasingly been accepted as a major norm or principle of contract law at tbe supranational level. One commentator on international commercial contracts predicts a continuing shift from the strict enforcement of contracts to fairness in the exchange and good faith norms. Though the principle of sanctity remains strong, reladonal elements are on tbe rise.... [Tbere bas heen] a major shift towards relationalism and a recognidon of equitable considerations. Principles of equity have heen fully recognized with respect to the dudes of good faith, renegotiation, and gap-filling.... The doctrines of good faith and fair dealing are integral parts of contract law. It, therefore, can be concluded that, though fairness might not he tbe sole aim of contract law, it is certainly its underlying basis and one of its major objecdves.'"

Althougfi the CISG does not possess an explicit good faith provision, its articies provide ampie opportunity for an arbitration panel to exercise flexibiiity in the interpretation of a contract
The notion of fairness of the exchange has heen traced to the natural law philosophy of Hugo Grodus and Samuel Pufendorf in the 17tb century. They believed that contractual fairness was a relevant factor in the enforceahility of contracts." The norm of fairness became a justificadon for the development of a numher of contract law doctrines. The civil law's notion of just contract'' and the common law doctrine of unconscionahility" come within this fairness penumbra. Fairness concerns and good faith can also he applied hy jurists and arbitrators through the vehicle of trade usage and custom. The court in
Titzloii-itzki V. Atlantic Richfield Co.'^

expressly applied the lex mercatoria in holding that "good faith must presideover the formadon and performance of contracts."' In short, good faith was ruled as a general principle pertaining to all internadonal contracts. Lord Mustill more recently attempted to list 20 rules that help make up the uncodified lex mercatoria. A numher of those listed are reflected in the imderlying principles often given for the CISG. These include tbe principle that a contract should he performed in good faith; the "rule that unfair contracts and clauses should not he enforced; the doctrine oi' mipa in contrahendo (bad faith hargaining); if unforeseen difficuldes intervene in tbe performance of a contract, the parties shouid negotiate in good faith; and the principle of H( res magis
valcat qiitmi pereiit (contracts should

be interpreted in order to give them effect and not to destroy them).'" Arhitral tribunals at dmes will look to the concept of good faith wben assigning Iiahility and damages in a contract dispute. Although tbe VASG does not possess an explicit good faith provision, its articles provide ample opportunity tor an arbitration panel to exercise flexibility in the interprctadon of a contract. For example, the statements and conduct of the pardes are to be "interpreted according to the understanding of tbe reasonable person."''Article 77 adopts the good faith concept of the duty to mitigate. The non-hreacbing party must take all necessary steps to minimize damages. Thus, an arhitration panel can reduce the amount of an award if it helieves that the claimant failed to cooperate or to avoid damages. It has heen predicted that arhitration panels and courts will imply a minimal standard of good faith that heing "an affirmative ohligation to communicate during perfonnance and to cooperate in the cure of defects and tbe modification of obligations for unforeseen circumstances."^'' CISG as Lex Mercatoria A secondary concern of this article is tbe place and importance of the CISG within the general m(tvement towards the internationalization of contract law and the creadon of a new

sought out the usage and customs of a particular trade in order to determine if a term was unreasonahle. "Tbe business practices-of-the-community test asks whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place."" The court held tbat a termination provision in a dealership agreement was "not atypical in the local husiness community,"'^and therefore was not unconscionahle despite the disparity in the bargaining positions ofthe pardes. Tbese general principles are consistent with arbitral tribunals deciding international contract disputes using "non-national norms," or what is hroadly referred to as the lex mercatoria. In one ICC award, a tribunal

lex mercatoria}^ The unification of contract law stems from numerous sources. These sources inchide the increase in economic and legal unions, most noticeably in Europe, the use of "neutral" country laws, and the increased recognition of general principles of contract law. The most profound evidence of the move towards the unification of contract law is the adoption of the CISC The development of a new contracts jurisprudence to interpret and bolster the CISG is likely to have important consequences for the enforcement of international sales contracts by arbitral tribunals.

