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CISG CASE PRESENTATION

ICC Arbitration Case No. 5713 of 1989 [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/895713i1.html]

Primary source(s) for case presentation: Case text


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Case identification

DATE OF DECISION: 19890000 (1989)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Case report does not identify presiding arbitrator(s)

CASE NUMBER/DOCKET NUMBER: 5713 of 1989

CASE NAME: Case report does not identify parties to proceedings

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Turkey (complainant)

BUYER'S COUNTRY: Switzerland (defendant)

GOODS INVOLVED: Unavailable


Case abstract

ICC Arbitration Case No. 5713 of 1989

Case law on UNCITRAL texts (CLOUT) abstract no. 45

Reproduced with permission from UNCITRAL

In a series of contracts for the sale of goods on f.o.b. terms, the buyer disputed, both prior to shipment and upon arrival, the conformity of goods covered under one of the contracts with certain contract specifications. The buyer treated the goods in order to make them more saleable and sold them at a loss. The seller demanded full payment and the buyer filed a counterclaim demanding compensation for direct losses, financing costs, lost profits and interest.

The arbitral tribunal held, pursuant to article 13(3) of the 1975 ICC arbitration rules, which allows the tribunal in the absense of a choice of law by the parties to determine the applicable law by applying the private international law rule that it deems appropriate, that the contract was governed by the law of the country where the seller had his place of business. In addition, pursuant to article 13(5) of the ICC arbitration rules, the tribunal decided to take into account CISG as a source of prevailing trade usages. As the applicable provisions of the law of the country where the seller had his place of business appeared to deviate from the generally accepted trade usages reflected in CISG in that it imposed extremely short and specific time requirements in respect of the buyer giving notice to the seller in case of defects, the tribunal applied CISG.

The tribunal found that the buyer had complied with the requirements of CISG to examine the goods properly (art. 38(1) CISG) and to notify the seller accordingly (art. 39(1) CISG). It was held that, according to article 40 CISG, at any rate the seller would not be entitled to rely on non-compliance by the buyer with article 38 and 39 of CISG for the reason that the seller knew of could not have been unaware of the non-conformity of the goods with contract specifications. The tribunal awarded the seller the full amount of its claim and set it off against part of the buyer's counterclaim.

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Classification of issues present

APPLICATION OF CISG: Yes, as source of prevailing trade usages -- even though the CISG by its terms is not applicable to this transaction

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 9 ; 38(1) ; 39(1) and 39(2) ; 40

Classification of issues using UNCITRAL classification code numbers:

9B [Implied agreement on international usage; standards]

38A [Time for examining goods: buyer's obligation to examine goods]

39A ; 39B [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time; Cut-off period of two years]

40B [Seller fails to disclose known non-conformity (sanction: seller loses right to rely on Articles 38 and 39)]

Descriptors: Applicability ; Usages and practices ; Lex mercatoria ; Examination of the goods ; Lack of conformity notice, specificity ; Lack of conformity known to seller

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Editorial remarks

EDITOR: Albert H. Kritzer

CISG issues ruled upon:

The contract was concluded in 1979, before the final text of the CISG was written; nine years before the CISG became the law of any country. The tribunal cited inspection and notice provisions of the CISG: Articles 38(1), 39(1), 39(2) and 40. The rules these provisions contain are: Article 40, a rule commonly encountered in domestic legal systems; Articles 38(1) and 39(1), rules more flexible than those of many civil law codes but in some respects tighter than those of the U.S. Uniform Commercial Code; and Article 39(2), a unique creation of the CISG. [This notice scheme also includes an Article 44, like Article 39(2) a compromise provision of the CISG that has no precise counterpart in any domestic law.]

Applicability/Trade usages, CISG as source of/Lex mercatoria. Article 9(1) states that the parties are bound by any usages to which they have agreed, either expressly or by implication. Article 9(2) provides that 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." Referring to ICC Arbitration Rules which state that arbitrators will take into account "relevant trade usages", the tribunal stated that the CISG's notice provisions are "prevailing trade usages" and held that, as such, they apply to this case.

Examination of the goods/Notice of lack of conformity. Citing Article 38(1) which requires the buyer to "examine the goods . . . within as short a period of time as is practicable in the circumstances," Article 39(1) which requires notice of lack of conformity "within a reasonable time after [buyer] has discovered it", and Article 39(2) which provides that in no event can this time exceed two years unless the parties agree otherwise, the tribunal referred to these provisions as "generally accepted trade usages" that are "considerably more flexible" than the notice rules contained in the law of the country of the seller; held them applicable; and concluded that buyer had complied with them.

