Uniform Law

Principles of Contract Law: A Compilation of Law Mercatoria?

In the Middle Ages a new set of rules, based on usages and customs, was developed by merchants with the intention of settling disputes arising between them through an a-national body of rules. This system, named Lex mercatoria, allowed merchants to conclude transactions with different peoples without fear of being subjected to foreign rules in the event of a dispute. This note draws a parallel between Lex mercatoria and the need for a unification of Private Contract Law in the European Union, based on the assumption that both sets of rules are designed with the same aim in mind: the good functioning of cross-border commercial relations between different peoples.

I. Lex mercatoria: origins, content and codification

The historical background of Lex mercatoria is controversial. Some authors suggest that Lex mercatoria is based on Ius gentium, the body of Roman law that regulated economic relations between Roman citizens and foreigners . It is accepted that Roman citizens entered into cross-border commercial relationships and that those transactions were governed by certain rules. However, the hypothesis according to which Ius genitum is the precursor to today’s Lex mercatoria has been severely criticized . Some authors question Ius gentium’s independent status vis-à-vis Roman Ius civile and state that, since Ius gentium was part of Roman law rather than an autonomous body of law, it cannot be conceived as the precursor of today’s Lex mercatoria.

Other authors claim that the origins of Lex mercatoria can be traced back even further, to before the Roman Empire, in Ancient Egypt, or even back to Greek and Phoenician trade . This theory is plausible since Lex mercatoria is used by merchants in international trade, and commercial exchanges in the Antiquity are considered to have been governed by customary commercial rules.

The debate about the origins of Lex mercatoria is far from over, although the majority of authors suggest that Lex mercatoria has its origins in the merchant law of the Middle Ages . Often qualified as trans-national law, Lex mercatoria is considered to be both a rebirth of medieval merchant law and a new understanding of the concept.

Even though the origins of Lex mercatoria are vague, for the aim of this paper it is important to note that the need to unify the law governing international private relations has existed since the first commercial transactions.

It has been said that there are as many definitions of Lex mercatoria as there are authors writing about it. However, when it comes to explaining the concept of Lex mercatoria, it is essential to highlight the importance of two authors: SCHMITTHOFF who developed the theory of the new merchant law, and GOLDMAN, who developed the theory on Lex mercatoria itself.

SCHMITTHOFF wrote that Lex mercatoria is the “expression of both spontaneous and official unification by means of general conditions, trade usages, customs and international conventions” . This new merchant law theory combines two inter-related elements: the importance of the international origin of rules and the uniformity of rules at an international level. However his vision of Lex mercatoria remains attached to national systems.

GOLDMAN’s approach to the definition of Lex mercatoria is revolutionary. He states that in International Commercial Arbitration, “arbitrators and parties could detach legal relationships from applicable national legal rules and submit these relationships to the Lex mercatoria”. Like SCHMITTHOFF, GOLDMAN also considered this body of law to be composed of general conditions, usages, customs and international conventions, but he added a new component: the general principles of law . Indeed, GOLDMAN does not consider Lex mercatoria to be dependent upon national legal orders. This autonomous approach claims that Lex mercatoria is a self-governing set of rules in an international trade framework, without reference to any particular national system.

As the different definitions demonstrate, not only is the concept of Lex mercatoria controversial but so is its content. In order to determine the real basis of Lex mercatoria, LANDO’s opinion is instructive. Far from distinguishing between sources and content –a pure theoretical issue-, LANDO proposes a list of “existing elements”. In fact, even if LANDO declares that it is not possible to compile an exhaustive list of elements forming Lex mercatoria, he gives a fairly complete list of elements constituting this set of trans-national rules. The elements are: public international law, uniform law, general principles of law, the rules of international organisations, customs and usages, standard form contracts and the reports of arbitral tribunal awards. Although there is no need to explain the content of this list, it is essential to remember that, even if arbitral awards are confidential in nature, there has been a tendency to publish them, investing this source of Lex mercatoria with a greater importance over time.

 This body of rules is still not concrete and, as a consequence, is both controversial and unclear. It has no evident limits and its parameters, despite academic efforts, are not clearly defined. As a result, it is unsurprising that some authors suggest that Lex mercatoria is a “myth” or even an “enigma” . However, it is clear that its importance has grown with the unification of rules at an international level. And even though its opponents claim that it lacks sufficient solidity and substantive force to govern a contract, it is increasingly applied, especially in international commercial arbitration, where parties choose it as the law applicable to their dispute.

International institutions and scholars have reacted to the above criticism regarding the lack of clarity in this body of Law. In the past three decades, international institutions have taken on a role of unifying and standardising the general principles of this “a-national” law and have created model contracts that are increasingly used in the international trade community due to their flexibility and simplicity . International organisations such as the International Chamber of Commerce (ICC), and the United Nations Commission for International Trade Law (UNCITRAL) have played a key role in this harmonisation of international trade rules.

Although there are a significant number of instruments that have contributed to harmonizing international trade practice, this essay will focus on the UNIDROIT principles, because that is where we see, most clearly, a codification of Lex mercatoria.

The majority of commentators agree that, unlike international conventions or model law, such as UNCITRAL (that has to be used alongside national legal rules and serves to assist States in their legislative unification), UNIDROIT principles are trans-national in nature. The fact that those principles are a non-binding codification, is due to their drafters’ shared view that mandatory instruments often result in “dead letter” law.

The preamble to the UNIDROIT principles foresees the application of those principles when the parties have referred to Lex mercatoria but there is no express reference to the UNIDROIT principles or the general principles of law . In fact, when parties refer in their contract to Lex mercatoria or to general principles of law as the law applicable to that contract, it is automatically assumed by the arbitrators that the parties wish to incorporate these principles as the law applicable to the contract. Logically, this leads us to the conclusion that the UNIDROIT principles are a codification of Lex mercatoria.

We can assume that when arbitratrors act as amiable compositeur –and are, therefore, not constrained to solve the dispute by reference to a national law but according to the requirements of justice- the role of the UNIDROIT principles would be weakened. However, this is not the case: arbitrators also apply the UNIDROIT principles in these circumstances. An old case remains a good explanation of this phenomenon: a partial arbitral award issued by the International Chamber of Commerce of Paris in 1995 in which the parties had decided to submit their dispute to “natural justice” and the arbitrators decided to apply the UNIDROIT principles even though the contracts in dispute had being signed fifteen years before the completion of the Principles! There were three reasons given by the arbitrators to justify the application of the UNIDROIT principles. Firstly, the arbitral tribunal said that the Principles were a codification created by recognised, independent and neutral experts. Secondly, the arbitrators held that the Principles were inspired by the United Nations Convention on Contracts for the International Sale of Goods (CISG) and therefore were specially designed to deal with cases like the one under consideration and, finally, that the principles are not vague and unclear but concrete and simple to apply.

There is little doubt that those principles are seen in International Commercial Arbitration as a codification of the usages of trade law, and therefore, a codification of the new Lex mercatoria. However, the application of the UNIDROIT principles is not only a matter of arbitration; they are also increasingly applied by national courts.

 II. Towards a unification of European Private Law: Contract Law

It is unrealistic to imagine that the unification of private law can occur on a global scale, however, unification at a European level is far more likely. Indeed, until the eighteenth century there were no frontiers in the study of private law in Europe. Scholars all around Europe studied the same private laws, stemming from a common legal tradition: Roman law.

There are many different views concerning the form that a ‘real’ unification should take. Some commentators have argued that a legal dictionary giving definitions of civil terminology would be enough ; other authors are fervent advocates for a real codification and, finally, there are proponents of a Common Frame of Reference (CFR) . The possibility of enacting a European Civil Code and the concrete codification of European Principles on Contract Law were also options that have been considered at a European level.

