The application of non-state rules as part of the applicable law: the example of the CISG

Article 9 of the CISG states:

• (1) The parties arc bound by any usage to which they have agreed and by any practices, which they have established between themselves.
• (2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

This is supplemented by article 8(3) which reads that to determine the intentions of the contracting parties due consideration should be given to all relevant circumstances, including trade usages. The CISG does not lay out a hierarchy for established practices and trade usages the way the UCC does. Based on article 8(3) which gives primacy to the intentions of the parties it could be assumed that course of dealing is more important than trade usages as this more closely expresses the will of the parties. However, there is no clear rule, and this is left to the interpretation of the courts.

The CISG is silent on what happens if trade usages arc conflicting, but scholarly commentary states that these should then be mutually exclusive,

and if the contract gives no further indication the issue should be solved per the gap filling rules of the CISG.⁴⁴

The CISG is silent on what happens in case there is a conflict between a trade usage and an article of the CISG. Commentary agrees that in such cases the trade usage should take precedence.⁴⁵ Article 6 states that the parties can opt out of the entire CISG or its individual provisions. As the rules of the CISG are thus variable rules, trade usages should take precedence over the CISG. Trade usages are considered implied terms of the contract and therefore reflect more closely the intentions of the parties than statutory law does.

For trade usages to be recognised they should be widely known and regularly observed in the specific trade. They do not necessarily need to be international in origin; they need only to be observed in international trade. Local usages could be applicable, provided these are either commonly used in trade with foreign parties, or that the foreign merchant has been doing business in that location regularly so it can be assumed that he has knowledge of the usage.⁴⁶ The wording ‘ought to have known’ indicates that pleading ignorance would not be sufficient defence for non-compliance.⁴⁷

• 44 Cesare Massimo Bianca and Michael Joachim Bonell, ‘Commentary on Usages and Practices’ in Cesare Massimo Bianca and Michael Joachim Bonell (editors), Commentary on the International Sales Law - The 1980 Vienna Sales Convention (Giuffre 1987) 110.
• 45 Ibid;

An example of a case dealing with this issue:

Bermatex s.r.l. v. Valentin Rins Clapers S.A. v. Sbrojovka Vsetin S.A, Juzgado National Cortade Primera Instancia en lo Comercial No. 10, October 1994;

On the issue of determining the interest rate on a credit the court stated:

‘Since CISG does not determine the interest rate, reference should be made to international trade usages which are assigned by CISG itself a hierarchical position higher than the very same CISG provisions (Art. 9 CISG)’.

46 See for instance: Parties Unknown, Oberlandesgericht Graz, Austria, November 1995,

Text available at: http://cisgw3.law.pace.edU/cases/951109a3.html#cx

‘The wording of Art. 9(2) CISG does not mean that, in the future, purely national or local usages can find no application for the interpretation and supplementation of contracts without an explicit reference by the parties. One can still presume an exception for usages that are in force at certain stock markets, trade fairs or deposit sites, as long as the usage is also regularly observed there in the trade with foreigners. Furthermore, the possibility does not seem to be excluded that a foreign tradesman, who is constantly active in another country and has already formed a number of transactions there, is bound by possible national usages.’ But see also: Parties Unknown, Oberlandesgericht Frankfurt am Main (Germany)

Text available at: http://www.unilex.info/case.cfm?pid=l&do=case&id=169&step=A bstract

‘CISG requires a trade usage to be international in order to be applicable to the contract, absent an agreement by the parties.’

• (in this case the German usage of concluding a contract through a letter of confirmation was not an international usage and was therefore not applicable).
• 47 Zivilgericht Kanton Basel-Stadt (Switzerland), Dec. 12, 1992

Tekst available at: http://www.unilex.info/case.cfm?pid=l&do=case&id=104&step=A bstract

See also: Clayton P Gillette, ‘Harmony and Stasis in Trade Usages for International Sale’ (1998-1999) 39 Virginia Journal of International Law 707.

The historic importance of trade usages meant that these were given a prominent place in the CISG. The UCC considers the lex mcrcatoria an important fundament of commercial law and this is reflected in the CISG, although in contrast to the UCC the CISG does not mention the lex mcrcatoria by name as its inspiration. It can be added that the UCC was a source of inspiration for the CISG.^[1] The strong position of trade usages under the UCC is reflected in the CISG. The scope that trade usages should be given was a matter of contention during the drafting process as anecdotal evidence from delegates suggests. The participating socialist and developing countries viewed trade usages more negatively than the free-market economy countries and wanted to limit their role in the contract.

