CISG Opt-Outs and Ascertaining Party Intent: A Back-to-Basics Perspective

Two of this year’s contributions to Transnational Litigation Blog have addressed the intellectually stimulating but also practically pressing issue of identifying when, and how, commercial parties can exclude the United Nations Convention on Contracts for the International Sale of Goods from their international sales agreements.

In Professor John Coyle’s CISG Opt-Outs and Party Intent, Professor Coyle argues that real-world contract drafters in the United States do not understand that choosing “the laws of the State of New York,” for example, includes the CISG.  For this reason, Professor Coyle advocates statutory intervention clarifying that “generic choice-of-law clauses [in favor of the laws of US states] exclude the CISG.”  In response, Professor Ronald A Brand and Professor Harry Flechtner’s Rewarding Ignorance of the CISG: A Response to John Coyle emphasizes that the expectations of U.S. contract drafters represent only half of the contractual negotiation equation. They also argue that “abject ignorance of the law” on behalf of those contract drafters “is not something to be encouraged.”

In this post, we offer a response to both perspectives.  Our insights are grounded in a back-to-basics approach to contractual interpretation.  They also draw upon analogous issues arising under a previously problematic (and now repealed) section of Australia’s international commercial arbitration laws.

Back-to-Basics: Choice-of-Law Clauses, Their Interpretation, and the CISG

Professors Brand and Flechtner’s observation that U.S. contract drafters are only one half of the contractual negotiation equation is an important component of a back-to-basics approach to the issue of contractual interpretation.

The CISG is a default international sales law.  If its application criteria are satisfied, it automatically applies, unless excluded by the parties.  As Professor Coyle correctly notes, this occurs via the mechanism of Article 6: “[t]he parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.”  The reference to Article 12 here, concerning written form requirements, is irrelevant for present purposes.

However, as Professors Brand and Flechtner also correctly note, the CISG’s default status means that “the CISG must apply to the interpretation of the [choice of law] clause” (emphasis in original).  What this means, as a matter of law, over and above the detail provided in Professors Brand and Flechtner’s post, is answered via a careful understanding of Article 8 of the CISG: the treaty’s rules for contractual interpretation.

Professor Coyle’s argument, supported by his empirical study, is based upon the subjective understandings of contract drafters sitting on the U.S. side.  Article 8, however, allows recourse to subjective and objective intent in different – and carefully defined – circumstances.  Pursuant to Article 8(1), when interpreting “statements made by and other conduct of a party” (which includes proffering contractual terms), interpretation occurs “according to [a party’s] intent when the other party knew or could not have been unaware what that intent was.”  Though subjective intent is the primary – that is, first in line – rule, this requirement presents a high bar, meaning that Article 8(2)’s objective intent rule applies instead in most cases.

Would an international (i.e. non-U.S.) contracting counterparty understand, without more, a U.S. party’s subjective intent that “the laws of the State of New York” (or other cognate clause) excludes the CISG?  To the extent that this represents American exceptionalism, as argued by Professors Brand and Flechtner, arguably not.  As Professor Dr. Ingeborg Schwenzer – the world’s leading international sales law authority – points out, there are many good reasons why commercial parties might choose the CISG over an unconnected third State’s law.  The list of reasons includes its comparative accessibility when a third State’s law (and commentaries) require translation, its ability to eliminate the need to hire legal experts from third states, and its potential superiority in addressing “central questions of contract law” that might not have been addressed by local law.  These reasons may also resonate with non-U.S. parties who may then, as a result, understandably consider that a reference to New York law (without more) includes the CISG.

Resort to the objective intent rule in Article 8(2) confirms that a choice of “the laws of the State of New York” likely includes the CISG, at least under the current state of the law.  To adapt the words of Professors Brand and Flechtner, it is hard to justify as reasonable (for the purpose of Article 8(2)) the view that “a choice of the law of state X should not include rules that clearly are the law of state X.”  Even Australian CISG case law, which has been unfortunately consistently parochial when it comes to the Convention’s interpretation, accepts that Victorian law includes the CISG, Victoria being an internal Australian state, just as New York is an internal jurisdiction of the United States of America.

For these reasons, case law reading a choice of New York law as including the CISG is not just “entirely sensible” for practical or policy reasons.  Such cases reflect a legally correct application of the CISG’s contractual interpretation rules: the rules that necessarily determine whether or not the CISG has been displaced.  The correctness of this interpretative approach is recognized around the world: contrary reasoning, including one instance involving an arbitral tribunal reading a choice of Italian law as excluding the CISG, is routinely criticized.

Australian Arbitration Law: A Cautionary Tale

Our back-to-basics analysis discloses that the problem at the core of Professor Coyle’s recommendation is the fact that some U.S. lawyers subjectively think that the law is different to what it actually is.  A cautionary tale, arising out of a now-repealed section of Australia’s international commercial arbitration laws, is instructive here.  Given their respective international origins and trade facilitation purposes, international sales law and international commercial arbitration law have much to learn from each other.

The issue previously arising under Australia’s international commercial arbitration laws also involved excluding a body of law by contract.  There, the relevant body of the law was the procedural-in-nature UNCITRAL Model Law on International Commercial Arbitration.