However, the unification of laws and its codification is not without problems. Many questions and uncertainties arise when thinking about the unification of Private law by means of codification, for example: How does one define the content of “Private law”? What means of codification should be used? What is the real meaning of the word “Code”? What should be codified? How does one ensure a uniform interpretation of the code by national courts? This mass of questions suggests that Europe may not be prepared for a real codification replacing national private rules. Indeed, “such a major step requires more time and more detailed knowledge about each other’s systems than we possess today” .

In order to draw the parallel between the unification of European Private Law and Lex mercatoria, it is essential to understand that the major objective of the European Union is the achievement of a single market. For instance, we can imagine the difficulties for the participants in trans-national transactions due to the fact that there is no harmonised contract law in the common market and each contracting party has its own perception and interpretation of the contract. As a result, the conclusion of trans-national contracts could involve such high risk that entrepreneurs will keep out of foreign markets. Therefore, the harmonisation or unification of European Private Law is an essential component in achieving an effective internal market. The exact same conclusion can be transposed to a global context and to Lex mercatoria, since it applies to international commercial transactions.

European institutions –by way of Directives issued by the European Commission and European Parliament Resolutions– and scholars have attempted to codify and harmonise European Private Law. However, while the European Institutions’ role has been to highlight the need for further harmonisation of private law, it was under the auspices of academic comparative research that the main practical work was carried out. Groups of scholars have been identifying a common core of legal solutions in order to achieve the codification of private law . Some of the work of those groups, such as the Pavia Group, the Trento Common Core Approach to European Private Law, the Study Group on a European Civil Code and the Commission on European Contract Law, offered clear solutions for unifying private law.

A special mention should be made both of the Common Frame of Reference (CFR) and of the Draft Common Frame of Reference (DCFR) and to the Principles of European Contract Law (PECL), since these provide the clearest expression of codification of commercial principles and practices at a European level.

In 2003, after several discussions at a European level, the Common Frame of Reference was the option finally chosen by the ‘Commission Action Plan on a more coherent European Contract Law’.

The European Commission’s Action Plan aimed to provide “fundamental principles, definitions and model rules that could assist in the improvement of the existing acquis communautaire” . The Commission not only insists on the CFR as an instrument to improve the acquis communautaire, but also as the basis of an optional instrument, that is to say an instrument that parties can use when entering into commercial transactions, but with no binding character. In order to do so, two groups contracted with the Commission’s Research Directorate General of the European Commission in order to produce the DCFR: an already-existing group directed by Professor C. von Bar – the ‘Study Group on a European Civil Code’ – and the ‘Research Group on Existing EC law’ or the ‘Acquis Group’ as it is known.

In 2008, the ‘Study Group’ and the ‘Acquis Group’ presented a draft edition of the DCFR that had been revised in order to take comments into account and to improve the text. This new edition was published in 2009. Both texts are basic editions in the sense that they are published without notes or comments. As is indicated in the introduction of the DCFR, we should distinguish between the DCFR and the CFR. The DCFR is a text that serves as a “draft for drawing up a ‘political’ Common Frame of Reference”, academic in nature while the CFR is more political, meaning that the CFR and DCFR are different in content and coverage. The DCFR was developed by academics and scholars and, as an academic text, has no political validity in the European Union.

One year after the publication of the UNIDROIT principles, in 1995, the Principles of European Contract Law (PECL), were published and later revised in 1999 . As with the American Restatement of the Law of contracts, the PECL are designed to provide legal solutions common to all Member States allowing the differences of national laws to converge and find common concepts and a common legal method. In the PECL, as in the American Restatement, the articles are complemented by commentary and explanations on practical examples. Compared to US contract law, the European Union contains a broad range of contract laws, owing their diversity to their different origins and to different legal traditions. The PECL take those different legal traditions into account and has become a codification with a mixture of influences. In order to do so, the Lando Commission applied a comparative method in order to establish the principles that best reflect the social and economic conditions prevailing in Europe and therefore attach varying weights of influence to the Member States’ laws.

As with the UNIDROIT principles, the European Principles were designed to be more than just a model or a checklist of principles. However, the application of both sets of principles differs because, contrary to the UNIDROIT principles, the PECL covers national commercial contracts as well as consumer agreements . Although the principles are also intended to serve other functions, it is true to say that the purpose of the PECL is to serve as the basis of a European Civil Code and, more concretely, of a European Code of Contracts that will replace national contract law in the Member States.

When it comes to solving a dispute, arbitrators often have to examine general principles of law that will allow them to solve the dispute without being bound by a specific set of national rules. In this sense, the PECL were also conceived to be used in arbitration . Indeed, when parties refer to Lex mercatoria as the law applicable to solve a dispute, arbitrators can and often do apply the PECL.

III. Conclusion

Lex mercatoria was born out of the need to codify the customs already in existence in international trade. On the other hand, European private law was created from different legal traditions with the objective of becoming, in the long term, the only law applicable to intra-EU and national transactions. Undoubtedly, both sets of rules contribute to the improvement of trade, but on a different level and for different reasons.

It is important to note that the European Union tries to protect the consumer, and above all, the European citizen. Without intending to be simplistic, Lex mercatoria is much more concerned with trade than it is about consumer protection.

However, in the field of contract law, Lex mercatoria and European contract law have many common features. The best way to illustrate this is by comparing the UNIDROIT principles and the PECL. International arbitrators as well as national courts have referred to both sets of principles when interpreting the contracts submitted to them for adjudication and in confirming their own legal solutions. Both works have a similar structure. However, the same cannot be said for the DCFR. Therefore, it is important to bear in mind that no real connection exists between Lex mercatoria and the acquis communautaire. The latter is based on enacted Directives and the European Court of Justice’s case law, while Lex mercatoria is a canon of practices and resolutions derived from international disputes panels and focusing on Contract law.

In conclusion, it could be said that, in the field of contracts, both the European private law and Lex mercatoria, aim to facilitate commercial trade at a European and global level. However, differences exist in the sources, content and legal traditions that make up these rival sets of trans-national legal principles.

Mariana Pendás Mariana Pendás is a Spanish qualified lawyer. She has worked in the Litigation and Arbitration department of an International Spanish law firm in Madrid since 2010. Prior to this, she worked as a trainee in the International Arbitration department of Shearman & Sterling in Paris and completed a traineeship with the European Commission. She holds a Masters of European Legal Studies form the College of Europe (Bruges) and completed her undergraduate law degree at the University of Fribourg (Switzerland).

Regional vs. universal unification?

The Proposal for a Regulation on the Common European Sales Law and the CISG

On October 11, 2011, the European Commission adopted a Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law[1] (“Regulation proposal”). The Regulation proposal suggested by the Commission is primarily intended to provide rules governing the cross-border sale of goods for B2B as well as B2C contracts within the EU, but also extends to dealings with third countries. Out of 27 EU Member States 23 are also contracting states of the 1980 United Nations Convention on Contracts for the International Sale of Goods (“CISG”), governing the transboundary sale of goods for B2B[2] contracts. Therefore, questions of compatibility of the Regulation proposal and the CISG arise, which will be discussed in the following contribution.

In the following article, the structure of the Regulation proposal and its scope of application on the one hand (I.) and the scope of application of the CISG (II.) will be explained. The substantive provisions of both instruments will not be covered in this article. Then, the potential for a coexistence and/or conflict of both instruments will be elucidated (III.). Finally, we will end with a conclusion (IV.).