The main division was between the objective and subjective theory on trade usages. Per the subjective theory usages are only applicable if the parties have consented to using them. Therefore, a trade usage of which the parties were not aware is not part of the contract. This was the viewpoint of many of the participating socialist countries. The objective theory considers that trade usages exist independently from the contract and that they have the legal authority to bind the parties without their explicit consent. The participating liberal market states leaned more towards this theory. This theory reflects the concept of trade usages under the UCC more closely. After deliberations, the article was accepted in its current form, which is closer to the objective theory.

The difficult negotiations explain why several key matters regarding trades usages were not resolved and left to the interpretation of the court. These include:

• • A definition of the concept of trade usages
• • Whether there is a time requirement before a practice can be considered a trade usage
• • The hierarchy between course of dealing and trade usages.
• • Whether trade usages can contradict express terms of the contract.⁵³
• • Whether a usage should be reasonable, when it is reasonable, and what should happen if a trade usage is not reasonable.⁵⁴ Although this issue is not dealt with explicitly Article 7 states that regard should be had to the observance of good faith in international trade.⁵⁵ From this it can be inferred that a trade usage that does not meet the standard of good faith should be considered unreasonable.⁵⁶

Determining whether a practice is a trade usage is left to the courts.⁵⁷ If courts apply trade usages in line with the underlying principles of the CISG a uniform definition of trade usages would emerge in the longer term.⁵⁸ Whether this actually happens is another matter. In practice there is a tendency for courts to use domestic law to define trade usages.⁵⁹ Courts liken international usages to local usages and interpret these accordingly.⁶⁰ Gillette analysed arbitral awards that applied usages in the context of the CISG and found that arbitrators generally are conservative and only apply those usages that can be proven easily and with certainty.⁶¹ Furthermore,

• 53 Jim C Chen, ‘Code, Custom, and Contract: The Uniform Commercial Code as Law Merchant’ (1992) 27 Texas International Journal 91, 104.
• 54 This is different from the UNIDROIT Principles, which state that usages are not binding if they are not reasonable (Art 1.8 (2) - in specific cases a known trade usage might not be applied if it can be considered as unreasonable in this situation.)

Gillette discusses that during the drafting of the CISG Chines trade delegates made an unsuccessful proposal that only reasonable trade usages should be applied: Clayton P Gillette, ‘The Law Merchant in the Modern Age: Institutional Design and International Usages under the CISG’ (2004-2005) 5 Chicago Journal of International Law 157,169.

• 55 Article 7 (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.
• 56 Cesare Massimo Bianca and Michael Joachim Bonell, ‘Commentary on Usages and Practices’ in Cesare Massimo Bianca and Michael Joachim Bonell (editors), Commentary on the International Sales Law - The 1980 Vienna Sales Convention (Giuffre 1987) 113.
• 57 Article 4 CISG

This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:

• (a) the validity of the contract or of any of its provisions or of any usage;
• 58 Ch Pamboukis, ‘The Concept and Function of Usages in the United Nations Convention tor the International Sales of Goods’ (2005-2006) 25 Journal of Law and Commerce 107,111.
• 59 Franco Ferrari, ‘Homeward Trend and Lex Forism in International Sales Law’ [2009] International Business Law Journal 333.
• 60 Franco Ferrari, ‘Uniform Interpretation of the 1980 Uniform Sales Law’ (1994) 24 Georgia Journal of International and Comparative Law 183,197.
• 61 Clayton P Gillette, 'The Law Merchant in the Modern Age: Institutional Design and International Usages under the CISG’ (2004-2005) 5 Chicago Journal of International Law 157,179.

Applying non-state rules 167 arbitrators do not seem to use trade usages to change express terms of the contract.^[2]

