CISG and Arbitration Clauses: Separate or Separable?

  • Bhawna Lakhina

INTRODUCTION

The Convention on International Sale of Goods (CISG) is the most successful convention pertaining to private international law in this era of rising international trade.  It provides a uniform set of laws to regulate contracts of sale between parties belonging to member States of CISG (called ‘Contracting States’).  In this sense, it leads to the harmonization of various national laws.  However, it is usually believed that CISG does not have an extensive scope. This is because it is restricted to regulating matters in relation to contracts of sale in the international sphere.

There are various agreements inherent in a sales contract, one of them being arbitration agreements.  This is because it is a common practice today to include arbitration clauses in contracts of sale in order to reduce the time and money involved in litigation. An arbitration clause is considered to be completely distinct from the main contract and thus, a different law can be made applicable to it.

Since CISG explicitly limits its scope to ‘formation of contract’ and ‘rights and obligations of the seller and buyer’[1], it is clear that CISG does not govern arbitration agreements.  However, the text of the CISG is constantly interpreted by scholars, judges and arbitral tribunals to make it applicable to arbitration clauses of the contract. The general notion of separability of arbitration clauses is interpreted in different ways by different scholars and the notion is constantly changing over time.

DOCTRINE OF SEPARABILITY

The ‘Doctrine of Separability’ defines the relationship between arbitration clauses and the main contract.  Accordingly, arbitration clauses are independent and distinct from the other terms of the main contract.[2]  In this sense, the validity of an arbitration agreement is not affected by the repudiation of the contract.[3]  Hence, an arbitral tribunal enjoys the authority to settle the dispute without looking at the validity of the contract as a whole.[4]

As a result, it can be inferred that arbitration agreements are completely separate from the main contract.  This means that different laws can be applicable to the arbitration clause and the main contract respectively.   However, there can be situations wherein parties to the contract have not agreed to the law applicable to arbitration clauses.  In such situations, it becomes the duty of the courts or arbitral tribunals to determine the applicable law.

The general notion in case of absence of any choice of law to govern arbitration agreements is that the law applicable to the main contract is automatically made applicable to the arbitration clause as well.  However, courts and arbitral tribunals have rarely adopted such an approach.[5]  In this sense, the mere fact that an arbitration agreement is incorporated into the main contract does not make it governed by the same set of laws.  It remains a separate agreement according to the ‘Doctrine of Separability’. 

In this respect, there are situations where CISG is the law applicable to the main contract.  However, it does not mean that the CISG automatically governs the arbitration agreement entered into between the parties to the contract.  In order for CISG to be the applicable law, scholars interpret its various provisions for the same.

ARTICLE 81 OF CISG

The ‘Doctrine of Separability’ is incorporated in Article 81 of CISG.  This is because Article 81(1) states that the avoidance of a contract has no effect on the dispute settlement mechanisms adopted by the parties to the contract.  Hence, it provides that arbitration clauses are separate from the main contract and thus, are unaffected by its repudiation.[6]

Article 81 of CISG does not relate to the formation of an arbitration clause.  Also, it does not provide that an arbitration clause is subjected to a law different from that applicable to the main contract.  It merely provides that avoidance of a contract does not affect an arbitration agreement.  This has even been explained in the Secretariat Commentary on Article 81 which states that, “[Article 81] would not make valid an arbitration clause, a penalty clause, or other provision in respect of the settlement of disputes if such a clause was not otherwise valid under the applicable national law; [Article 81] . . . states only that such a provision is not terminated by the avoidance of the contract”.[7]

In this sense, the ‘Doctrine of Separability’ does not affect the applicability of the CISG to the formation of the contract, including the arbitration clause. In addition, CISG is not applicable in case of proving the formal validity of an arbitration agreement.  This is also supported by the renowned scholar Robert Koch.[8] 

THE MODERN APPROACH

The case of Filanto S.p.A. v. Chilewich International Corp.[9] served as a turning point as it provided a different interpretation of the ‘Doctrine of Separability’. This is the second or the modern approach defining the relationship between CISG and arbitration clauses. In this case, one of the issues was whether the sales contract concluded between the parties included the arbitration clause as well for the reason that Filanto had expressly refused to be bound by it.  Chilewich, on the other hand, submitted that Filanto’s rejection of the arbitration clause came long after it had already executed its part of the obligation and thus, Filanto was bound by it.

The Court accepted Chilewich’s contention.  In addition, an interpretation of the ‘Doctrine of Separability’ in relation to Article 81(1) of the CISG was carried out.  It was held that Article 81(1) provides for ‘severability’ of arbitration clauses in the event of avoidance of the contract.  In this sense, these clauses are not separate initially, i.e., when the contract is entered into, rather ‘severable’ at the time of avoidance of the contract. 

This approach has been adopted by various scholars as well.  Professor Davor Babic supports the view that arbitration clauses are not ‘separate’ but ‘severable’.[10] This view has also been supported by Professors Ronald Black and Harry Flechtner according to whom this case rejected application of ordinary contract law principles to the process of interpreting the parties’ intention with respect to arbitration.[11]

CONCLUSION

The doctrine of separability serves as the first approach wherein arbitration agreements are considered to be independent of the main contract.  Hence, even though a contract is governed by CISG, it does not automatically mean that the arbitration clause of the contract will also be governed by the same.

However, the second approach provides a different interpretation of the ‘Doctrine of Separability’. Accordingly, the arbitration clauses are ‘severable’ at the time of avoidance of the contract.  They are not separate at the time of the formation of the contract.  In this sense, arbitration clauses are not ‘separate’ rather they are ‘separable’ from the main contract.

This modern approach is different from the conventional approach in the respect that the latter suggests that arbitration agreements are completely separate from the other terms of the contract governed by the CISG. On the other hand, the former holds the view that the arbitration clauses and the main contract are not separate at the time of formation of the contract rather they can be severed later at the time of repudiation of the contract. This is the approach that is used today by the arbitral tribunals and courts while giving awards or pronouncing judgments respectively.

The author is a 1st Year student at NLIU, Bhopal.


[1] Article 4, CISG, 1980

[2] Julian D.M. Lew Et Al., Comparative International Commercial Arbitration 102 (2003)

[3] Id.

[4] Klaus Peter Berger, International Economic Arbitration 147 (1993)

[5] Albert Jan van der Berg, ICCA Yearbook of Commercial Arbitration XXVI  869, 878 et seq (2001)

[6] Schlechtriem/Schwenzer, p. 356, para 14; Farnsworth Art. 19, note 2.8; Walker, p. 160; Kröll et al. Art. 11, para 13; Magnus, Art. 90, para 11; Huber, Art. 90, para 5; Schroeter, §6, para 37

[7] See Secretariat Commentary on Article 66 of the 1976 Draft (draft counterpart of Article 81) (1976)

[8] Robert Koch, The CISG as the Law Applicable to Arbitration Agreements, in Sharing International Commercial Law Across National Boundaries: Festschrift For Albert H. Kritzer on the Occasion Of His Eightieth Birthday 267, 286 (Camilla B. Andersen & Urlich G. Schroeter eds., 2008)

[9] 789 F. Supp. 1229 (1992)

[10] Professor Babic’s lectures on European private law, University of Pittsburgh School of Law, February 2012

[11] Ronald A. Brand & Harry M. Flecthner, Arbitration and Contract Formation in International Trade: First Interpretations of the U.N. Sales Convention, 12 J.L. & COM. 239, 260 (1993)

Leave a Reply

Your email address will not be published. Required fields are marked *