I. Background, structure and scope of application of the CESL

The CESL can be considered the outcome of a discussion about the harmonization of the European contract law, which has been taking place in the EU for more than ten years[3]. Despite the fact that there are respective academic proposals and though the Commission is open towards the idea of a far-reaching harmonization of substantial European contract law, there seems to be no political support for such attempts. What started as a proposal for a binding and comprehensive harmonization of European contract law, has found its end – at least for the time being – as an optional instrument on sales law.

The Regulation proposal consists of the actual body of the regulation as well as two appendices. The regulation is limited to mere provisions governing the applicability as well as definitions, while the text of the CESL is contained in Annex I.

The Commission not only has conceived the CESL as an optional instrument; the CESL applies only if the parties agree on its applicability (Articles 3 and 8). Thus, the Commission chose an “opt in”-solution instead of an “opt out”-solution like the CISG (see infra II.3). The validity of such an agreement has to be determined in accordance with the CESL itself[4], i.e. Articles 30 seqq. CESL on the formation of a contract. In addition, in case of a consumer contract the agreement has to be contained in a document separate from the contract itself. Also, the trader has to inform the consumer in advance about the intended inclusion of the CESL by using a notice form included as Annex II to the Regulation Proposal.

CESL is intended to apply only to cross-border contracts (Article 4). The contract is considered a cross-border contract whenever the parties have their habitual residence in different countries. In case of consumer contracts it is required that either the address of the consumer, the billing address or the place of delivery is located in an EU Member state different from the trader’s state of habitual residence.

Ratione materiae, CESL applies to sales contracts as well as contracts on the supply of digital content as well as related services (Article 5). Whenever the contract is a mixed-purpose contract, CESL shall not apply (Article 6). CESL’s scope of application ratione personae is determined by Article 7. CESL applies in B2C contracts between a trader and a non-trader. A contract concluded between two traders can only be governed by the CESL if one of the parties is a small or medium enterprise (“SME”). The term SME is further defined by Article 7(2) as a trader employing fewer than 250 persons or having an annual turnover not exceeding EUR 50 million. It has been rightly criticized that this definition will entail great uncertainty as the contracting parties may not know whether these criteria are met when the contract is concluded.

Although the Regulation proposal contains rules on CESL’s scope of application, it does not govern the “international” scope. The explanatory statement expressly mentions that the “Rome I Regulation and Rome II Regulation will continue to apply and will be unaffected by the proposal. It will still be necessary to determine the applicable law for cross-border contracts.”[5] In this regard, there is a great difference compared to other uniform law instruments like for instance the CISG, which prevails over any national conflict of law rules with the exception of those cases where it expressly refers to the private international law rules of the forum (see infra II.2).

II. The CISG’s scope of application

To allow a better comparison with the CESL, we will give a very brief overview about the substantive (1.) and territorial (2.) scope of application of the CISG. Furthermore, we will explain the option of parties to a sales contract to exclude the CISG by virtue of an agreement (3.).

1. Scope of application ratione materiae (Articles 2-3 CISG)

The CISG only applies to contracts on the sale of goods. There is some uncertainty whether the concept of goods also includes intangibles, such as Software. Some courts decided in the positive,[6] some in the negative. [7] The majority of judicative and also academic discussion seem to meet in a compromise: intangible good are included as long as they are fixed on a tangible medium, such as burned on a DVD. [8] The CISG does not apply if those goods are purchased for the personal, household or family use unless the seller neither knew nor ought to have known of the buyer’s intention (Article 2 lit a CISG). To meet those requirements, Article 2 lit. a CISG only focuses on the buyer’s intention by the time the contract is concluded and the seller’s ability to discern this intention, notwithstanding the actual use of the good afterwards. In contrary to the CESL, the CISG neither is limited to enterprises of a certain size nor does it require such a size.

Some circumstances of the contract conclusion and certain objects of the transactions are excluded in Article 2 CISG, as they touch special public interests (auctions, by authority of law, stock, vessels, electricity…). Finally, contracts on the sale and manufacturing/production of goods are treated as sale contracts as long as the manufacturing/production is not the preponderant part of the contract (Article 3).

2. Territorial scope of application

The CISG only applies to contracts, if the contracting parties have their place of business in different states and those places of business are either both located in Contracting States (Article 1 (1) lit. a CISG) or the lex fori’s private international law rules leads to the application of the law of a Contracting State (lit. b).

The Contracting States have some possibilities to further limit the scope of application of the CISG: The Convention offers the possibility to declare not to be bound by part II or III of the CISG (Art icle 92) or that Art. 1(1)(b) CISG is not applicable. Furthermore, Contracting States can limit the application in relation to certain other States (Art icle 94) or within their borders for certain territorial units (Art icle 93). Also, Contracting States can depart from the Convention’s general rule that a contract for the sale of goods does not require a special form (Art icle 96). Several States used these possibilities to limit the scope of application of the CISG.[9]

Finally, according to its Article 90, the Convention does not prevail over any actual or future international agreement that contains provisions concerning matters governed by the CISG. It has been argued that EU law should be treated as an international agreement in the sense of Article 90 CISG as it has the same function as such an agreement (harmonizing the international trade).[10] Article. 90 CISG has the function to regulate a possible conflict on the international law level, stepping back behind other rules of the same legal quality. Regarding the EU law, Primary Law, such as the TFEU would have the same legal quality as the CISG. TFEU and CISG do not collide as their substantial scopes are different. Secondary Law, on the other hand, derives its legitimacy and existence from the international agreement TFEU, but is not an international agreement on its own. Beneath this level of international law, the Convention has no conflict to resolve as it prevails. Therefore, Article 90 CISG does not deal with questions concerning the relation between the Convention and EU Secondary Law. Furthermore, there is no need to apply Article 90 CISG as the Member States always have the possibility to limit the CISG’s scope of application by a declaration in the sense of Article 94 CISG.[11]

3. Exclusion by Party Autonomy

Article 6 CISG allows the exclusion of the application of the Convention as a whole or the derogation of almost all provisions[12] by explicit or implicit party agreement.[13] In addition, the parties do not only have the possibility of a choice of law but they also can change the substantial CISG provisions by their private autonomy.

The requirements for an implicit exclusion of the CISG are not everywhere easy to meet. Some courts require a clear expression of intend to exclude the CISG.[14] Thus, the mere choice of the law of a Contracting State is not regarded as an implicit exclusion of the CISG as the CISG forms part of each domestic law of a Contracting State.[15] Likewise, the choice of two laws of two territorial units bound by the CISG (by declaration of Article 93 CISG), neither excludes the CISG.[16] Furthermore, the use of legal terminology of one domestic law system in the language of this law system neither is sufficient to state such a clear expression of intent.[17] Finally, according to one court, the parties must show awareness of the existence of the CISG in their agreement to be able to exclude it.[18]

Summarizing those decisions, the party agreement must expressly refer to the CISG to exclude its application. Only referring to the application of other law systems is not sufficient.

III. CISG and CESL: Coexistence or conflict?

Based on the findings from above, CISG and CESL have an overlapping scope of application. Therefore, the question of a potential or the feasibility of coexistence arises. The relationship between CISG and CESL is mentioned in Recital 25 of the Regulation proposal:

“Where the United Nations Convention on Contracts for the International Sale of Goods would otherwise apply to the contract in question, the choice of the Common European Sales Law should imply an agreement of the contractual parties to exclude that Convention.”

Therefore, the drafters of CESL are of the opinion that in a potential case of overlap the CESL would prevail over CISG. The agreement to apply CESL would be considered as an exclusion of CISG by Art. 6 CISG. A clear-cut distinction seems regarded as possible.