than on any predisposition towards a domestic law. These factors, along with widely accepted supranational rules of commerce, have lead to the creation of a law of business for international transactions.''' The progress of this internationalization of transactional law into domestic legal systems was duly noted by Schmitthoff: "The legal techniques of carrying on international trade are the same everywhere, irrespective of the political, ideological or economic orientation of the countries linvolved]."-' The terse, clear, and non-legal language of the CISG provides arbitrators a source of such In many ways, international comsupranational rules of commerce. mercial law or the lex ?Ne7xatoria can be seen as the world's first uniform law, albeit in an uncodified form. Arbitral Tribunals' Use of CISG Merchants have long developed usage as Trade Usage In a previous article, I cited an and practices that have given tliem the ability to communicate with one International Chamber of Commerce another without the distractions pre- (ICC) arbitration decision in posing sented by the nuances of culture, lan- the following question: "Can the guage, and national legal systems. CISG itself be considered a usage of Professor John Ilonnold, University of Pennsylvania emeritus, has noted that successful sales law unification entails a body of rules that are event-specific and void of unnecessary legalese. An international sales law "needs to cut out legal idioms, and write the rules in terms of commercial events that happen around the world. Without knowing the languages of the world you can be sure that there have to be words for trade and be applied outside of its these commercial events wherever direct application as domestic law?"^" there is commerce."" The ICC panel reasoned that "there is Professor Zagteb Goldstajn, no better source to detemiine the preauthor of "International Commercial vailing trade usage than the terms of Arbitration," (1987) has attributed the CISG."-" This is so, even when the current rise of a supranational neither party is from a country that is commercial law'' to the increased use a signatory to the CISG. Therefore, of arbitration to settle contractual arbitration tribunals can imply the disputes. The Council of Europe, for CISG into a contract dispute as eviexample, "started work as early as dence of international custom or trade 1959 on the preparation of a conven- usage.'" For example, in the ICC case, tion on arbitration."-^ The European the issue was the amount oftimethe arbitration convention is to "a large purchaser of goods had to give notice extent based on the various legal sys- of defect. The arbitration panel disretems involved and on the fruit of garded a domestic law's shorter statute practical experience."-' Commercial of limitations period in favor of the arbitrators are less likely to be con- two-year period provided in tbe cerned with the peculiarities of an CISG. Thus, arbitrators may use the individual national system of law. CISG as a vehicle to avoid procedural They are more likely to make deci- obstacles in order to render an award sions based upon pro-arbitration on the merits or equities of the case. norms, such as equity and fairness. In the ICC Arbitration Case No. 57B of

1989, the arbitration panel was able to extend a statute of limitations period in order to allow a purchaser of defective goods to bring a claim. In short, the arbitral tribunal used the CISG as evidence of international trade usage to avoid what it deemed to be an unfair domestic law: "As the applicable provisions of the law of the country where the seller had his place of business appeared to deviatefromthe generally accepted trade usage reflected in the CISG in that it imposed extremely short and specific requirements in respect of the buyer giving notice to the seller in case of defects, the tribunal applied the CISG."" The use ot international conventions and documents as sources of customary international law was recognized in relation to the non-hinding Principles for International Commercial Contracts sponsored by the UNIDROIT: "With the assistance of the Principles, arbitrators called upon to decide questions of

"The legal techniques of carrying on international trade are the same everywhere, irrespective of the political, ideoiogicai or economic orientation of the countries [invoived]."
interpretation will fmd it easier to avoid recourse to rules peculiar to this or that domestic law and to adopt an autonomous and internationally uniform solution.'"- In short, the general principles and conditions of international conventions like the CISG are generally regarded as evidence of trade usage." Another commentator stated that the CISG "may be applied virtually anytime an arbitrator believes that it produces the proper result."'^ Thus, like the medieval lex ??iercatoria, the CISG can be seen as a "collection of trade usage"" that arbitration tribunals can resort to in international commercial disputes. This premise is supported by Article 28 of the American .\rbitration Association's (AAA) International Arbitration Rules, which states that, "in arbitrations involving the application of contracts, the tri77