Knowledge of lack of conformity. Citing Article 40, the tribunal stated that "[i]n any case, the seller should be regarded as having forfeited its rights to invoke any non-compliance with the requirements of Articles 38 and 39" since these requirements do not apply where "the lack of conformity relates to facts of which [seller] could not have been unaware, and which he did not disclose".

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

English: ICC International Court of Arbitration Bulletin (December 1990) 24; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=16&step=Abstract>

French: Bulletin de la Cour Internationale d'Arbitrage de la CCI (December 1990) 24; Droit et pratique du commerce international (1994) 95-96

German: Schweizerische Zeitschrift für Internationales und Europäisches Recht (SZIER)/Revue suisse de droit international et de droit européen 1995, 281

Italian: Diritto del Commercio internazionale (1993) 652-653 No. 10

Polish: Hermanowski/Jastrzebski, Konwencja Narodow Zjednoczonych o umowach miedzynarodowej sprzedazy towarow (Konwencja wiedenska) - Komentarz (1997) 241-242

CITATIONS TO TEXT OF DECISION

Original language (English): Collection of ICC Arbitral Awards/Recueil des Sentences Arbitrales de la CCI 1986-1990 (Kluwer) II, 223-226; Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, Kritzer ed. (Kluwer 1994), vol. 2, suppl. 9; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=16&step=FullText>; Yearbook Commercial Arbitration (1990) 70-73 [text presented below]

Translation (Spanish): Bueno Barrera, Quatro casos relacionados con la Convención de Viena sobre Compraventas Internacionales de 1980, Thesis, Universidad Panamericana (Mexico, D.F. 1996) 263-266

CITATIONS TO COMMENTS ON DECISION

English: Gillette/Walt, Sales Law Domestic and International (Foundation Press 1999) 33-34 [application of CISG by analogy]; Ferrari, International Legal Forum (4/1998) 138-255 [180 n.351 (criticism of application of CISG to contract concluded before CISG came into effect)]; Bonell/Liguori, Uniform Law Review (1996-2) 359 [363 n. 12, n. 13]; Brand/Flechtner, Journal of Law & Commerce 12 (1993) 239 [258-260]; DiMatteo, 22 Yale Journal of International Law (1997) 111 [142-143]; Goode, 46 International Commercial Law Quarterly (1997) 15 [20-25]; Hyland, in Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, Kritzer ed. (Kluwer 1994) vol. 2, suppl. 9 [text presented below]; Winship in: Contemporary International Law Issues: Opportunities at a Time of Momentous Change (1994) 122 [123]; Goode, in: Ziegel ed., Proceedings of the 8th Biennial Conference of the International Academy of Commercial and Consumer Law, Oxford: Hart (1998) 21-25 [criticism of tribunal's application of CISG as "usage"]; for a survey of close to 100 judicial and arbitral rulings on Article 39(1), go to the 1998 Pace essay on this subject by Camilla Baasch Andersen; Petrochilos, Arbitration Conflict of Laws Rules and the CISG (1999) nn.90-93; Flambouras, Transfer of risk (1999) n.126; Spanogle/Winship, International Sales Law: A Problem Oriented Coursebook (West 2000) [when parties fail to designate the applicable law 52-68 (this case at 63-64)]; Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at nn.612, 614; CISG-AC advisory opinion on Examination of the Goods and Notice of Non-Conformity [7 June 2004] (cases cited in addendum to opinion); [2004] S.A. Kruisinga, (Non-)conformity in the 1980 UN Convention on Contracts for the International Sale of Goods: a uniform concept?, Intersentia at 10; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 38 para. 16

German: Will, UN-Kaufrecht und internationale Schiedsgerichtsbarkeit (1999) nn.11, 23

French: Witz, Les premières applications jurisprudentielles du droit uniforme de la vente internationale (L.G.D.J., Paris: 1995) 92

Italian: Liguori, Foro italiano (1996-IV) 145 [169 n. 109, n. 110]

Spanish: Bueno Barrera, Quatro casos relacionados con la Convención de Viena sobre Compraventas Internacionales de 1980, Thesis, Universidad Panamericana (Mexico, D.F. 1996) 139-174

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Case text

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

I. Applicable Law

[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.

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Case commentary

Commentary on ICC Arbitration Case No. 5713 OF 1989

Richard Hyland [*]

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).

CISG as applied to contracts previously concluded

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.

37. C. civ. arts, 1645-46; see 3 H. Mazeaud et al., Lecons de droit civil (Principaux contrats: vente et echange) no. 988 at 311-12 (M. de Juglart ed. 7th ed. 1987).

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