In the following, we want to discuss a hypothetical case that will show that there are borderline cases where both instruments can claim to be applicable (1.). Unlike suggested by the Recital 25, it is the prevailing view that a conflict between CISG and CESL would have to be solved under EU law to the benefit of the CISG (2.). However, we are going to argue that CISG can be interpreted to step back behind CESL (3.).

1. The hypothetical case and the two perspectives

A German company sells a machine to a US based company. The sales contract provides in its section on the applicable law that the contract is “construed in accordance with German sales law including the EU law”.

Based on the approaches discussed above, it is possible to consider the case from different perspectives: Based on a pure CISG approach, a court in a CISG Member State would have uphold that this is a case fulfilling the applicability requirements of Article 1(1)(a) CISG, as the parties have their places of business in different contracting states. The corollary question is thus, whether the wording “in accordance with German sales law including the EU law” can be considered an implicit exclusion of the CISG under Article 6 CISG. As has been discussed above, most courts accept an implicit exclusion of the CISG and only few require an expressed one. In a case like the one at hand, it may nevertheless be doubtful whether the wording is sufficiently clear to interpret the clause as an exclusion of the CISG. According to the strictest view (Tribunale di Padova), an exclusion of the CISG is impossible as the party agreement does not show any awareness of the CISG. But even some of the less strict approaches would very likely come to the conclusion that the contract indeed contains a choice of law in favor of the German law including EU law as part of the German substantial law as the CISG forms part of the German law. Furthermore, the CISG is part of the German law and so not clearly excluded. Therefore, it is conceivable that a court will come to the conclusion that CISG will apply to the case and the rest of the German and the EU law will apply in those matters where the CISG does not apply.

From an EU law perspective, the starting point would have to be to determine the applicable domestic law. Within the EU (with the exception of Denmark), the instrument primarily dealing with the law applicable to contracts is the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I”)[19]. As the contract contains a choice of law clause, Article 3 Rome I would be relevant. Bearing in mind that the parties also have decided to “include” EU sales law, it is tenable that this was meant to be a reference to CESL and that this clause can be understood to be an implicit agreement to apply CESL pursuant to Articles 3 and 8 Regulation proposal.

In those cases, both CESL and CISG can claim to be applicable and a potential conflict is likely.

2. Solving the problem under EU law

However, the solution just explained as pure EU law perspective would only apply where the Rome I-Regulation applies.

As to those EU Member States, which have acceded to the EU after they became a party to the CISG, CISG will remain valid even if there was a conflict by virtue of Article 351 TFEU. Although this provision does not apply as to the “old member States”, it is at least arguable that the EU has to respect the international obligations of its Member States (like under the CISG) by virtue of Article 4(3) TEU.

Most likely the EU did not intend to displace the CSIG by adopting Rome I. According to Article 25(1) Rome I, the regulation “shall not prejudice the application of international conventions to which one or more Member States are parties at the time when this Regulation is adopted and which lay down conflict-of-law rules relating to contractual obligations”. Therefore, it is arguable that the CISG remains untouched pursuant to Article 25(1) Rome I. However, the EU Member States had to notify the Commission of those Conventions that they deem to be not prejudiced by virtue of Article 25(1) Rome I. The CISG was not mentioned in these notifications[20]. But this should not be understood in the sense that Rome I prevails over the CISG. According to Article 1(1) Rome I, the regulation only deals with “a situation involving a conflict of laws”. It is possible to interpret the concept “conflict of laws” in a narrow and technical sense, as those rules which in an international context determine the applicable substantial law. In cases where the CISG is applicable, there is no “conflict of laws” as the applicable substantial law is already determined[21].

Therefore, no conflict will arise as EU Law and in particular Rome I does not apply to the extent that CISG applies. Therefore, it seems to be a mistake to presume – as Recital 25 of the Regulation proposal does – that CISG will step back behind CESL because of a mere choice of the CESL. Such a choice is only possible where the parties have clearly excluded CISG and not only chosen the CESL.

3. Solving the problem under the CISG?

Based on the findings just made, the scope of application of Rome I and CESL will be determined by the CISG’s scope of application. But the question arises whether it is possible to interpret the CISG in the light of the CESL so that an implicit choice of CESL will nevertheless be read as an exclusion of the CISG as suggested by Recital 25 of the Regulation proposal.

Actually, such construction is possible: CISG is an international treaty and has to be interpreted in accordance with the principles applicable to those treaties, which are also codified by the Vienna Convention of the Law of Treaties (“VCLT”)[22]. According to Article 31(3)(b) VCLT, a treaty also has to be interpreted in the light of “any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation”.

In case 23 Contracting States of the CISG (i.e. those EU Member States that are parties to the CISG) adopt a piece of legislation that implicitly contains an interpretation of Article 6 CISG, this is subsequent practice under Article 31(3)(b) VCLT. Unless the other CISG Contracting States protest against this interpretation, this will have to be considered an “agreement of the parties”. This interpretation would not only have to be considered by the EU Member States and their courts, but by all courts applying the CISG.

IV. Conclusion

The scope of CISG and CESL partly overlap. Although this entails the potential for a conflict of these instruments, both instruments can be harmonized so that they, in the end, have a complementary scope of application. CESL and Rome I only apply where CISG does not apply. However, CISG’s Article 6 and the parties’ implicit agreement to exclude CISG can to be interpreted in the light of CESL (and the subsequent case law on its implicit inclusion). The implicit statement contained in Recital 25 Regulation Proposal, that any choice of the CESL would exclude CISG, thus not only would bind the courts of the EU Member States, but would have to be considered uniform practice regarding the interpretation of the CISG that binds even other CISG Contracting States.

Susanne Lilian Gössl               Jan Asmus Bischoff

Susanne Lilian Gössl studied law at the University of Cologne and in Naples from 2003-2008. After her graduation she worked as a research assistant at the Institute for International and Foreign Private Law, University of Cologne. She completed a Master of Laws at Tulane University Law School, New Orleans in 2009/2010 and afterwards was research assistant at the Institute for Media Law, University of Cologne. In this period she worked on her doctoral thesis on “Internet specific conflict of laws – possibility and necessity” under the supervision of Professor Dr. Heinz-Peter Mansel. She is expecting to defend her thesis in December 2012. Currently, she is working as a legal stagiaire (Rechtsreferendar) in Hamburg.

Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as an attorney (Rechtsanwalt) at Dabelstein & Passehl, Hamburg in the field of maritime law and international dispute settlement.


[1] Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law, October 11, 2011, COM(2011) 635 final, available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011PC0635:EN:NOT.

[2] See infra II.1.

[3] The Communication from the Commission to the Council and the European Parliament on European contract law, of July 11, 2001, COM(2001) 398 final, can be considered the starting point of this discussion; the document is available at: <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52001DC0398:EN:NOT>.

[4] Article 8(1).

[5] Regulation proposal, p. 6.

[6] Handelsgericht Zürich, 17.02.2000, http://www.cisg-online.ch/cisg/urteile/650.html (26.06.2012); Bridge, International Sale of Goods, No. 11.18; Diedrich, Maintaining Uniformity in International Uniform Law via Autonomous Interpretation: Software Contracts and CISG, 8 Pace Int’l L.Rev.303 (1996), 338; Fakes, The Application of the United Nations Convention on Contracts for the International Sale of Goods to Computer, Software and Database Transactions, 3 Software Law Journal 559 (1990), 587 seq.; Karollus, UN-Kaufrecht, Vienna Springer 1991, p. 21; Lookofsky, Understanding the CISG, 3rd ed.Kluwer Law International Alphen aan den Rijn 2008, p. 20 seq.

