Reproduced with permission of 17 Journal of Law and Commerce (1998) 355-364
The CISG as the Model of the Century?
Emerging Questions in the 1990's
A Comparison of the Three Current Projects as Illustrations
Other Recent Developments
The CISG as the Model of the Century?
The United Nations Convention on Contracts for the International Sale of Goods ("CISG") and the process by which it was adopted, established the benchmark for the unification of commercial law in the post-war era. In the period from 1945 to 1970, cross-border harmonization of private law was primarily effective in the areas of international transportation and dispute resolution, the latter resulting in the Hague Conventions on service of process and evidence and the U.N. Convention ("New York Convention") on foreign arbitral awards. The United States actively entered this process in the mid-1960's, by joining the Hague Conference and UNIDROIT, becoming an active member of UNCITRAL which was established as a body of the U.N. General Assembly, and several years later becoming actively engaged in the resurrected private international law (PIL) process at the Organization of American States.
The process at UNCITRAL, to the lasting benefit of those engaged in harmonization of law, managed to dodge the regional and political confrontations and bloc politics then common in U.N. bodies. The CISG, completed in 1980, which drew substantially on UNCITRAL's first multi-lateral treaty on limitation (prescription) periods, as well as prior treaty regimes worked out at UNIDROIT, essentially merged civil and common law precepts in an area of long standing domestic law in all countries. The standard was harmonization through acceptable common denominators.
The CISG came into force in 1988 when the United States, Italy and China together deposited their instruments of ratification. It has not only drawn an impressively large number of states to join its regime but spawned the important "CLOUT" system of standardized reporting of national decisions through the U.N. The latter has set the groundwork for the reality of a future internationalization of legal results. These are heady achievements.
What else have the last 25 years shown us? The CISG evidenced that the international process could indeed produce rules of substantive law, notwithstanding the traditional wisdom that this was largely unachievable, citing the limited reach both of the CISG's treaty predecessors in the European community and the Bustamente Code in the Americas. This achievement set in motion a number of efforts in various international fora, and predictably will continue to do so. For many commentators this is the standard against which all later efforts need to be viewed. At the same time, however, economic and technical developments since 1980 have created questions as to whether the CISG model alone is enough for some commercial law topics now at issue.
Emerging Questions in the 1990's:
(A) Should harmonization continue to occur by merging existing legal systems and established rules, and thus reaching common denominators between countries; or
(B) Should commercial law unification now become, as some argue, result and policy driven, so that agreement is measured by economic gains and not by the merging of differing standards; and
(C) In view of various technological changes, primarily electronic commerce, can these efforts legitimately seek to establish uniform rules before national legal systems have been developed?
As to the first question, recent U.S. efforts have challenged unification work in the absence of sufficient international consensus on economic goals. This has partly resulted from the focus on promoting the expansion of trade and "global law networks." This has been coupled with greater support internationally for private economic sector solutions, which in turn may mean emphasizing lex mercatoria and market practices, rather than balancing of juridical rights of various parties or focusing on the judicial process.
Secondly, since the advent of electronic commerce, this work has moved away from the traditional harmonization process seeking to bridge differences stemming from decades of national laws, decisions and cultural approaches. Recent efforts have attempted to establish international legal norms and standards before national laws take root and territorial differences loom as obstacles to cross-border computer based commerce.
Finally, it is arguable that compared with major developments of the 1980's, such as the CISG, the U.N. Limitations Convention, and the UNIDROIT Principles of International Commercial Law, some of the "front line" work of the 1990's has taken on more economic and other policy issues, which from time to time may call for a different vision of the unification process.
A Comparison of the Three Current Projects as Illustrations
Until recently, harmonizing standards between insolvency regimes was considered outside the realm of achievable results, in large part because such laws are laden with economic and political values, and often reflect socio-economic bias more directly than many other areas of commercial law. They also present the need to decide whether to follow a "territorialist" or a more "international" approach to the role of law. The fifteen-year trek of many Western European states toward a still troubled E.U. Treaty emphasizes that difficulty. Nevertheless, a United Nations Model Law covering "procedural" aspects of cross-border insolvency was completed at negotiations at UNCITRAL in May 1997, and is moving toward final U.N. endorsement by the General Assembly this fall.
