The Intersection of CISG and Arbitration Agreements: A Holistic Understanding

This article 'the intersection of CISG and Arbitration Agreements: a holistic understanding' by Raj Pipara & Yashashwani Parashar analyzes both the Domestic Arbitration and International Commercial Arbitration processes in India and attempts to identify both the problems and solutions that the parties face. Additionally, the article attempts to devise a machine capable of resolving disputes in a different manner than traditional methods. In the history of civilization, arbitration has served as a mechanism for resolving disputes.

Arbitration is an enforceable method of settling disputes between parties by means of mutual consent or third-party mediation. Under Roman law and Greece's sixth-century civilization, it was a common practice. The attitude towards arbitration in England was rather hostile earlier, but business imperatives led to change over time, turning England into a more favourable location for commercial arbitration. Until the medieval period, ancient India offered a wide range of mediation/arbitration practices.

International Commercial Arbitration has also gained special importance in India as trade barriers have been removed and trade has become more open. The key point is that "ADR is becoming more viable by creating its own national institutions, gaining experience, and improving its theoretical and practical development, while simultaneously simplifying cross-border disputes."

Introduction

International Commercial Arbitration, as defined under Section 2(1)(f) of the Indian Arbitration and Conciliation Act, 1996, is any arbitration in which disputes arise from the existence of a legal relationship, whether contractual or not, that has to be considered commercial, either among foreigners or among companies, associations or bodies of individuals with foreign management or control. By holding that 'Commercial' should be construed broadly, the Supreme Court defined the scope of "Commercial" relationships. Today, it includes the manifold activities that are integral to international trade.

As a general principle, International Commercial Arbitration refers to the resolution of conflicts arising under international contracts. Such Arbitration can be either institution-based or ad-hoc, depending on the terms of the parties' agreement. In institutional arbitrations, parties decide to appoint an arbitral institution for the purpose of resolving their disputes. An "ad-hoc arbitration" refers typically to arbitration where the parties decide independently how many arbitrators to appoint, which forum to use, how the proceedings will be conducted, and many other aspects of the arbitration.

After independence, India ratified the New York Convention on 13th July 1960, which in turn led to the passage of the Foreign Awards (Recognition and Enforcement) Act, of 1961, which provided recognition of Arbitral Awards rendered abroad. The 1961 Act marked the start of International Commercial Arbitration, which eventually resulted in all arbitral awards outside of India's territory being recognized.

According to Section 4 of the law mentioned above, foreign awards would be enforceable in India as if they were Indian awards. Additionally, the Act set out requirements for "staying arbitration proceedings where matters were agreed to be arbitrated"; "filing of awards in court"; "judgments rendered on awards"; "circumstances under which a Foreign Award cannot be enforced" and "the evidence necessary to enable enforcement of an award. " It was necessary to follow a unified code of conduct in order to enforce any foreign award under International Arbitration.

Therefore, the United Nations facilitated international arbitration for the very first time under both the New York Convention and the Geneva Convention. In an effort to provide uniformity to the law of arbitration procedure, the United Nations Commission for International Trade Law adopted the UNCITRAL Model Law. As a result, several countries, including India, have passed laws on arbitration during the process of adopting the Model Law.

An increase in international trade and investment is accompanied by growth in cross-border commercial disputes. International arbitration has emerged as the preferred method of resolving such disputes, given the importance of an efficient dispute resolution program. The international community is closely monitoring the development of the Indian Arbitration Regime due to some controversial decisions made by the Indian judiciary in recent decades, more specifically when foreign parties are involved. Thus, if the Indian Arbitration Regime is to evolve with the times, it needs to be subject to measures designed to ensure that it does so. International trade and commerce are accompanied by financial transactions that vitally contribute to the expansion of the global market, the exchange of goods and services across countries is a rigorous process.

Within this process of economic expansion, there come transactional and operational disputes during the course or subsequent of it. In order to protect the business interest, investors and traders need to deploy a wide range of policies, legalities, and governmental relations. However, diplomatic considerations require patience to create a balance where the interest of private stakeholders lies at stake. Thereon, parties seek to resolve the dilemma through local remedies as a better option prior to formal proceedings via international dispute settlement or any other method which might challenge the sovereignty of a county. Genuine disputes arise from the interpretation of contractual terms, and their legal implementation and decide the rights and obligations of the parties. Major areas of difference can include mismanagement, failure to pay consideration, and other extraneous factors making contractual performance impossible.

Globalization is the realization of disputes in cross-border transactions, caused due to varying laws governing commercial contracts. Uniformity can rein the recalcitrant trend of sales of goods and services, emphasizing that uniformity of law is necessary for uniformity of trade and maintaining international standards. The parties to a contract feel to put their rights and interests on equal footing and may choose to put CISG as the applicable law to arbitral agreements. Generally, an international sales contract requires to be accompanied by a specific regulation and arbitration clause. Hence, to remove regulation barriers, the applicability of CISG in an arbitral agreement can access the parties to maintain the standard of regulation.

The United Nations Convention on Contracts for the International Sale of Goods (CISG) of 1980 was one of the products of a series of texts accompanied by the United Nations Commission on International Trade Law (UNICITRAL), Hague Conference on Private International Law (HCCH) and the International Institute for Unification of Private law (UNIDROIT). CISG has been signed by 94 states, aggregating the objective to uphold international trade and overcome trade barriers. CISG provides guidelines for the formation of contracts in the purview of international sales of goods. The applicability approach provides neutrality towards the regulation of such contracts and prefers to avoid the necessity of domestic laws on predominant issues.