[7] (26 August 1994) Oberlandesgericht Köln, 19 U 282/93, http://cisgw3.law.pace.edu/cases/940826g1.html; (20 December 1993) Budapest Arbitration proceeding, Vb 92205 (Shares of stock case), http://cisgw3.law.pace.edu/cases/931220h1.html, Ferrari in: Schlechtriem/Schwenzer (ed.), Kommentar zum Einheitlichen UN Kaufrecht, 5nd ed 2008 Beck Munich, Art. 1 para 34; Achilles, Kommentar zum UN-Kaufrechtsübereinkommen, 2000 Luchterhand (Hermann) Neuwied, Art. 1 para. 4.

[8] (21. June 2005) Supreme Court, 5 Ob 45/05m (Software case), http://cisgw3.law.pace.edu/cases/050621a3.html; Ferrari in: Schlechtriem/Schwenzer (eds.), zum Einheitlichen UN Kaufrecht, 5nd ed 2008 Beck Munich, Art. 1 para. 36, 38.

[9] An entire list can be found at http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html (June 28, 2012).

[10] Mankowski in: Ferrari/Kieninger/Mankowski et al. (eds), Internationales Vertragsrecht, 2nd ed. 2011 Beck Munich, Art. 90 para. 9-11.

[11] Ferrari in: Schlechtriem/Schwenzer, Kommentar zum Einheitlichen UN Kaufrecht, 5nd ed. 2008 Beck Munich, Art. 90 para 3.

[12] Not Artice 12, if applicable, and neither some public international law rules laid down in Articles 89-101.

[13] E.g.   (2 July 1993) Oberlandesgericht Düsseldorf, no. 17 U 73/93 (Veneer cutting machine case), http://cisgw3.law.pace.edu/cases/930702g1.html.

[14] (6 January 2006) U. S. District Court, M.D. Pennsylvania, No. Civ.A. 1:05-CV-650, American Mint LLC, Goede Beteiligungsgesellschaft, and Michael Goede v. GOSoftware, Inc., http://cisgw3.law.pace.edu/cases/050816u1.html.

[15] (3 December 2002) Handelsgericht St. Gallen, HG. 1999.82-HGK (Sizing machine case), http://www.cisg-online.ch/cisg/urteile/727.htm, English Translation http://cisgw3.law.pace.edu/cases/021203s1.html.

[16] (27 July 2001) U.S. District Court, Northern District of California, San Jose Division, C 01-20230 JW, Asante Technologies, Inc. v. PMC-Sierra, Inc., (CLOUT) abstract no. 433.

[17] (15 January 2002) Tribunal de commerce [District Court] Namur, R.G. no. 985/01, SA P. v. AWS http://cisgw3.law.pace.edu/cases/020115b1.html

[18] (25 February 2004) Tribunale di Padova, No. 40552, http://cisgw3.law.pace.edu/cases/040225i3.html

[19] OJ L 177 of 4.7.2008.

[20] See: Notifications under Article 26(1) of Regulation (EC) No 593/2008 of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I), OJ C 343, 17.12.2010, p. 3; but see: Jan von Hein in:  T Rauscher (ed.), Europäisches Zivilprozess- und Kollisionsrecht, Rom I-VO/ Rom II-VO, 2011 Sellier Munich, Art. 25, para. 7.

[21] Schilling, EuZW 2011, 776, 779 seq.; Wagner, TranspR 2009, 107; Hartenstein, TranspR 2008, 146; Brödermann/Wegen in: Prütting, Wegen, Weinreich (ed.), Bürgerliches Recht, 7th ed. Luchterhand Köln 2012, Art. 25 para. 4.

[22] See J Bischoff, Interpretation of Uniform Law, Max Planck Encyclopedia of European Private Law, 982 seqq. (Basedow et al., eds.,OUP, 2012).

Proposed reforms for European jurisdiction – an outside view from an insider

How are non-Member States of the European Union, such as the United States, affected by Europe’s law on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters – a group of instruments which one can call the ‘Brussels-Lugano regime’? Developments in Brussels may be about to bring about significant changes, as part of a package of measures now being considered to update this regime. The other significant development in those proposals, from a non-European perspective, relates to arbitration.

The external dimension

Since before it was signed in 1968, the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, and its associated instruments, have prompted adverse comment for their inward-looking nature. The Brussels-Lugano regime, now largely based on Council Regulation (EC) 44/2001 (the ‘Brussels I Regulation’), provides mandatory and uniform jurisdictional rules for 32 jurisdictions spread across 30 European countries (the 27 member states of the European Union plus, under the Lugano Convention, three EFTA states – Switzerland, Norway and Iceland).

But it very largely ignores the rest of the world. With just three exceptions, it governs jurisdiction only against defendants domiciled in the member states, providing a framework of rules governing the jurisdiction of the courts of the member state to entertain civil or commercial proceedings. (For these purposes, ‘domicile’ is a much more liberal concept than the rather narrow common law concept of domicile). What it does in this regard, and what it leaves undone, are both significant.

First, what it leaves undone. Article 4(1) of the Brussels I Regulation says,

If the defendant is not domiciled in a Member State, the jurisdiction of the courts of each Member State shall, subject to Articles 22 and 23, be determined by the law of that Member State.

Article 22 contains rules conferring exclusive jurisdiction on the courts of member states with which, by reason of their particular subject-matter, the proceedings are considered to have a particularly close relationship. Thus, proceedings concerned with rights in rem in immovable property in a member state, or the constitutions of companies incorporated in a member state, or public registers, or patents, or the execution of judgments are all assigned exclusively to the member state in question, irrespective of where the defendant is domiciled.

Article 23 confers jurisdiction –exclusively so unless the contrary is agreed – on the courts of member states which the parties have chosen in a forum selection agreement. There are a number of conditions for the efficacy of such an agreement, one of which is that either party must be domiciled in a member state. So a plaintiff who is domiciled in a member state and who has such an agreement with a defendant who is non-European domiciliary can still rely on Article 23 both to confer jurisdiction on the chosen court, provided it is within a member state, and to derogate from the jurisdiction of an otherwise competent court.

The only other exception is of marginal interest: Article 9(2) deems a non-European insurer to be domiciled where its European branch is domiciled.

With those three exceptions, when it comes to non-European defendants, national law rules the day, including the widely varying and sometimes exorbitant rules which the national laws contain. Some of these are mentioned in Annex I to the Brussels I Regulation. In Germany, for example, Article 23 of the Zivilprozessordnung (ZPO, the Code of Civil Procedure) provides for jurisdiction based on the presence of property, irrespective of whether the dispute has any connection with that property. In France, Articles 14 and 15 of the Civil Code notoriously provide a forum for any dispute brought by or against a person of French nationality. In England, jurisdiction may be founded on the service of the claim on a person during their presence in England, even if it is only transitory (although in this case the exorbitance of the rule is tempered by the doctrine of forum non conveniens).

As against persons domiciled in member states, these and other rules of national law are excluded by Article 3(1), which says that persons domiciled in a member state may be sued in the courts of another member state only by virtue of the rules set out in the Regulation. And it is now clear, following the decision of the European Court of Justice in Owusu (case C-281/02, [2005] ECR I-1383) that not only ‘may’ they be sued in the courts of the member states but, if they are to be sued at all, they must be sued there. In other words, proceedings properly brought under the jurisdictional rules of the Brussels-Lugano regime cannot be stayed under national law powers for jurisdictional reasons, either in favour of the courts of another member state which might also be competent under the regime or in favour of the courts of a non-member state.