This effort, in large measure, tracked the progress of the CISG by observing careful analysis of the laws and practices of various states and regions, and seeking common support for those issues on which consensus could be built. By excluding most of the so-called substantive issues, such as priorities and preferences as to competing claimants, at the outset, consensus was reached in a short two-year time. At the same time, the new model rules moved well toward the minority position on adopting the "internationalist" approach, (which includes the U.S. since the 1978 amendments to the Bankruptcy Code), and away from the more traditional "territorialist" laws. On this basis, national treatment was provided for, notwithstanding the tension that exists between granting special rights to foreign interests versus protecting local creditors and labor and other preferential claims policies.
An indispensable factor was the active preliminary work by NGOs, primarily INSOL (an international association head quartered in the U.K.) and the IBA, both in producing key preliminary legal standards texts and in co-sponsoring with UNCITRAL several conferences of judges, officials and practitioners that moved the topic toward consensus. This assured wider input than often occurs when governmental delegations alone are at the negotiating table. The new rules provide for access to and the right to initiate local court proceedings for foreign bankruptcy representatives and foreign creditors; some type of mandatory stay of asset transfers and other relief; some recognition of "main" proceedings as compared to "secondary" proceedings; equalized payouts for creditors in concurrent proceedings; and -- a difficult point for many civil law jurisdictions -- authorization for cross-border judicial cooperation.
Possibly setting a track record for domestic consideration of an international legal text, several jurisdictions, including the U.S., are already considering amendments to their insolvency codes on this basis. The congressionally established National Bankruptcy Review Commission voted in August 1997 to recommend that the UNCITRAL rules be adopted as amendments to the U.S. Code.
The other side of the coin as to methods for unification of law has emerged through the advent of computer-based commerce. Contract and other commercial acts undertaken through the Internet and other systems have challenged traditional legal concepts, while potentially opening new avenues for international trade, including markets in countries often outside the regular trade stream.
The first UNCITRAL project on electronic commerce, completed in 1992, covered U.N. rules on international credit transfers (principally electronic funds transfers), and rested in part on commercial banking law concerns and in part on public supervisory concerns of banking authorities. Some solutions departed from most existing national banking laws, and whether that will become a standard has yet to be seen. The U.N. General Assembly more recently, in November, 1996, endorsed the UNCITRAL Model Law on Electronic Commerce, which has already found wide usage as a basis for new national and domestic law proposals on computer-based commercial transactions. The Model Law covers functional equivalents of what a document is, "writing," "signature," etc., and establishes rules for attribution of messages and risk allocation. Public policies were not a significant part of the three-year deliberations, although at issue was whether any international attempt at standards should be made until a decade or more of national laws and conflicting decisions would emerge. Of necessity, the rules agreed to were not based on any existing national legal system.
The most recent phase at UNCITRAL, however, which began this February, has engaged substantial public policy issues and squarely contrasts governmental concerns or regulatory approaches with private sector marketing and risk issues. This phase focuses on proposed international legal rules for identification and attribution of messages, as well as message integrity.
The North American Free-Trade Agreement (NAFTA) states led the "free marketeers" group at the February meeting of an UNCITRAL Working Group, although no consensus has been reached. Many Western European states, although not necessarily the European Union, and some states in the U.S., support a regulatory or licensing approach, involving third parties who will issue electronic identity certificates, and absorb some of the risk attendant to remote computer messaging. This model, which often involves "digital signatures" or dual-key technology, is proposed by many countries to be the standard at UNCITRAL in formulating commercial law. The U.S. has argued instead that the market should remain open for other electronic signature technologies, and that commercial law development should also reflect a wide market for varying services.
The private economic law issues surrounding electronic signatures, including warranties, levels of assurances, and liabilities, which are critical for a nascent industry, are further complicated by public law concerns involving data protection, privacy, law enforcement, and national security. The limits of commercial law unification have thus been brought squarely to the fore. This issue has raised law unification and UNCITRAL's activities to the White House level, and some critics question whether PIL is the right framework within which to deal with these issues, often contrasting it with the CISG .
