The application of non-state rules to interpret the law
Introduction
This chapter examines how courts use non-statc rules to interpret the law, as general principles of law, and accepted international commercial practices. The previous chapter focused on the use of non-statc rules as a source of domestic law. This current chapter focuses on how non-statc rules arc applied to interpret the law or the contract. This is regardless of whether the parties have referenced/included non-state rules in their contract. This means that non-state rules are seen by courts to be representative of transnational commercial law doctrine. Courts thus attribute legal authority to non-state rules by applying these to interpret the law and the contract.
The first part of this chapter examines how non-state rules are applied to interpret conventional law and uses the CISG as the main example. The second part of this chapter examines how courts use non-statc rules to interpret domestic law, and the third part analyses how non-state rules are used as transnational commercial law doctrine. This mainly focuses on case law from the UK and how this has built a narrative whereby accepted international commercial law practices arc used as a reference in discussions on points of domestic law.
This chapter demonstrates that non-state rules play a key role in the interpretation of both the law and the contract. Courts use non-state rules to give further legitimacy to their decisions. By linking their reasoning to non-state rules courts clarify that their decision not only has legitimacy in the domestic sphere but also in the transnational sphere. Courts thus attach legal authority to non-state rules and treat them as accepted principles/practices of transnational commercial law.
The application of non-state rules as part of international conventional law
The 1964 Convention for a Uniform Law on the International Sale of Goods (ULIS) excluded the use of domestic law to interpret the convention.[1] This was to ensure a more uniform interpretation and to do justice to the international character of the instrument. As ULIS and its sister convention, the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS), were only ratified by eight states this interpretation never materialised in practice.[2]
As ULIS/ULFIS failed to attract ratifications UNCITRAL made the decision to develop a new convention, which would become the CISG. De Ly seeks the tailure of ULIS/ULFIS in their complete exclusion of domestic law which was too radical for many states as well as in the predominantly civil law approach of the conventions. It is therefore not surprising that the CISG took a different approach. The CISG does not exclude the use of domestic law to interpret the convention but relegates this to a secondary place:
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.
- (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.
The underlying principles the convention specifically mentions arc internationality, uniformity, and good faith. The CISG does not specify how these principles should be applied or whether these arc the only underlying principles. If no underlying principles can be found, the court can apply domestic law.
In practice courts frequently fall back on domestic law, even when this is not in accordance with Article 7. Article 7 does not specify that the Convention can be interpreted through domestic law. It only specifics that domestic law can be used to interpret matters governed by the convention. There is a tendency for courts to use the lex fori to interpret the CISG and contracts governed by the CISG. This is known as the homeward trend.[3] This is also not in accordance with article 7, which specifies that the applicable law should be used and this is necessarily the lex fori. For courts it is easier to apply the lex fori than to discover the underlying principles of the Convention. These principles are not well defined nor does the convention give concrete guidance on how these should be applied. Courts have a better understanding of the legal principles of the lex fori. It is thus easier to interpret the CISG by relying on domestic law. This is especially the case if the rules contained in the CISG arc closely reflected in domestic law and lead to an easy analogy. Of course, there are also many examples where the CISG or matters underlying it are interpreted with respect to its international character. It is however a worrying tendency that undermines the purpose and uniformity of the convention.
If the CISG should be interpreted in accordance with the underlying principles this immediately leads to the question of how these principles can be discovered and how they can be applied. The CISG mentions three principles explicitly: intcrnationality, uniformity, and good faith. The interpretation of the CISG should thus be done in a manner to promote uniformity, with respect to the intcrnationality of the Convention, and uphold good faith in international trade. Other principles that are implied by the convention through a holistic reading of its articles are freedom of contract, due diligence, favor contractus, and pacta sunt servanda.
To discover other underlying principles one possibility would be to use general principles of law as defined by article 38 of the ICJ and distil from these the principles that have a bearing on private law, but as discussed before this is not particularly practical because these principles are intended for state-state relations and are of a very general nature that makes their direct applicability to commercial contracts difficult. Courts could also use (international) key cases of the CISG or compare the private law principles of different legal systems to understand the majoritarian approach. These methods are time consuming and do not lead to predictable results. They are therefore not necessarily in the interests of the parties, as they do not provide certainty.