bunal shall take into account usage of vide fair decisions. For example, the trade applicable to the contract." One CISG's rejection of a writing or commentator concluded that it is nat- statute of frauds requirement for ural tor arbitrators to use the CISG as international contracts removes a trade usage because it was drawn formal obstacle in rendering equifrom common commercial practice: table decisions. Furthermore, Article "Arliitrators can draw comfort from 11 provides that "a contract and its the fact that their understanding of terms may be proved "by any means, international commercial law and including witnesses." Arbitration practice is consistent with the United panels applying the CISG may conNations Convention designed to sider all evidence and not just a final reflect international consensus."'"The writing in rendering their decisions. CISG and the UNIDROIT Princi- For example, a contracting party's ples can be seen as compilations of oral representations and warranties general principles that have tradition- given during the negotiation stage ally been the Hfeblood of the lex mercan be entered into evidence througb catoria. The lex inercatoria and its witness testimony. Tbus, the unsoprinciples have often been directly applied in arbitral decisions.'" This is phisticated ,\merican businessperson especially true when arbitrators are may be trapped if sbe believes that authorized to decide ex aequo et bonos her oral representations or informal
or as amiables com posit etirs.

assurances given during the negotiation stage of a contract. This is especially important in international transactions because tbe line between negotiation and contract is often blurred. One commentator warned of the expansion of contractual liability in international transactions because of tbe practice of placing discussions in writing at earlier stages of the contract formation process. Recent cbanges in modern international transactions bave led to an increased reliance on pre-contractual instruments. Connnercial transactions are increasingly consummated between parties of diverse cultural and legal traditions. Parties are often unfamiliar with the ethical and legal ramifications of the negotiating process in other countries, which may lead the parties to write out their goals at a relatively early stage of the negotiation....The primary question becomes wbether tbe relevant community would accord binding force to these [instruments].*'

The CISCi is the latest attempt at codifying the lex ?nercatona for international sale of goods transactions. Despite its enactment as the "domestic" international law of over 50 countries, its importance will initially lie advanced by its recognition as customary international law by arbitral tribunals. Some commentators regard the recognition of something as custom "as the prior source of international law, if not indeed the sole source!"'" The CISG's underlying principles of fairness, good faidi, equity, and civility are consistent with tbe approach of arbitral tribunals in international contract dis[)ute resolution. Instead of strict rule application, arbitrators are often motivated by the equities of the case in rendering fair and equitable decisions. The CISG is ready-made for sucb an approach because its meaning and terms are to be originally interpreted. A priori meanings taken from national legal systems are to be aliandoned in favor of tbe independent meanings consistent with the above underlying principles. Article 7{I) of tbe CISG mandates that matters of interpretation are "to be settled in conformity with the general principles" of the CISCi and of international contract law. The numerous provisions and jirinciples ot the CISG can be used by arbitrators in tbeir attempt to pro-

The CISG's underlying principles of fairness, good faith, equity, and civiiity are consistent with the approach Arbitral tribunals recognizing the CISC as customarv' international law ofarbitrai tribunais will be free to impose liability wben warranted in the pre-contractual setin internationai ting. contract dispute Conclusion International arbitration panels are resoiution. best positioned to apply a general
business correspondences are only binding if confirmed in tbe fmal contract.'" This broad evidentiary thresbold is akin to most arbitration rules. For example. Rule 31 of tbe AAA's Commercial Arbitration Rules provides that "parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the arbitrator may deem necessary to an understanding and determination of the dispute." The lack of a writing requirement and a parol evidence rule for a contract intended as afinalintegration of the parties' agreement is likely to expand the area of pre-contractual liability. Arbitrators, when looking to the CISG as customary international law, will be less constrained in finding liability for representations or principles approach to international contract law. The role of arbitrators as providers of business-oriented, fair decisions has been recognized. For example, tbe Superior Court of Quebec declined to set aside an arbitral award due to the "alleged lack of coberent and comprcbcnsible reasons." The court ruled that "arbitrators cannot be criticized for expressing themselves as commercial men and not as lawj'ers."^' They are generally concerned with non-nation specific applications of international principles of equit)' and contract. The articles of the C^ISG offer an attractive source of international customary law to be used in support of arbitral awards. The rules of the CUSCi are expressed in terms of events found generally in international trade; they

are not tied to thematic, abstract elements of any domestic contract law regime. These characteristics of the (;iSG will be inviting for arbitrators more concerned with how businesspersons transact business, than with the idiosyncratic rules of nationspecific contract rules. The CISG, much like die International Chamber of Commerce's Uniform Customs and Practices for Documentary
' United Nations C^onvcnrion on Contracts for the lntL'm^ti()n<il Sale of Goods (April I I . 1980), U N DOC. .V(:ONF.97/18, Annex I, reprinted in 19/./..M. 668. The CISC; has lieen enacted as the domestic law of the United States and at least 53 other countries. ' For the legislative history of the C;iS(i, see "United Nations (Conference on Contracts for the International Sale of Goods," (Vienna: 10 March-11 April 1980), Offkial Records, U N Document No. A/CONF. 97/19 (E.81.IV.3) See also John Honnold, Docume?itiiry History of the Vnifonn Law for Inteniational Sales (1989).