The third topic for comparison crosses over areas of established law, such as those encountered in the formulation of the CISG, as well as electronic commerce and new economic functions of the law in today's market. It is the largest "front" in the PIL field today, cutting across many basic economic assumptions and beliefs as to what the commercial law can and cannot be permitted to do. Security interests for commercial finance in moveable, i.e., "non-possessory," property has been the real economic engine of the American experiment with the modern Uniform Commercial Code. Nevertheless, its economic underpinnings and the legal concepts it carries are a difficult sell internationally.
Two draft conventions are concurrently underway at UNIDROIT and UNCITRAL which can significantly boost availability of commercial credit for investments and transactions. Adoption of either for many countries could signal a concrete step toward seeking the benefits of a global economic village, which in turn may also call for a change in some domestic law traditions. On this topic, the U.S. view has been that traditional methods of harmonization are of little real value to the developing and emerging states. While merging existing concepts of assignment law may have some effect on evening out the legal field, it is unlikely to produce new credit.
According to the commercial finance community, if countries adopt laws comparable to Article 9 of the U.C.C., based on publicly-accessible notice filing systems which determine priority for claimants, new credit derived from bulk receivables, such as credit card receivables, can flow to the markets of underdeveloped countries. This means, in the U.S. view, that economic objectives, i.e., new credit for needy markets, should be agreed upon and serve as the basis for the formulation of laws. This would, however, also result in significant changes in many national laws, and the outcome of this approach is far from clear.
The first of the two projects, a proposed UNIDROIT convention, is more narrowly focused on high-end moveable equipment such as aircraft, containers, satellites, agricultural and construction equipment, and possibly vessels. This convention builds on the 1988 UNIDROIT Convention on International Financial Leasing. Determining when equipment has entered the international zone and is covered, or whether to cover equipment ab initio that crosses borders regularly in the normal course of business is a key issue. Both treaty projects rely on open disclosure systems, whereby potential assignees, upon whom credit systems rely, would have prior notice of the existence of other and possibly competing interests. Notice would be effected through internationally-based electronic registries, or nationally-linked registries under an international supervisory system.
The second related project, the proposed UNCITRAL convention, covers accounts receivable financing, which is often employed for general inventory and project financing, and would have a much wider reach than the UNIDROIT text. The convention, as currently drafted, would cover both international receivables and international assignment of domestic receivables. The latter would go beyond many similar conventions in terms of direct affect on domestically created rights, however, a consensus for such a step has not been reached. The draft also calls for acceptance of the concepts of future interests in property not yet in existence, "bulk" assignments, which are key factors in inventory and agricultural production financing, as well as accessing new pools of credit supported by bank card, toll road and other high volume transactions.
Both projects will soon face a significant conceptual and practical hurdle -- the need for acceptance of the concept of perfection of security interests through computer-based registries, possibly operated internationally. The efficiency of computer systems covering distant countries' markets is what would achieve a sufficiently low cost of credit to make it useful for the undeveloped world, if its products are to enter the stream of trade. This is a vision shared by the international lending agencies, such as the World Bank, the IADB, the U.S., Canada and some other states, and the finance lending community, but not yet by a number of other states, including many West European states. Even if agreement on concepts can be reached, practical hurdles exist internationally since such registries do not yet exist. Conversely, in the U.S., where the legal concepts are in place, the registries across our many counties and states are almost all paper-based, and migration to linked computer systems, which would need some degree of uniformity, may be years away.
One might be tempted, on the basis of the discussion above, to cast the era of the CISG nostalgically as the "good old days!"
Other Recent Developments
The 1995 UNCITRAL-prepared U.N. Convention on Direct Guarantees and Standby Letters of Credit ("U.N. Guarantees Convention") has been endorsed by the U.C.C. Committee of the ABA Business Law Section and the U.S. Council on International Banking, and will be circulated for clearance for U.S. signature this fall. The Convention bridges gaps between U.S. post-1960 letter of credit law (U.C.C. Article 5), and European bank guarantee practice, based on the 1930's Geneva treaty system.
U.S. objectives, to secure U.N. approval of laws supporting credit enhancement instruments with a high rating, which can increase trade through their use as collateral, were largely met. This effort combined the process of merging different legal systems and traditions similar to the process of the CISG, while relying on developed practices of the banking community, and economic objectives for the Convention as a basis upon which to decide several important issues.