Another method to discover and interpret the principles underlying the CISG that courts have developed is to use codified non-state rules. This happens especially with the UPICC. When the UNIDROIT Principles were published the possibility of using these to interpret the CISG was raised immediately.[4] The advantages are self-evident. The UPICC are a concrete instrument that courts can consult easily which makes it a more attractive option than going through a longer process with an uncertain outcome of comparative discovery to find the underlying principles of the CISG. A less utilitarian argument would be that the UNIDROIT Principles were drafted with the CISG in mind and the instruments are close in spirit. Furthermore, the Principles are a thorough and comparative work of research. Yet, it should be recognised that the UPICC are not just a restatement but arc also a work of innovation and therefore not all the content would necessarily reflect globally accepted principles of commercial law (if such a thing even exists.)
It could be argued that the UPICC were drafted much later than the CISG and that therefore they should not be used to interpret the CISG, as the underlying principles the latter refers to cannot be the UPICC. This depends on how the convention is interpreted. This can be in a narrow way which confines these principles to the space and time when the CISG was drafted or by adopting a wider view whereby these principles can change over time as circumstances and context change. The ICJ stated that a treaty should be interpreted according to the context at the moment of interpretation and not the moment of creation or ratification.[5] This decision supports the legitimacy to use the UPICC to interpret the CISG.
Courts started to use the UPICC to interpret the CISG shortly after they were first published. In October 1996 the Court of Appeal of Grenoble referenced the UNIDROIT Principles as support for the CISG and consequently made a connection between both instruments. A French buyer and a German seller concluded a contract for the sale of machinery. The buyer claimed restitution of part of the excess purchase price paid. French law was the applicable law and through this the CISG. The court ruled that restitution should be made at the seller’s place of business. The court pointed out that this rule is an interpretation of the general principle that payment takes place at the domicile of the creditor and that this principle is found in article 6.1.6 of the UNIDROIT Principles. The UPICC were accordingly used as support for an underlying principle of the CISG. In 1997 an ICC arbitration award went further and stated that the general principles of the CISG arc contained in the UNIDROIT Principles. The Court of Cassation in Belgium stated that gap filling in the CISG should take place per the underlying principles of the Convention, which can especially be found in the UPICC.
An example of how the UPICC are used concretely is to determine the interest rate: Article 78 of the CISG states that the party in breach of its obligations should pay interest but does not say how the interest rate should be calculated. The UNIDROIT Principles contain guidelines on establishing the interest rate. Several arbitral awards used the UPICC to interpret
The application of non-state rules 175 interest rates under the CISG.[6] State courts have followed, for instance the Supreme Economic Court of Belarus used the UPICC to determine the interest rate. The UPICC arc thus used both to materialise the underlying principles of the CISG and to find the concrete rules that the court can apply.
Other non-state instruments could be used to interpret the CISG. The PECL have been used in this fashion, but not as regularly. As the PECL represent a European regional approach whereas the CISG is a global instrument it is not surprising that this does not happen regularly. The PLACL would have the same issue. The Incoterms are often used in conjunction with the CISG to regulate passage of risk. If an Incoterm is included in the contract it displaces the articles on the passage of risk in the CISG as express contract terms take precedent over the CISG. This is not the same as interpreting the passage of risk in the CISG through the lens of the Incoterms. The Incoterms do not contain general principles of interpretation. It would of course be possible to construct an Incoterm and the CISG rules on the passage of risk together if the contract asks for this. It would be difficult to use the Incoterms to interpret the CISG without the contract making any reference to the Incoterms.
Trade association rules are usually not neutral and universal enough to interpret the principles underlying the CISG. It is thus not surprising that mainly the UPICC are used in this fashion.