Would it be possible to apply codified non-state rules as trade usages under the CISG? Under article 9 (2) the knowledge of the trade usage needs to be widespread and regularly observed. If codified non-state rules adhere to these criteria, then there is no reason why they should not be accepted as trade usages. Courts at times have accepted the Incoterms as trade usages under the CISG. The parties could incorporate a trade term without specifying that this should be interpreted as an Incoterm. As discussed previously trade terms do not only exist as Incoterms, but also exist in domestic legislation. Therefore, if a court were to apply a trade term it would have to decide the intention of the parties if this intention was not specified further. In a case that concerned the sale of gasoline between BP Oil International and an Ecuadorian oil company the court stated that: ‘Incoterms are incorporated into the CISG through article 9(2)’ and ‘even if the usage of Incoterms is not global, the fact that they are well known in international trade means that they are incorporated through article 9(2).’^M The court thus applied the Incoterms as trade usages. Knowledge of the Incoterms is widespread, and this could justify their application as trade terms. This collaborates with the tendency to interpret trade terms internationally. There arc cases where it is questionable what the intentions of the parties are. If for instance the law of New York is the applicable law, then perhaps the intention of the parties would be for the trade term to be interpreted according to the UCC as applicable in the state of New York. At the same time the CISG is also applicable in New York per federal law. The intention of the parties should decide how the trade term is interpreted and this intention cannot always be determined in a straightforward manner. Scholarship and case law do point to the possibility of using the Incoterms as trade usages under the CISG.

Could the UNIDROIT Principles be applied as usages under the CISG? The pre-amble suggests that they take on the role of trade usages but of course a self-declaration does not make them trade usages. There is some case law that seems to imply at least tacitly a strong connection between the Principles and trade usages. In 1998 a court of appeal in Paris enforced an arbitral award based on trade usages and referenced the UPICC and concluded that the ‘arbitral tribunal is entitled to base its decision on the rules of law it considers most appropriate and to refer to trade usages’™ In 2003, in a dispute before the ICC, the parties requested that the decision should be based on ‘international trade usages.The Tribunal pointed out that this reference can be criticised for its vagueness and found that ‘consideration of a specific codification, as the UNIDROIT Principles may provide a more precise set of rules. ’ It is not clear from this formulation whether the Tribunal considers the UPICC as trade usages or whether it found the choice of law clause too impractical. In a case in the Netherlands the court stated expressly that the UPICC can be used to fill any gaps in the CISG but this does not necessarily qualify them as trade usages.^[3] There is nothing in the CISG to suggest that the UPICC would not be able to be considered trade usages but it depends on how frequently and consistently the Principles are used by the merchant community and subsequently applied by courts/tribunals. Given that the use of the UPICC by merchants is still limited as of now it would be difficult to consider the Principles as trade usages.

Several conclusions can be made with regards to trade usages under the CISG. First of all, trade usages have an important place in the CISG, but key aspects are not resolved in the convention itself and left to the discretion of the courts. This hampers uniform interpretation and leads to unpredictability. Second, courts tend to fall back on domestic legislation to interpret trade usages. As the exact nature of trade usages under the CISG has not been defined the fall back on domestic legislation surrounding trade usages is understandable. Third, despite this there is some evidence that courts do try to use a more international interpretation through, for instance, the use of the Incoterms as trade usages.

Conclusion: applying and interpreting trade usages

Trade usages arc applied regularly by courts and arbitral tribunals as a source of domestic law and therefore play an important part in international commerce.

Trade usages arc implied contractual terms and therefore need to be explicitly contracted out of. There is a presumption that the parties wish to adhere to trade usages.

Trade usages demonstrate the agency of the merchant community to develop their own rules. They show that the merchant community has the legitimacy and the authority' to make law. Within that process there is an important role for the courts (and tribunals.) Courts affirm the practices that were started by the merchant community. It is the court that decides whether a practice is a trade usage, usually based on observation. A sense of obligation is not required, and this is the main difference between trade usages and custom. This diminishes the authority' of the merchant community to decide what is law as it blurs the differences between those practices done for relational reasons and those practices that the parties would acknowledge as having force of law. If it is left to the courts to decide through observation whether a practice is a usage, then the rights of the merchant community to make this distinction are diminished.

The place of trade usages in transnational commercial law shows that if we move away from the confines of private international law there is an important role for non-state rules. Non-state rules can be applied as part of the applicable law and as such fulfil an important role in the contract. They' derive their legal authority from their status in domestic law.

Codified non-state rules can be applied as trade usages, this can especially be observed with the Incoterms. There is some evidence that this also happens with the UPICC, although this is more limited. This is for several reasons, first, the UPICC arc a relatively recent work and second, whilst trade usages formed one of the sources of inspiration for the UPICC, they were not the only one which therefore makes it more difficult to claim that the UPICC are trade usages or arc fully' representative of existing trade usages. The UPICC arc applied more frequently' as usages under the CISG than under the UCC. The reasons for this are likely that the CISG and UPICC arc both transnational commercial law instruments, the unfamiliarity' of the US courts with the UPICC, and that the CISG and the UPICC arc close in spirit. When codified non-state rules arc applied as trade usages, they have legal authority through the status that trade usages have as a source of domestic law. Therefore, if they arc applied in this way' their legal authority comes from their assimilation with trade usages and does not stand on its own; it hinges on their application by the courts as trade usages.