Which brings us to what the regime Brussels-Lugano leaves undone. What it does not do is to provide exceptions to take account of the external dimension. The three areas which have long been recognized as giving rise to problems are (1) where there is a close connection with a third state, the paradigm case being one concerning title to land in that third state; (2) where there is a valid forum selection agreement giving exclusive jurisdiction to the courts of a third state; and (3) where there are prior proceedings on foot in the third state between the same parties and involving the same cause of action as later proceedings commenced in a member state. In any of those cases, proceedings commenced in a member state under the Brussels-Lugano regime will  not be stayed or dismissed in favour of the third state (or at least they should not be – there is anecdotal evidence suggesting that, at least in the case of forum selection clauses, the clause is sometimes given effect and the Brussels-Lugano regime ignored).

The proposal

The European Union has an unusual legislative process. Legislative proposals are made, and can only be made, by the European Commission. But they are adopted, and can only be adopted, by the Council (which represents the governments of the member states and which has a system of qualified majority voting) and, in a fairly recent development, by the European Parliament, which is directly elected. Both the Council and the Parliament have to give their approval.  As it was mandate to do by the Brussels I Regulation, the Commission has carried out a review of the working of the Brussels I Regulation and in December 2010 put forward a proposal for its revision  or ‘recast’  (COM(2010) 748/3).

It is by no means clear that this proposal will pass into law in its present form, not least because the European Parliament is taking a close interest in the matter and has made a number of criticisms, as behind the scenes, no doubt, have the member states. Nevertheless, the Commission is in a powerful position and will be keen to press for some at least of its proposals.

The Regulation in the international legal order

Among the proposals is the repeal of Article 4, removing the power of member states to apply their own laws to defendants domiciled in non-member states, and the removal of the ‘domiciled in a member state’ qualification in most of the Regulation’s jurisdictional rules. This would have the effect that the jurisdiction of the courts of member states over persons domiciled anywhere in the world would then be subject to the Brussels I Regulation. At present, for example, English courts will assume jurisdiction over a contract case where the contract is governed by English law – a common state of affairs in international sale or transport contracts, for example. But if the proposal were adopted, they would no longer be able to do so. Admittedly, if England was the place of performance of the obligation in question, they would then be able to assume jurisdiction on that basis under Article 5(1) of the Regulation, but that is a power which, albeit on slightly different terms, they have already. It seems very likely, especially in the shipping field, that if the proposal is adopted in this form it would result in a significant loss to Europe of dispute-resolution business from around the world. It is probably for this sort of reason that the European Parliament has expressed concern that the repeal of Article 4 should not occur without a lot more detailed analysis and consultation.

An exception to the generalised extension of the Regulation’s jurisdictional rules to defendants domiciled in non-member states is provided by Article 6(1). That provision enables a defendant domiciled in a member state to be sued as a co-defendant in the courts for the place where any of the other defendants is domiciled; but it is not proposed to extend this rule to found jurisdiction against defendants domiciled in non-member states.

One deficiency of the present system is addressed by the proposal, although curiously two more are not.  What the proposal contains is a welcome provision, in Article 34, designed to deal with the problem which may occur when proceedings in relation to the same cause of action and between the same parties are pending before the courts of a third state at a time when a court in a member state is seised.  As we saw, at present the latter court has no power to stay its proceedings, notwithstanding the parallel proceedings in the third state.  Under the proposed revision, the court seised in the member state would have a discretion to stay its proceedings if certain conditions are satisfied, including that,

‘it may be expected that the court in the third State will, within a reasonable time, render a judgment that will be capable of recognition and, where applicable, enforcement in that Member State; and the court is satisfied that it is necessary for the proper administration of justice to do so.’

These conditions are both, to a common lawyer, gratifyingly discretionary and mark something of a shift towards a flexible realism and away from a dogmatic adherence to legal certainty. The court would have power to lift the stay at any time and the stay would not prejudice the plaintiff’s position on limitation. This proposal has been generally welcomed and it seems likely that it will be adopted, whatever the fate of Article 4.

What the Commission’s proposal does not contain, however, is either a provision dealing with cases involving a close connections with a third state of a kind which, within the European Union, would give rise to exclusive jurisdiction under Article 22, or a provision enabling effect to be given to choice of court agreements in favour of third states. The case for the former is less clear cut, but the case for the former is very strong.

As regards the latter, an argument which Commission officials have been advancing in public for this omission is that such agreements will soon be dealt with by the Hague Convention on Choice of Court Agreements of 30 June 2005, and that if the Brussels I Regulation were to contain a more favourable rule, then third states would have a reduced incentive to ratify the Convention.  Ratification by the EU and by other states around the world is doubtless a desirable objective, but it is not a sufficient reason to exclude a provision from the recast Brussels I Regulation on this question. It is far from certain when, if ever, this Convention will come into force at all, let alone as between the EU and enough states around the world to make any other rule of marginal significance. So far only Mexico has ratified the 2005 Convention, and its eventual effectiveness is likely to depend to a great extent on whether the United States SA ratifies it. But this question is bogged down in a constitutional dispute within the USA on whether its implementation falls within the exclusive competence of the Federal government, or also of the individual states. Even if it does come into effect, it will exclude significant numbers of international contracts and, for a significant period at least, many countries.

The case for legislation on forum selection agreements in favour of third states is now generally agreed, and perhaps the simplest way of doing it would be to adopt wholesale the terms of the 2005 Hague Convention, which could if necessary be done by reference, even in circumstances where that convention itself does not apply. It would, however, be sensible to extend the subject-matter scope of the rule to the subject-matter scope of the Brussels I Regulation, so that the difficulties which the current rules present are not perpetuated for cases which fall outside the subject-matter scope of the Hague Convention, but within the Brussels I Regulation.

Arbitration

The Brussels-Lugano regime expressly excludes arbitration from its scope: Article 1(2)(d). It is clear that for most purposes the law which governs arbitrations is unaffected by the Brussels-Lugano regime. It does not apply to the recognition and enforcement of arbitration awards as such, nor to court judgments which incorporate such awards. Equally, proceedings which form part of the arbitral process – such as the appointment of an arbitrator, setting aside an award or ruling on points of law in the course of the arbitral proceedings – fall outside the regime. But the scope of the exclusion is unclear at the margins and the effectiveness of arbitration as a parallel system of dispute resolution has been potentially compromised by the famous West Tankers decision of the European Court of Justice (case C-187/07, [2009] ECR I-663). The Commission’s proposal contains a provision designed to overcome this difficulty, although whether it does actually do so is less clear.

The critical questions are (1) the extent to which court proceedings which aim to protect or give effect to arbitration agreements and arbitration proceedings are excluded from the regime; and (2) the effect of a dispute involving an incidental or preliminary question relating to arbitration. Both questions are affected by the decision in West Tankers.

West Tankers

In brief, the case involved a jetty in Italy owned by Erg Petroli SpA which was damaged in a collision with a tanker owned by West Tankers Inc. There was a contract between Erg and West Tankers which included a London arbitration clause. Erg was paid by its insurers for the damage up to the policy limits and then made a claim against West Tankers in a London arbitration for the excess. Meanwhile, the insurers, in exercise of their subrogation rights, brought proceedings against West Tankers in Italy. West Tankers disputed the jurisdiction of the Italian court and also sought and obtained from the English courts an anti-suit injunction to restrain the insurers from pursuing the Italian proceedings, arguing that these were covered by the arbitration clause. The question of whether that was permissible under the Brussels I Regulation was referred by the House of Lords to the European Court.

In deciding that that was not permissible, the European Court affirmed two principles. First, it decided that despite even if the London proceedings were their being outside the scope of the Regulation, it could nevertheless have a collateral effect on them if those proceedings would have the consequence of undermining the effectiveness of the regime, “namely preventing the attainment of the objectives of unification of the rules of conflict of jurisdiction in civil and commercial matters and the free movement of decisions in those matters” (para. 24).  This is an example of the ‘principle of effectiveness’ in European law.