Courts can also use principles arising from case law to interpret the CISG. UNCITRAL maintains a database with CISG case law although some countries are overrepresented or underrepresented depending on available published cases. Based on this database UNCITRAL publishes a case law digest. This greatly facilitates the interpretation of the CISG as it arranges key cases per article of the CISG. Under the article 7 headline differentprinciples are found that have been extracted from case law. These principles include party autonomy, favor contractus, mitigation of damage, and informality' among others. The digest is not binding on ratifying states, but it has persuasive value and is an important tool that contributes towards a more uniform interpretation of the CISG.[7]
Another initiative that should be mentioned is the CISG Advisory Council, which was founded in 2001 and publishes opinions on aspects of the CISG to come to a uniform interpretation of the Convention. The Advisory Council lacks any authoritative force and is a private initiative of a group of scholars. Nonetheless, their work is of significant value in aiding courts in interpreting the CISG and the Advisory Council has observer status at both UNIDROIT and UNCITRAL. If these opinions arc used with regularity to interpret the CISG, they become more persuasive and gain legal authority. Currently there are 21 opinions published. These have all been translated in French, English, German, and Spanish. A number of the opinions are also translated in Russian, Arabic, Chinese, Portuguese, and Japanese.
Codified non-state rules and case law arc thus used to discover the Principles underlying the CISG and to find concrete rules to interpret these principles. Good faith, uniformity, and internationality are all three generic principles of which a myriad of different meanings and interpretations can be found. Courts resort to domestic law to interpret the CISG and find the concrete rules. Although the Convention does allow for this it should only be done in the absence of any underlying principles. Furthermore, courts should resort in that case to the lex contractus and not to the lex fori.
The publication of the UPICC and to a smaller degree the PECL led to courts using these to find the principles underlying the CISG. Other international initiatives that aid in the interpretation of the CISG are the opinions issued by the CISG Advisory Council and the UNCITRAL case law digests. Concluding, courts apply non-state rules like restatements of law, case digests, and authoritative guidelines to interpret the CISG and find both the principles underlying the convention as well as concrete rules that can be applied to solve the contractual dispute and fill the gaps in the convention.
- [1] Questions concerning matters governed by the present Law, which are not expressly settled therein shall be settled in conformity with the general principles on which the present Law is based.
- [2] Belgium. Germany, Gambia, Israel, Italy, Luxembourg, San Marino, the Netherlands, and the United Kingdom (opt in). Most of these have now denounced the convention. ULIS and ULFIS are still in force in San Marino, the UK, and the Gambia. See for the current status: http://www.unidroit.org/status-ulis-1964; http://www.unidroit.org/status-ulfc-1964; It is rarely applied. An example is ICC Case No. 8547 where the parties chose ULIS as the governing law (which was then supplemented by the UPICC and ULFIS to fill in the gaps). 2 Filip de Ly, ‘Sources of International Sales Law: An eclectic model’ (2005) 25 Journal of Law and Commerce 1,2. 3 Franco Ferrari, ‘Homeward Trend and Lex Forism in International Sales Law’ [2009] International Business Law Journal 333.
- [3] The term homeward trend originates with John Honnold who used it in his work Documentary History of the Uniform Law for International Sales: The Studies, Deliberations, and Decisions that Led to the 1980 United Nations Convention with Introductions and Explanations (Kluwer Law International 1989) 298-299 ‘The Convention, faute de mieux, will often be applied by tribunals (judges or arbitrators) who will be intimately familiar only with their own domestic law. The tribunals, regardless of their merit, will be subject to a natural tendency to read the international rules in light of the legal ideas that have been imbedded at the core of their intellectual formation. The mind sees what the mind has means of seeing.’ See also: John Honnold, ‘The Sales Convention in Action- Uniform International Words: Uniform Application?’ (1988) 8 Journal of Law and Communication 207 For a practical example see Angela M Romito, ‘CISG: Italian Court and Homeward Trend - Queen Mary Case Translation Programme Corte d’Appello di Milano 20 March 1998 Italdecor s.a.s. Yiu’s Industries (H.K.) Limited (default)’ (2002) 14 Pace International Law Review 179. 2 Franco Ferrari, ‘Homeward Trend and Lex Forism in International Sales Law’ [2009] International Business Law Journal 333, 339.