The Evolving Role of Non-Government Organizations (NGOs)
The trend toward acceptance of the role of private sector solutions, coupled with the recognition of market practices as a basis for legal standards, has led to NGOs increasingly providing necessary expertise. The importance of NGOs, bar associations and others in assuring a practical direction for commercial law, rather than a regulatory or theoretical legal approach, is supported by a growing body of countries. Nevertheless, an "NGO problem" is looming politically, at least in the United Nations system, and to some extent elsewhere. The problem is, what is the proper role of non-state actors in the international law process? Claims of some NGOs that they should be able to engage in the formulation of law, along with sovereign states, as a matter of right, has raised this issue to a high temperature in various bodies. Proposals to distinguish the commercial law unification process, for example, from arms control and other governmentally sensitive issues, where NGO participation may not be acceptable to many states, is not an agreed solution.
For the moment, NGO participation at UNCITRAL on commercial law may be secure. The issue may be confronted soon at the Organization of American States (OAS), as it considers a list of possible topics for its Sixth Specialized Conference on Private International Law (CIDIP-VI), and at the Hague Conference as it gears up for negotiations on enforcement of foreign judgments.
Regionalism vs. Universality?
The polarity of these two approaches to law harmonization is often raised. The United Nations and other broad-membership based organizations, (such as UNIDROIT, the Hague Conference, ICC, IBA), are active in private law matters, more so than regional economic or political bodies. Two regions, the European Union and European Free Trade Agreement (EFTA) states, and the Latin American community are comparatively active in this field. While participating to some extent at the U.N. and elsewhere, many Latin American and Caribbean states continue to play a more active role in the OAS. Western European states, long active in private law harmonization at the international level, could become less active due to preoccupation with regional E.U. law development, despite treaty and other limitations on the extent to which the E.U. can declare "competency" on commercial law matters. Nevertheless, there are many advocates for the view that broad geographically-based bodies should remain the primary venue for such activity, and should take precedence over the work of regional bodies.
At the same time, efforts are gaining to convert various regional state groups, such as APEC, into more active bodies on commercial law standards. Proposals to this effect are likely within scope of MERCOSUR, NAFTA and other economically-related groups, since the absence of harmonization in areas of law such as banking, bills of lading, insurance, and even powers of attorney has become more clearly an impediment to many cross-border transactions. At the OAS, which is the most active body in this hemisphere, the new Secretary-General has emphasized private law advancement as a means of working toward economic integration, although his position on the role of law has not been approved, at this time, by the member states as policy of the organization.
The U.S. response, at least with regard to commercial law, has been to support both, in some cases simultaneously. Eight topics have been proposed, from which two are likely to be chosen, for the next OAS-sponsored Specialized Conference on Private International law (CIDIP-VI), likely to take place in 1999. The United States' recommendations on those topics were given recently to the OAS -- and international secured interests tops the list, on which concurrent work is underway both in UNIDROIT and UNCITRAL.
Regional Economic Organizations
Comparison of the processes involved under NAFTA, MERCOSUR and the European Union with regard to private law harmonization may yield some trends for the coming decade. Private law unification has largely avoided the significant limitations that often result from negotiations on other matters between blocs, or groups of states, as is often the case in public law fora. Potential problems, however, now exist with the "one bloc, one vote" issue, at least to the extent that the E.U. declares competency and speaks for its member states, and the effect of such a development on multilateral bodies, such as UNIDROIT and the U.N., could be substantial. Recent assertions of competency in selected matters by the MERCOSUR secretariat at the March 1997 Belo Horizonte meeting does not suggest a comparable problem at this time.
Options for commercial law unification in the next millennium could include law harmonization among economic blocs. This could also involve, for example, a joint venue composed of the several economic blocs in the Americas, including, in addition to those already cited, CARICOM, the Andean Pact country group, and the Central American economic organizations that may become reinvigorated. If the World Trade Organization (WTO) should also move in that direction, which has been proposed by some commentators, such a proposal may acquire more interest. The attractiveness of such potential developments may depend on how vital the process remains in existing broader-based bodies such as the OAS, UNIDROIT, the Hague Conference and the U.N. system.
FOOTNOTES* Executive Director, Secretary of State's Advisory Committee on Private International Law 1. It may be worth noting that UNCITRAL was and is directed toward the "progressive" harmonization of law, which in its early years could easily have sidetracked its efforts along political lines of battle.
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