Credits (UCP 500) and its Incotemis manual, can be used by international arbitration panels as a neutral source for internadonal customary law. The CISG, along with the UNIDROIT Principles, provide arbitrators a suitable framework for deciding international contract disputes by the application ofthe general principles that underlie both documents. Furthermore, the more specif-

ic rules found in the CISG can and have been used as evidence of international trade usage. As such, they can be used as an alternative to more harsh national laws. By recognizing the CISG as customary international law in cases where it is not directly applicable, arhitral tribunals can avoid the intricacies of conflict of law rules and help promote the unification of international contract law.

Commission on International Trade, Vnifomt Conmienial l^nv in the Twmty-Fityt Cmtu,y{\W^) 38. " Supra, note 10, at 101. '' Richard Hyland, ICC Arbitration Case No. 5713 of 1<>89, in Albert H . Kritzer, Guide to Practical Application.*: of the United Nations Convention on Contracts for -" Larry A DLMatteo, "The CISG the Imernatiomil Sale of Goods (1994), '- See generally Raymond de Roover, "The Concept of the Just and the Presumption of Enlorce- Supp. 9, at 7. Price: Theory and Economic ahility: L'nintended Contractual " Henri Pirenne, Economic and Policy," 18 Journal of Economic Liahility in International Business Social History of Medieval Europe Hist.oty (1958) 41H. See also James Dealings," Yale Journal of Interna- 53(1936), as quoted in supra, note Gordley, "Equality in Elxchange," 69 tional Lni'(1997) 111, 134-135. The 23, at 143. material in this paragraph and some California Lm-Reviav (\9S\) 1587. "^ Andreas F. Lowenfeld, "Lex " See generally U.C.C. 2-302 of the other backgn>und infbnnation Mercato^ria: An Arbitrator's View," 6 in this article were taken from the (1994); Restatement (Second) of Arbitration Inteniatioiial 133. (1990) Yale article. ' Micliuel J. Bonell, " T h e Contracts 208 (1981). 137-140, as reprinted in Reisman, et al. -' Council of Europe, Legal CoL NIDROli" Principles of Intema'^ Md. '" See I.C.C. Awaril, Case No. 19S7-I982 ijonal C^onuiiercial Contracts: Why? '' Id. at 960, See also Gordon v. Operation in Europe: 2583/ 76 (1977); I.C.C, Award, Case What? How?" 69 Tulane Laiv Crown Central Petroleum Corp.., 423 (1983)37. N o . 2 2 9 1 / 7 5 (1976); and I.C.C. mfjr (1995) 1121, 1142. F.Supp. 58 (N.D. Ga. 1976), afFd, " Id. at 38. Award, Case No. 1641/69 (1974), as -' Professor Kastely lists a numljer cited in Franco Ferrari, "Defining ' See generally Lord McNair, 564F.2d413(5diCir. 1977). of universalized norms of eontraa law "The Generalized Principles of Law " Ibid. the Sphere of Application of the Recognized hy Ci\ilized Nations," 2 '" Pabalk Ticaret Ltd. Sirketi v. that provide the hasis for the intema- 1994 ' U N I D R O I T Principles of tionalization of transactional law. British Yairhook of hitei'tiatiomil L/ni' Nofsolor S.^-}.,\1 Yearbook of Comn/erInternational Commercial C o n (1975) 1, 19. See also Joseph M. dat Arhirration 484 (1986), as reprint- They include "the goal of com)ieasatracts,' " 69 Tulane Law Review Perillo, "LTNIDROrr Principles of ed in, W . Michael Reisman, W . tion, the moral convention of promis(1995) 1225, 1231. International Commercial C o n - Laurenc-e Craig, William Park, & Jan ing, a community's sense of justice, '" Teklewold Gebrehana, Duty to tracts; T h e Black Letter Text and Paulsson, Inrerniitioriai Comvii'vcial relational and coofieration noniis, and certaint)' in international sales con- Negotiate: An Element of International Review," 63 Pordham Lais Review Arbitration (i')^)7) 20}, 2m. Z^ni'(1978) 