Applicability of CISG may be effective in two ways i.e., automatic application on member states as per Article 1(1)(a) of the convention and by rules of private international law under Article 1(1)(b) of the same. In the possibility that neither of the parties is a member of the convention, the parties to an international sales contract may apply CISG to their matter of dispute through an agreement. It is seen through statistics and recorded samples that the choice of substantive law in international commercial contracts is a rare practice. Where the parties agree to insert the clause in the arbitral agreement to solve disputes with the enforceability of CISG, the decision on such basis becomes binding on parties referred by the tribunal as an express approach.

In some cases, the application of CISG at the discretion of the court contingent on the circumstances has also been impliedly practiced. The parties have autonomy, freedom, and discretionary power to consider the application of the law under Article 6 of CISG i.e. They have the choice to consider the application of CISG or appropriate any other substantive private law.

However, the application of CISG as law turns the procedural fluency of the tribunal to be simple as compared to the complexities faced in cases where the substantive law of the contracting state applies. Sometimes pragmatic application of CISG indirectly illuminates the procedure of dispute resolution either by combined procedure or by parallel procedure. Since the nature of arbitration and CISG is often similar, they both are combined for effective outcomes in the purview of its objective of maintaining the "International Standard Interpretation Trend" in good faith. On the other hand, in cases where the path of CISG and arbitration lies entirely different, another competent law is applied to solve the arbitral dispute.

However, the rigidity of the procedure is not maintained if any competent forum can refer to the provisions of CISG and fill the gap of legislation through the assistance of the convention. This may be known as a gap-filling procedure, i.e., Article 7(2) of the CISG. Hence, attributes of CISG in the context of international commercial arbitration are not restricted to the optimism of uniformity but also provide a chance for enhancement of international standards of interpretation, autonomy to prefer substantive law, and flexibility to refer CISG expressly or impliedly.

It is unclear how a new binding instrument will interact with the CISG in the event of a proposal for a new Convention. If the CISG is revised, we may end up jeopardizing the results we have obtained through 85 years of work in developing and implementing that instrument. The global revision and expansion of the CISG could halt its wide adoption and, along with it, the process of unifying sales laws the world over.

India's Stand

CISG-ratified countries usually have one set of laws that regulate domestic sales within their borders, and another set of laws that deal with international sales. International sales are governed by the CISG through the incorporation of CISG in their legislation. India would only be entitled to apply the CISG to its domestic laws governing international sales if it ratifies and subsequently adopts it.

Apart from causing immense harm and suffering, the pandemic has widened avenues for foreign investment and trade in India and will continue to do so. Hence, CISG ratification is probably in India's long-term interest due to the ease of trade and the widespread acceptance of the CISG. Both legal and trade advantages would accrue to India through this development.

The right of compensation under the CISG is best suited to the modern-day international trade environment, which I believe is one of the most significant advantages of the CISG. Unlike the Indian Sale of Goods Act that was enacted in 1930, this Act does not restrict the sale of goods in India. Damages can be sought as a consequence of either an ordinary breach or an ordinary breach that results in avoidance of the contract, depending on the facts and circumstances. Furthermore, an avoidance claim based on a fundamental breach of contract does not preclude an action for damages based on that very same breach. Therefore, a party can recover damages for the loss resulting from the breach by the breaching party as well as restitution for rightful avoidance of the contract.

Conclusion

When one wishes to analyze the relationship between international arbitration and the CISG in depth, it is unquestionable to conclude that these two institutions are replete with harmonizing moments. It is estimated that the CISG is used often in arbitration because they share the same, or at least very similar, fundamental values. The CISG can be applied without a choice of law by the contracting parties in the absence of a choice of law in almost all cases. In addition, both methods of application examined above do not present major problems in the interaction between CISG and international arbitration. Nonetheless, the relationship between the two global players isn't completely without problems since, as we've seen, there are several factors that hinder the relationship.

In cases where the parties have not chosen a law, for instance, the indirect method of application of the law, the distinction between domestic and international law, and the issue of specific performance are examples of disharmonies, but they can be avoided for the most part by applying the proposed solutions. Furthermore, the possibility that national and arbitral courts might adopt divergent interpretations and gap-filling is also something to be observed. The CISG and international arbitration, regardless of these problems, appear to be a couple in love, but it is sometimes inhibited by certain obstacles, just as relationships often do.  

References

[1] Interim Relief in Aid of International Commercial Arbitration, Available Here

[2] International Commercial Arbitration, Available Here

[3] The Arbitration and Conciliation Act, 1996, Available Here

[4] Supreme Court of India delivers landmark arbitration decision in Bharat Aluminium, overruling Bhatia International, Available Here

[5] Dispute settlement activity, Available Here

[6] The Applicable Law in International Commercial Arbitration, Available Here

[7] Recognition and Enforcement of Foreign Arbitral Award in India, Available Here

[8] Choice of Law in International Commercial Arbitration, Available Here

[9] The Balco Rationale — A Shift to the Territoriality Principle in International Commercial Arbitration, Available Here

[10] India as Hub of International Commercial Arbitration, Available Here

[11] Not a High Court, But High Cost? - A Discourse on High Cost in International Commercial Arbitration, Available Here

[12] Claiming Sovereign Defamation Under CISG and Uncitral in International Commercial Arbitration, Available Here

[13] India and Interim Measures in International Commercial Arbitration: Impressions from Bitter Experience, Available Here

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