- [4] Michael Joachim Bonell, 'The UNIDROIT Principles of International Commercial Contracts and CISG - Alternatives or Complementary Instruments?’ (1996) 1 Uniform Law Review 26, 35-37; Professor Bonell gives several examples on how the UNI DROIT Principles could accomplish this. One of these is for instance that the criteria used to determine whether there is a fundamental breach of contract contained in article 7.3.1 of the Principles could be used to define the concept of fundamental breach under CISG article 25 further. Alejandro M Garro,The Gap-Filling Role of the UNI DROIT Principles in International Sales Law: Some Comments on the Interplay between the Principles and the CISG, [1994-1995] 69 Tulane Law Review, 1149 Jürgen Basedow, ‘Uniform Law Conventions and the UNIDROIT Principles of International Commercial Contracts’ (2000) 5 Uniform Law Review 129 François Dessemontet, ‘Use of the UNIDROIT Principles to Interpret and Supplement Domestic Law’ (2002) Supplement Special Bulletin de la Cour Internationale d’Arbitrage de la CCI 1, 18 This possibility was also raised for the Principles of European Contract Law. 2 Michael Joachim Bonell, 'The UNIDROIT Principles of International Commercial Contracts and CISG - Alternatives or Complementary Instruments?’ (1996) 1 Uniform Law Review 26. 3 Michael Joachim Bonell, 'The UNIDROIT Principles and Transnational Law’ (2000) 5 Uniform Law Review, 199,210. 4 Herbert Kronke, ‘The UN Sales Convention, the UNIDROIT Contract, Principles and the Way Beyond’ (2005-2006) 25 Journal of Law and Commerce 451, 457.
- [5] Jürgen Basedow, ‘Uniform Law Conventions and the UNIDROIT Principles of International Commercial Contracts’ (2000) 5 Uniform Law Review 129, 133/136 quoting: International Court of Justice 21-06-71, ICI Rep. (1971), 31 (Legal consequences for States of the continued presence of South Africa in Namibia). 2 SCEA GAEC Des Beauches Bernard Bruno v. Société Teso Ten Eisen GmbH & COKG, Cour d’Appel de Grenoble, October 1996, http://www.unilex.info/case. cfm?pid=2&id=638&do=case. 3 ICC Award No. 8817 (1995) http:/Avww.unilex.info/case.cfm?pid=2&do=case&id=659&step=FullText; A court decision in the Netherlands that same year confirmed this: Cooperative Maritime Etaploise i>. Bos Fishproducts District Court Zwolle 5 March 1997. 4 Scafom International BV vs Lorraine Tubes s.a.s, Cour de Cassation, 19/06/2009 http:/Avww.unilex.info/case.cfm?pid=2&do=case&id=1456&step=Abstract. 5 Article 74.9(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate-fixed by the law of the State of the currency of payment.
- [6] Michael Joachim Bonell, 'The UNIDROIT Principles and Transnational Law’ (2000) 5 Uniform Law Review 199, 210 Two arbitral awards made by the International Court of Arbitration of Federal Chamber of Commerce in Vienna And one made by the ICC: ICC Award No. 8128 (1995) Text available at: http://www.unilex.info/case.cfm?pid=2&do=case&id=637&step=A bstract This award also referred to article Art. 4.507 of the Principles of European Contract Law: ‘L’arbitre considère justifié d’appliquer au litige les règles identiques contenues dans les principes UNIDROIT et les principes du droit européen des contrats en tant que principes généraux au sens de l’article 7(2) de la Convention.’ 2 Parties Unknown, Supreme Economie Court of the Republic of Belarus, 03/01/2003 http://www.unilex.info/case.cfm?pid=2&do=case&id=1389&step=Abstract Holzimpex Inc. v. Republican Agricultural Unitary Enterprise, Supreme Economic Court of the Republic of Belarus, 20/05/2003 http://www.unilex.info/case.cfm?pid= 2&id=1007&do=case. 3 http://www.uncitral.org/uncitral/en/case_law.html Pace Law School & Unilex also maintain case law collections on the CISG. 4 UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods http://www.uncitral.org/pdf/english/clout/CISG-digest-2012-e.pdf.
- [7] Another initiative is the trans-lex database, which is focused on transnational commercial law in general. This database has extracted principles on transnational commercial law from case law and other materials. These principles can be found on the website: http://www.trans-lex.org/principles/. 2 These opinions are published on their website: http://www.cisgac.com/; The Advisory Council is a private initiative that consists of scholars from different cultures and backgrounds and ‘is guided by the mandate of Article 7 of the Convention as far as its interpretation and application arc concerned: the paramount regard to international character of the convention and the need to promote uniformity.'.