Secondly, therefore, it went on to consider whether the Italian proceedings themselves fell within or outside the subject-matter scope of the Regulation. The critical question for these purposes was whether the fact that the dispute was subject to an arbitration agreement (which was assumed for the purposes of the argument) took what was otherwise a straightforward civil or commercial dispute outside the Regulation’s scope. It concluded that it did not: a dispute that fell within the Regulation was not removed from it by reason of a preliminary or incidental issue relating to the validity of an arbitration agreement. It was for the Italian court to rule on its own jurisdiction, even if that involved ruling on the validity or applicability of the London arbitration clause, without interference by the London anti-suit injunction.

As a footnote, what happened next was that the London arbitration proceeded and was extended to include a counterclaim by West Tankers against Erg and the insurers for a declaration that it was under no liability. Although Erg participated the insurers did not and the arbitrators made an award in West Tankers’ favour against the insurers. West Tankers then applied for and obtained an order that that award be registered as a judgment of the English court. The English court held ([2011] EWHC 829 (Comm)) that although such an order would not normally be made in respect of a declaratory award, where, as in this case, the successful party’s objective was to establish the primacy of its award over any inconsistent judgment, an order would be made because that would make a positive contribution to obtaining the material benefit of the award. That order was appealed, the appeal was heard on 22 November and judgment is awaited. Meanwhile, the Italian proceedings are stayed.

The proposal

The difficulty with the West Tankers decision is that it removed from the London courts the ability to rule on the validity of the London arbitration agreement. It is this difficulty which the Commission’s proposal seeks to address. The way in which it seeks to do so is by providing an exception to the general exclusion of ‘arbitration’ in Article 1(2)(d) of the Regulation. The exception is in a new Article 29(4), which would require a court whose jurisdiction is contested on the basis of an arbitration agreement to stay its proceedings once the arbitral tribunal, or the courts of the member state of the seat of the arbitration, have been seised of proceedings to determine the existence, validity or effects of the arbitration agreement, even if that is merely an incidental question in those proceedings.

It remains to be seen whether this proposal, if adopted, will have its intended effect, the main difficulty being that the original court whose jurisdiction is challenged will have to decide as a threshold matter whether its jurisdiction is actually contested on the basis of an arbitration agreement. It is not hard to imagine that frivolous recourse may be had by recalcitrant defendants to alleged arbitration agreements as a delaying tactic. But abuse of that kind aside, it seems that a proposal along these lines is probably the best that can be achieved in keeping courts away from disputes that really ought to be decided by arbitration. (Other concerns about the proposal, such as its application to insurance disputes, or its potential effect on the competences of member states, are beyond the scope of this paper).

Other proposals

In addition to the proposals relating to the Regulation’s external dimension and to arbitration, the Commission’s proposal contains a number of other matters.

Perhaps of greatest interest to non-Europeans is the inclusion of  two proposed new fora of last resort, for cases in which no court of a member states has jurisdiction under the Regulation’s other rules. Under the first of these – a type of forum arresti – a member state’s courts would have jurisdiction if the defendant’s property was located in that state its value was not disproportionate to the value of the claim and the dispute had a sufficient connection with that member state (Article 25 of the draft). Under the second, which is subsidiary to the first, the courts of a member state with which a dispute is sufficiently connected could accept jurisdiction if the right to a fair trial or the right to access to justice so required, particularly if proceedings could not reasonably be brought or conducted in a third state with which the dispute was closely connected, or if a third state judgment would not be afforded recognition and enforcement in that state, thus counteracting the claimant’s rights – a forum necessitates – (Article 26 of the draft).

Other proposals in the draft recast of the Regulation include

  • the abolition of exequatur in respect of judgments from other member states – a proposal which is exciting controversy because of public policy concerns;
  • proposals to ameliorate the rigidity of the lis pendens priority rule, including a proposal to give priority to the putatively chosen courts to determine the effects of a forum selection clause,
  • provisions to increase communications between courts to aid the co-ordination of interim measures with substantive proceedings and other detailed proposals relating to interim measures,
  • a proposal to give priority over cases involving rights in rem in movable property to the courts of the situs, and
  • a strange proposal affirming the priority of workers’ rights to engage in collective action to protect their rights.

Conclusion

It remains to be seen how much of the Commission’s proposal survives the inter-institutional wrangling which is already under way, and what amendments are finally adopted. With some amendment, it seems likely that much of it will find its way into the law, although a big question-mark still hangs over the extension of the Brussels I Regulation to cover claims against persons domiciled outside the European Union.

Alexander Layton

Queen’s Counsel (barrister) in practice at 20 Essex Street, London. Visiting fellow at NYU School of Law’s Center for Transnational Litigation and Commercial Law. Expert adviser to the Legal Affairs Committee of the European Parliament on the proposed reform of the Brussels I Regulation. Immediate past chairman of trustees, British Institute of International and Comparative Law.

Implicit Exclusion of CISG

One of the enduring issues about which courts in different states that have adopted the CISG continue to disagree are the requirements under which that body of law will not apply, even though the requirements necessary to its application under Article 1 have been satisfied.  Of course, Article 6 permits the parties to a contract otherwise subject to the CISG to exclude its application. The case law on the mechanism for exclusion, however, suggests that the parties must be quite deliberate and explicit in their efforts to derogate from the terms of the Convention. Merely invoking domestic law as the governing law of the contract will not do the trick, as domestic law typically incorporates treaties and conventions. Either some express limitation to domestic sales law or an explicit exclusion of the CISG is necessary. In the United States, for instance, it is by now well recognized that a clause making “New York law” the governing law of the contract does not exclude the CISG, although a clause that recites that the contract is subject to “the New York Uniform Commercial Code, and not the United Nations Convention on Contracts for the International Sale of Goods” will be sufficient.

The requirement of an explicit invocation of specific domestic sales law or exclusion of the CISG suggests that parties cannot avoid the applicability of the CISG through inadvertence. Thus, one might think that courts would be hesitant to infer the inapplicability of the CISG simply because the parties failed to recognize its existence or relevance to their dispute. Indeed, case law from other jurisdictions states exactly that. For instance, an opinion of the Tribunale di Padova in 2004 (February 25, 2004, available at http://cisgw3.law.pace.edu/cases/040225i3.html) concluded that exclusion of the CISG is possible only where the parties were aware of its applicability. Given that the pleadings in that case revealed ignorance of the CISG, the parties “could not have excluded – even implicitly – the application of the CISG, by choosing to make an exclusive reference to the Italian law.” Cases from other jurisdictions are to the same effect (see, e.g., Oberlandesgericht Linz [Germany], January 23 January, 2006, available at http://cisgw3.law.pace.edu/cases/060123a3.html).

A recent case from the United States District Court for the Southern District of New York, however, has taken a broader view of the effects of party pleadings that fail to recognize the applicability (or the existence) of the CISG. The court thus grafts onto the requirement that any exclusion be explicit an exception where the parties have assumed at some point in the litigation proceedings that domestic (or State) law governs their contract, even though one of the parties subsequently recognizes the applicability of the CISG. In Ho Myung Moolsan, Co. Ltd. v. Manitou Mineral Water, Inc., (S.D.N.Y. December 2, 2010), available at http://cisgw3.law.pace.edu/cases/101202u1.html, a South Korean buyer of mineral water filed a breach of contract action against an American seller. In its initial complaint and in all pleadings through the discovery stage – including a motion for a preliminary injunction and an appeal from denial of that motion – the buyer had relied on New York law and asserted that its claims were brought “under state law.” After the close of discovery and thereafter, however, the buyer maintained (correctly it appears) that the CISG governed the transaction.