According to the former International Arbitration Act 1974 (Cth) section 21:

If the parties to an arbitration agreement have (whether in the agreement or in any other document in writing) agreed that any dispute that has arisen or may arise between them is to be settled otherwise than in accordance with the Model Law, the Model Law does not apply in relation to the settlement of that dispute.

Initially, Queensland’s Eisenwerk decision took a position at odds with the internationally understood difference between arbitral laws and contractual arbitration rules.  It held that adopting the International Chamber of Commerce (‘ICC’) arbitration rules operated to opt out of the Model Law.  This was despite Articles 2(e) & 19(1) Model Law specifically providing for party choice of arbitration rules.  The practical effect of Eisenwerk was to subject similar arbitration agreements to Australia’s domestic commercial arbitration acts which were (at the time) not based upon international standards.  This left the consistency of Australia’s arbitration regime with international expectations in a state of flux.  Somewhat surprisingly, given the jurisdiction’s reputation for arbitration excellence, Eisenwerk influenced Singapore’s approach to its own section 21 equivalent, though this position was quickly legislatively reversed in that jurisdiction.

Legislative attention to this problem took much longer in Australia.  The original section 21, however, was reconsidered in New South Wales in 2010, with Eisenwerk’s opt-out analysis being considered wrong and thereby not followed.  However, as the so-called Eisenwerk principle itself was grounded in contractual interpretation, the Court also addressed whether the very existence of the Eisenwerk authority was relevant to the parties’ objective intentions when adopting the ICC arbitration rules.  On that point, the Court emphasized that the slightly different wording in the arbitration clause under examination compelled a different conclusion, despite the existence of Eisenwerk as a legal authority at the time of contracting.  The jurisdictionally peculiar Eisenwerk precedent was confined to its facts, so as to give internationally accepted understandings of the Model Law their maximum possible effect.  More recent Australian High Court authority has emphasized the importance of context in construing arbitration agreements: for present purposes, considering the international context of choice of law clauses is equally important in determining whether they exclude the CISG.

Eisenwerk, like Professor Coyle’s proposed choice of law reform, was a jurisdictional peculiarity considered out-of-step with international expectations.  For that reason, it was rightly criticized, “as it limited the certainty that parties could have” regarding their governing procedural regime.  U.S. legislative intervention clarifying that choosing state law excludes the CISG would arguably have the same effect, so far as U.S. merchants’ international counterparties are concerned.

Suggested Perspectives: Advancing the Debate from Here

At the outset of this post, we described the issues under examination as intellectually stimulating, but also practically pressing.  It is worth remembering here that they are relevant outside of formal dispute resolution, too.  Determining a choice of law clause’s meaning – including whether or not it encompasses or excludes the CISG – may affect outcomes in litigation and in arbitral proceedings.  But it also stands affect contract performance, and settlement prospects: particularly in the small-to-medium enterprise context, where the CISG has special utility as a tool to assist informal dispute resolution.

This broader context is a reminder that whilst the CISG is fertile ground for technical legal analysis, it is ultimately intended to be a tool for business and the promotion of international trade.  At the same time, the CISG’s contribution “to introducing certainty in commercial exchanges and decreasing transaction costs” requires it be properly understood and properly applied as law.  This includes, at a back-to-basics level, its contract formation rules, which apply to choice of law clauses purportedly excluding the CISG.  This also includes understanding that the CISG’s application mechanisms – binding on Contracting States as a matter of public international law – aren’t susceptible to adjustment by Contracting States.  This is more so the case when proposed adjustments advance the interests (objectively legitimate or not) of practitioners from one particular legal system.

Does this necessitate resort to the tried-and-tested placement of blame on contract drafters?  Not necessarily.  The objection against “having to learn more law” is a strong motivator against State adoption of the CISG in the United Kingdom context.  In any event, the empirically confirmed phenomenon of U.S. parties opting-out of the CISG when it would not apply in any event seems to sit in tension with Professor Coyle’s other findings as to U.S. lawyers’ ignorance of the CISG.  Perhaps the better view is to see this matter as requiring enhanced student CISG education – identified by Professor Schwenzer as lacking in many jurisdictions – and greater student education around private international law as a whole.  Despite private international law’s importance to contemporary legal practice, it is not routinely studied in our own jurisdiction (Australia).  CISG education undertaken in isolation, separated from the consideration of broader choice of law rules, arguably only goes part-way to solving the “disconnect” identified by Professor Coyle.  A more holistic understanding of the choice of law process might help future practitioners understand that where opt-outs are genuinely desirable, “an express opt-out clause is always preferable” to avoid the problems this series of blog posts has addressed.

On that disconnect, given that “The View from the Bench” is consistent with back-to-basics interpretative principles, it is preferable that any adjustment occurs on the practitioners’ side.  Article 6 is actually one reason for the CISG’s success.  Its result is that “nothing has to change if you don’t want it to change because you can insist on excluding the CISG.”  Still, there must be a legally effective insistence on such exclusion, in accordance with this post’s analysis.  What represents a problem now may in truth be a great opportunity to internatonalize law school curricula in an increasingly international business world.