Overall, it is clear that trade usages arc an important source of law; they can displace variable rules of international commercial law, interpret contractual terms, and add terms to the contract. Courts recognise the key role that trade usages have in international commerce and as such apply' them in an authoritative way. The legal authority' of trade usages is enhanced through their application as courts give them a central place in international commercial law. The following chapter focuses on how courts use non-state rules to interpret the law and the contract.

• [1] Franco Ferrari, 'The Relationship between the UCC and the CISG and the Construction of Uniform Law’ (1996) 29 Loyola of Los Angeles Law Review 1021, 1023 Michael Joachim Bonell, 'The UNIDROIT Principles of International Commercial Contracts and CISG - Alternatives or Complementary Instruments?’ (1996) 1 Uniform Law Review 26, 28. 2 Stephen Bainbridge, 'Trade Usages in International Sales of Goods: An Analysis of the 1964 and 1980 Sales Conventions’ (1983-1984) 24 Virginia Journal of International Law 619, 636-637. 3 Ibid, 636-638 As the author himself notes these are of course generalisations and it could not be said that every developing and/or socialist state held the exact same view. 4 See for instance: Clayton P Gillette, 'Harmony and Stasis in Trade Usages for International Sale’ (1998-1999) 39 Virginia Journal of International Law 707 Ch Pamboukis, 'The Concept and Function of Usages in the United Nations Convention for the International Sales of Goods’ (2005-2006) 25 Journal of Law and Commerce 107. 5 Stephen Bainbridge, ‘Trade Usages in International Sales of Goods: An Analysis of the 1964 and 1980 Sales Conventions’ (1983-1984) 24 Virginia Journal of International Law 619,641 Cesare Massimo Bianca and Michael Joachim Bonell, ‘Commentary on Usages and Practices’ in Massimo Bianca and Michael Joachim Bonell (editors), Commentary on the International Sales Law - The 1980 Vienna Sales Convention (Giuffre 1987) 110.
• [2] Ibid. 2 For a comprehensive analysis of cases that have arisen about this subject see: Ch Pamboukis, ‘The Concept and Function of Usages in the United Nations Convention tor the International Sales of Goods’ (2005-2006) 25 Journal of Law and Commerce 107,126-129. 3 BP Oil International v. Empresa Estatal Petroleos de Ecuador, United States 11 June 2003 Federal Appellate Court [5th Circuit], http://cisgw3.law.pace.edu/cases/030611ul.html See also: Cedar Petrochemicals, Inc v Dongbu Hannong Chemical Co Ltd: ‘it is worth noting at the outset that the entire body of INCOTERMS, ‘FOB’ Included - is incorporated into the CISG under Article 9 of the CISG.’ And in China: N. Chem.Indus Corp v Bestom Chem. Corp (S.D. Text 2006) ‘Incoterms is the dominant source of definitions for commercial delivery terms used by parties to international sale contracts.’ 4 Cesare Massimo Bianca and Michael Joachim Bonell, ‘Commentary on Usages and Practices’ in Cesare Massimo Bianca and Michael Joachim Bonell (editors), Commentary on the International Sales Law - The 1980 Vienna Sales Convention (Giuffre 1987) 110. 5 Ch Pamboukis, ‘The Concept and Function of Usages in the United Nations Convention for the International Sales of Goods’ (2005-2006) 25 Journal of Law and Commerce 107,126-129. 6 The UCP would not be considered usages under the CISG because their field of application is different from that of the CISG.
• [3] Société FOR ASCII. v. Société mixte Franco-Kazakh CISTM, Cour d’appel de Paris (1er Chambre Civile) (1998) http://www.unilex.info/case.cfmipid-28cid-10348cdo-case. 2 ICC Award No. 12040 (2003) http://www.unilex.info/case.cfmiid-1418. 3 Parties Unknown, Hof‘S-Hertogenbosch, 16-02-2002, English language abstract available at: http://www.unilex.info/case.cfmipid-28cdo-case8cid-9598cstep-Abstract For an arbitral award dealing with the same issue see: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 5 June 1997, 229/1996, English language abstract available at: http://cisgw3.law.pace.edu/cases/970605rl.html The Tribunal applied the UNIDROIT Principles of International Commercial Contracts as an international usage on the basis of article 9.2 of the CISG.