The court concluded that the buyer “by its actions” had consented to the application of the New York Uniform Commercial Code and it was “far too late” to withdraw that consent without undue prejudice to the seller. The court relied on New York law that allowed parties in litigation to consent by their conduct to the law to be applied – even though that decision was erroneous under prevailing legal principles. The court further concluded that the “course of the case would not have changed” even if the CISG applied. The decision is consistent with other cases that have precluded parties from asserting CISG claims after the commencement of litigation, although those cases often concern efforts to raise the claims for the first time during the appellate process.

These divergent opinions reveal one more example of the limitations of implementing uniform international commercial law. The procedural law of the forum state will determine the willingness of courts to circumscribe the pleadings or to bind parties to their understanding of applicable law. It is not clear that either procedure is clearly superior to the other. Courts that override parties’ understanding of the relevant law are more likely to decide cases in accordance with the legal principles that legislators and courts have adopted to govern situations of the type that the case presents. Indeed, there seems something odd about the notion that parties, by their ignorance, can exclude the application of a body of law that the legislature has determined should govern a particular transaction. And there is something anomalous about a system that makes explicit opting out of the CISG so burdensome, while simultaneously permitting implicit opting out through inadvertence.

Nevertheless, a rationale for essentially finding that parties have waived any rights under a statutory framework that they have ignored may be found outside the realm of commercial law. While the maxim iura novit curia suggests that the court can determine the law on its own (for a reference to this maxim in CISG case law, see, e.g., Tribunale di Vigevano [Italy], July 12, 2000, available at http://cisgw3.law.pace.edu/cases/000712i3.html) the plethora of statutory rights combined with courts of general jurisdiction often make that assumption, where it exists at all as part of the applicable procedural law, into a fiction. Thus, a desire to economize on judicial time may appropriately lead a court to bind attorneys to the law that they have invoked. Perhaps more importantly, a broad concept of waiver induces attorneys to be diligent in comprehending the law that governs their transactions. While the court in Ho Myung Moolsan believed that the UCC and the CISG were identical in all pertinent respects, there will clearly be cases where that is not true, and an implicit exclusion of the CISG can lead one party to pull defeat from the jaws of victory.

Clayton P. Gillette

Proferssor Gillette is Max E. Greenberg Professor of Contract Law, New York University School of Law

Subjective Intent in American Contract Law and the CISG

In the recent case of Hanwa Corp. v. Cedar Petrochemicals, Inc., 2011 WL 165404 (S.D.N.Y.), the court concluded that a Korean buyer of the petrochemical toulene had not made an effective offer to purchase under Article 14 of the CISG because it did not reveal an intent to be bound when it made its bid for the goods.  The court determined that the parties had created a practice between themselves of a two-step process of contract formation in which neither party performed until they had reached agreement on terms that were not included in initial bids.  Analysis of the circumstances in which the parties’ prior transactions occurred supported the proposition that they had not entered into a final contract when they disagreed about a choice of law clause, even if they had already agreed on product, quantity, and price.

In the course of reaching that decision, however, the court made broader allusions to the role of intent in contract formation under the CISG. Unfortunately, those allusions reveal a possible misunderstanding of the CISG’s position on the use of subjective versus objective intent. Moreover, the court’s comment is consistent with remarks made in at least one other American CISG opinion and thus requires some clarification.

The court in Hanwa Corp. began its analysis of the intent to contract issue by referencing CISG Article 8 for the proposition that “although the CISG expresses a preference that the offeror’s intent be considered subjectively, that consideration is not possible in this case since neither party submitted any competent evidence of their subjective intentions.”  It is certainly true that in the hierarchy of intent, subjective intent of the parties, when properly applicable, takes priority over other tools of interpretation.  But that is a far cry from a claim that the CISG “expresses a preference that the offeror’s intent be considered subjectively.”  The latter comment suggests that subjective intent consistently dominates objective evidence in the formation or interpretation of contracts.  The court’s comment might be dismissed as an overstatement or a casual dismissal of an issue not really before the court, given that no evidence of subjective intent was available.  Nevertheless, it is reminiscent of other judicial references to the relevance of subjective intent under the CISG.  Perhaps most notably, the court in the well-known case of MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’Agostino, S.P.A., 144 F.3d 1384 (11th Cir. 1998), purported to juxtapose Article 8(1)’s invocation of subjective intent with the American “preference for relying on objective manifestations of the parties’ intentions,” and cited Justice Holmes for the proposition that the law was unconcerned with “the actual state of the parties’ minds.”

One might infer from these comments that the CISG has embraced 19th century notions of subjective intent that required an actual meeting of the minds before contracts were concluded.  American contract jurisprudence has subsequently replaced reliance on largely unverifiable subjective intentions with more objective measures, as evidenced by the Restatement (2d) of Contracts reference to “manifestations” of a party’s intent rather than to the intent itself.  One underlying rationale is that it is less costly for the idiosyncratic actor whose subjective meaning or hidden intentions deviate from normal expectations of counterparties to explain his or her actual intentions than for each actor to attempt to discern the actual meaning of his or her counterparty.  The judicial references to the CISG’s elevation of the subjective view therefore suggests a view of contract more concerned with protecting the autonomous intentions of commercial actors than with reducing the transactions costs.

But these references to the primacy of subjective intent in Article 8(1) appear to misunderstand the scope of its application.  Article 8(1) does, of course, make subjective intent the measure of a party’s meaning, whether to determine the existence of a contract or to interpret its terms.  But it does so only when the other party could not have been unaware of that subjective intent.  A well-hidden, subjective intent of which the counterparty neither was nor should have been aware plays no role in the process.  An expression of desire to enter into a contract that commercially reasonable actors would take as sincere is not undermined by a subsequent claim that the speaker had private reservations.  Nor should it be.  Transactions costs would increase dramatically if actors had to discern the secret, if honestly held, beliefs of counterparties rather than rely on what reasonable actors would infer in the circumstances.

This does not mean that subjective intent is irrelevant.  Rather, it means that the circumstances matter.  Under Article 8(1), if the circumstances reveal that I understand your offer to me is, in your mind, insincere or incomplete, then no contract will be concluded by my purported acceptance, even if some third party would infer just the opposite from your manifestations.  The result is fully consistent with the standard understanding of American contract law.  Take the classic example of Lucy v. Zehmer¸ to which the court in MCC-Marble referred as the model of the American approach. In that case, the court famously observed that a binding contract existed even if an offeree signed a proposed contract in jest, as long as the context allowed the offeror to conclude that the acceptance was serious.  But the court was equally clear that if all parties had or should have understood that the offer was in jest, the act of accepting it would not create a contract.  In the language of the court in Lucy, subjective intent prevails notwithstanding objective manifestations if the personal meaning “is known to the other party.”  Article 8(1) limits the application of subjective intent to those same circumstances when it provides that statements and conduct are to be interpreted according to the actor’s intent “where the other party knew or could not have been unaware of what that intent was.”  American courts should be more cautious about proclaiming an expanded scope for subjective intent in international sales law.

Clayton P. Gillette

Professor Gillette is Max E. Greenberg Professor of Contract Law at New York University School of Law

The Center for Transnational Litigation and Commercial Law aims at the advancement of the study and practice of international business transactions and the way to solve related disputes either through litigation or arbitration. As commercial transactions become increasingly international, it is vital to the legal and business communities to understand and analyze the practices and legal principles that govern relationships between firms and between firms and consumers in the international arena