Date: Final Award, 2014

Origin of the parties: North America, Asia

Applicable substantive law: CISG, per parties’ subsequent agreement

Breach of Duty of Good Faith

Claimant

  1. Claimant submitted that Article 7 CISG provides for the observance of good faith in the performance of Contracts in international trade.
  2. …
  3. …
  4. Regarding a general duty to observe good faith in an international contractual relation governed by the CISG, Claimant referred to an article of Keily in Vindobona Journal of International Commercial Law and Arbitration, Issue 1 (1999) 15-40, “Good Faith and the Vienna Convention on Contracts for the International Sale of Goods” where Claimant found the author supporting the view that Article 7(1) CISG not only requires the observance of good faith in the interpretation of the convention, but also in the interpretation of a contract governed by the convention. However, Claimant did not provide any case law or legal writing supporting his view in this respect.
  5. Claimant, in its closing arguments, also proposed that the duty of good faith follows from Article 7(2) CISG, referring to the principles of private international law, and thus – since the Contracts had been executed in New York – the UCC §1-203 which had to be applied to fill the gap.

Respondents

  1. Respondents submitted first that there is no such freestanding duty of good faith in Article 7 CISG, whether for pre-contractual conduct or the performance of contractual duties. It follows from the literal and historical interpretation of the Convention on Contracts for the International Sale of Goods that the duty of good faith is to be observed “in the interpretation of this Convention” only. In this context, Respondents also referred to ICC Arbitration Case No. 8611 of 23 January 1997.
  2. Secondly, Respondents submitted that Claimant, by way of Article 7(2) CISG, cannot add duties to the Contracts which are not there. The Article 7(2) argument was only brought into the proceedings during Claimant’s closing statement despite the Arbitral Tribunal’s [Procedural Order]. Thus, Claimant is barred from introducing this new argument. Further, Article 7(2) CISG does not operate to introduce, by way of private international law a local law (US law) duty into the Contracts. They said that Article 7(2) applies only to supply a solution by reference to national law in relation to a matter covered, but not expressly dealt with by the CISG. That is not this case.
  3. Even if there had been an argument to introduce a US law principle of good faith there is no such principle under New York law or the UCC which would apply to this case. Furthermore, Article 14.4 of the Contracts (a permitted derogation from CISG by virtue of Article 6) is an “entire contract” clause and prohibits imposing a good faith duty to the parties.
  4. Finally, Respondents argue that there is no breach of any hypothetical duty to disclose and no causational link between any such breaches and the alleged damages.

The Arbitral Tribunal’s Findings

  1. The existence of a duty of good faith in a contractual relationship is one of the issues which divides common law from civil law. This issue has also been discussed during the negotiations of the CISG.1 Whereas civil law delegates favoured imposing such a duty upon contracting parties, delegates from the common law countries strongly resisted it. Article 7 of the Convention was the compromise. It states explicitly that “[i]n the interpretation of this Convention, regard is to be had to… the observance of good faith in international trade.” The wording itself makes clear that the provision focuses on the interpretation of the convention, not on the interpretation of contracts governed by the Convention. In contrast to the CISG, the 2004 UNIDROIT Principles of International Commercial Contracts, drafted after the CISG, contain a specific provision directed to the parties of an international commercial contract to observe these obligations in good faith in international trade.
  2. It is the Arbitral Tribunal’s conclusion that no duty of good faith directed to the parties of a commercial contract can be derived from Article 7(1) CISG since it concerns only the interpretation of the convention. This view is supported by the decision in the ICC Case No. 8611 of 23 January 1997. The Arbitral Tribunal considers that there is a benefit, to those engaged in international trade who may well come from different legal and business cultures, in arriving at an interpretation of the CISG which gives effect to its clear words.
  3. Regarding any alleged duty of good faith following from Article 7(2) CISG and UCC §1-203, the Arbitral Tribunal first refers to its [Procedural Order] which was issued subsequent to a pre-hearing conference where the Parties extensively discussed the legal basis for Claimant’s claims and the applicable law. Although the parties had already had sufficient opportunity to present their legal arguments, the Arbitral Tribunal granted an additional opportunity to identify the legal basis in the light of the Parties’ agreement that the CISG should be the applicable law … In the Memorandum, the Claimant mentioned neither Article 7(2) CISG nor UCC §1-203.The Arbitral Tribunal has decided that Claimant should not be permitted to advance this argument at such a late stage. It is not fair to Respondents to permit Claimant to ignore the directions of the Arbitral Tribunal and, especially, [Procedural Order] in this way.
  4. Nevertheless, the Arbitral Tribunal has been able to form a view about the argument. The Arbitral Tribunal finds that Article 7(2) CISG introduces rules of international private law only in limited cases. It applies where the subject matter of the dispute is addressed by the CISG and does not operate to “import” a general duty to act in good faith in circumstances where the matter (here delivery) is one expressly dealt with by the CISG but not “expressly settled” by the “general principles” of the CISG. Only in that case one can have recourse to national law. But Article 7(2) CISG is no justification for introducing a “general principle” (good faith) where the CISG does not incorporate it. But in any event Claimant did not submit convincing evidence or arguments as to why US or New York law should be the proper law of the contract nor did it provide sufficient evidence that there would be a duty to act in good faith (and the specifics of it) according to New York law. Based on the … expert opinion of … the Arbitral Tribunal would have found that there is no duty of good faith under the UCC in this case in any event.

1
Keily in Vindobona Journal of International Commercial Law and Arbitration, Issue 1 (1999) 15-40, “Good Faith and the Vienna Convention on Contracts for the International Sale of Goods” paragraph 4