18. (1994)281. '" Lord Justice Mastill, "The New tracts," Kastely, mp-a, note 22. '" "Under the CISG, any rele-' C M . Schmitthoff, Commercial ' "Common and civil law juris- Lex Mercatoria: T h e First Twentyvant statement made in negotiations Five Years," 4 Arhitration Intematiomil Law in a Changing Econmnic Cthnate dictions recognize a principle of prior to signing of the contract are good faith requiring 'fair dealing, (1988) 86, 108, as reprinted in (2ded. 1981) 18-20. admissible into evidence," John E. affirmative disclosure of material Reisman, etal at 222-226. -" Supra, note 23, at 142. Murray, jr., "Different Laws Might facts, and assistance to others in '" CISG, at .'\rticle 8(2). -" Seller v. Buyer, Int'l Comin. Apply to Foreign Buys Lender the achieving the free henefit of con'" Hancock, "Guide to Interna- Arh. No. 5713 (1989), reprinted in tractual relationships," William A. tional SaleofCio(xls"at 101.007, par- Year Book of Commercial Arbitration, UN Convention for the Internationai Sale of Goods," 119 IHirchasHancock, ed.. Guide to the Intema- tially quoting .Arthur Rosett, "Critical 15(1990)70. ingiOct. 19, IW)3O. f ional Sale of Goods Convention I Reflections on the United Nations '" See Ronald A. Brand & Harry (1995), quoting R. Newman, ed., Convention on Contracts for the M. Fletchner, "Arhitration and *' John Klein & C^arla Bachechi, "The General Principles ot F.quity," International Sale of Goods," Ohio Contract Fonnadon in International "Precontractual Liahility and the in Equity hi the World's Legal Systeriis Swre Zvni.'>WTO/(1984) 265, 283. Trade: First Interpretations of the Duty of Good Faith Negotiation in (1978) .589, 600-608. -' T h e passage of the N o r t h UN Sale Convention," \2 Journal of Internationa! Transactions," 17 Houston Journal of International Law The Convention specifically American Free Trade Agreement La-d' & Cmmiei-ce (1W3) 239. excludes from governance over "the and the Uruguay Round of the " I C C Case N o . 5713, as ( 1 9 9 4 ) 1 , 8 , I I . " Navigation Sonaynar Inc. v. \-ali(iity of contracts," Q S G at Art 4 (a). (ieneral Agreement on Tariffs and reported in U N Commission on ' See U N I D R O I T I n t e r n a - Trade are two examples of the gloh- International T r a d e , "Cases on Algoma Steamships Ltd., Rapports tional Institute for the Unification of alization of commercial transactions. U N C I T R A L T e x t s , " A / C N . 9 / Judiciaires de Quebec (1987), as reported in U N Commission on ['rivatc Law, Principles of liita'nationul See generally, Denis Tallon, "Civil SER.CyABSTRACTS/3 (1994). Law & Commercial Law," Interna(^mtiifiarial Cantimts (Rome 1994). '" Michael J. Bonell, " N o n - International Trade, "Case Law on tional Encyclopedia of Co?/iparative Legislative Means of Harmoni- UNCITRAL Text," A / ( : N . 9 / "Supra, note 4, at H38. zation," in Proceedings of the Con- SER.C/ABSTRACTS/1, UN Pub. '" Nagla Nassar, Sanctity of Z ^ ' , V i n (1993) 10. Contracts Revisited: A Study in the -' John Honnold, "Beyond the gress of the United Nations No. E.94.V.8(1994). Theory and Practice of Long-Term CoNimercial Cmirraas (1995) 234. " "[Tlhe arguments of fairness, good faith, and change of circumstances were generally recognized by natural law Iawyer[s],"57y)n7, note 10 at 7. See generally, Hugo Grotius, The Law of War and Peace (trans. F.W.Kelsey 1925). DISPUTE RESOLUTION JOURNAL 79 Reef: Uniform Law for International Trade," Lecture at the University of Hawaii (May 13, 1986), as quoted in Amy Kastely, "'I"he Right to Require Performance in International Sales: Towards an International Interpretation of the Vienna Convention," 63, n.l2, iVashington Lffw Rei'iew (1988) 607,609.