In Transmar Commodity Group Ltd. v. Cooperativa Agraria Industrial Naranjillo Ltda. (721 Fed.Appx. 88 (Mem)), the Court of Appeals for the Second Circuit reversed a decision rendered by the Federal District Court that had held that the parties had not agreed to arbitrate their dispute on the grounds that the buyer’s standard contract’s terms containing the arbitration clause had not become part of the contract. According to the Court of Appeals, the District Court had erred in substituting New York law for the United Nations Convention on Contracts for the International Sale of Goods (CISG) for the purpose of determining whether the standard contract terms and, thus, the arbitration clause, had been agreed upon.
Both the District Court’s and the Court of Appeals’ decisions indicate that there is still some confusion about when the CISG applies and how a choice of law clause (in the case at hand in favor of “the laws of the State of New York”) affects its application. The District Court did not examine the CISG’s applicability at all, while the Court of Appeals did so, but rather superficially: it failed to look into whether the parties had excluded the CISG’s application, which, pursuant to CISG Art. 6, they are allowed to do.
But do these shortcomings have any impact on the ultimate decision that no arbitration agreement had been concluded between the parties? It is certainly true, as pointed out by the Court of Appeals, that “New York law differs from the CISG in several important respects.” Still, as regards the rules on the incorporation of standard contract terms, the CISG and New York law are comparable, with the consequence that even under the CISG it does not appear that an arbitration agreement had been reached.
Incorporating Standard Contract Terms Under CISG
With respect to the incorporation of standard contract terms, the CISG does not set forth special rules. Rather, the relevant rules have to be derived from Arts 14 et seq., the rules governing contract formation, as well as the CISG’s provision on interpretation (Art. 8). Hence, where the addressee knew or could not have been unaware of the offeror’s intent to have the standard contract terms be part of the offer, those terms are to be considered an integral part of the offer (Art. 8(1)). Standard contract terms must also be considered an integral part of the offer if “a reasonable person of the same kind” as the addressee “in the same circumstances” (Art. 8(2)) would have understood that the terms were supposed to be part of the offer in light of all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties (Art. 8(3)). In light of this, as held by the German Supreme Court in a decision dated Oct. 31 2001, “[i]t is [. . .] required that the recipient of a contract offer that is supposed to be based on general terms and conditions has the possibility to become aware of them in a reasonable manner.” This in turn “requires [...] from the user of standard contract terms that he send their text to the addressee or make them available in another way” (id.). In effect, “[f]or the user of the standard terms it is easily possible to attach the terms – which are regularly advantageous to him – to the offer. It would violate both the principle of good faith in international trade ([set forth in] Art. 7(1) CISG) [ . . .] if one were to impose an obligation on the contractual partner of the user of the standard contract terms to inquire as to the contents of the terms that have not been transmitted, and, thus, impose upon that party the risks and disadvantages of unknown standard contract terms drafted by the opposing party” (Court of 1st Instance Neubrandenburg (Germany), 3 August 2005). In light of the foregoing, it is not sufficient, for instance, that the user refers to its standard contract terms accessible on the Internet (as did the award creditor) because, as mentioned, the addressee is under no duty to get access to standard contract terms that the user wants to use against the addressee. If, however, the addressee is familiar with the standard contract terms used by opposing party because they have been used on previous occasions between the parties, particularly in long-standing business relationships, these terms do not have to be transmitted to the addressee of the proposal. This requires, however, that the user of standard contract terms had submitted them to the opposing party on several previous occasions, which the user of the terms had not done in the Transmar case.
New York law is not New York law
For the purpose of deciding whether the arbitration clause had become part of the contract, the District Court applied New York contract law, without taking at all into consideration that “the CISG, [. . .] preempts inconsistent provisions of [State] law where it applies” (Nucap Industries, Inc. v. Robert Bosch LLC., 273 F.Supp.3d 986, 1005 (N.D. Ill. 2017)). This is due to the fact that “[t]he Constitution’s Supremacy Clause declares a duly ratified treaty to be ‘the supreme Law of the Land’, U.S. Const., art. VI, cl. 2” (ibid.). In other words, whether the parties had agreed to the arbitration clause contained in the standard contract terms was not to be decided on the basis of the New York law, but rather the CISG (so long as its application requirement are met). The reasoning in Nucap should have guided the court in the Transmar case: “[t]he Supremacy Clause makes the CISG the law of [the State] on formation here, and the CISG, therefore, governs the parties’ battle over what terms were incorporated.” The District Court should have examined whether the CISG was applicable. On appeal, the Court of Appeals found that the CISG was applicable to the sales contract in which reference was made to the standard contract terms containing the arbitration clause, and reversed the decision. The CISG was found applicable, since its Art. 1(1)(a) requirement was met. Pursuant to this provision, the CISG applies when the parties have their place of business in different contracting states. The buyer’s and seller’s places of business were located respectively in the United States and in Peru, both of which are contracting states to the CISG, the Court of Appeals applied the CISG. However, the court was wrong not to consider that the CISG constitutes a set of default rules, which the parties can opt-out of (Art. 6). The court should have examined whether the parties had excluded the CISG because an exclusion could have led back to the application of New York law (other than the CISG) to determine whether the standard contract terms had become part of the contract.
Knowing How to Exclude the CISG
As regards the CISG’s exclusion, it may occur expressly, by way of an explicit reference to the fact that the CISG is not to apply, or impliedly, without any references to the CISG itself, as long as there are “clear” (Hanwha Corporation v. Cedar Petrochemicals, Inc., 760 F.Supp.2d 426 (S.D.N.Y. 2011) indications that the parties really wanted such an exclusion; there must be a real―as opposed to theoretical, fictitious or hypothetical―agreement of parties; whether that is the case is an issue of interpretation to be effected on the basis of the interpretive criteria set forth in Art. 8 CISG.
There are various ways in which to implicitly exclude the CISG. One such way is through a choice of the applicable law. Such a choice effectively excludes the CISG when the parties “expressly provid[e] in the contract that the law of a non-CISG jurisdiction applies” (Ajax Tool Works, Inc. v. Can-Eng Manufacturing Ltd., 2003 WL 223187).
What effect a choice of the law of a contracting state, or of a given state within a contracting state, has seems less clear. Does the CISG apply, for instance, when the parties subject their contract to a given national law, such as French or Swiss law, or the law of a given state (such as New York)? According to a minority view, the designation of such a law ought to amount to the CISG’s implicit exclusion, because otherwise, that designation would have no practical meaning. This author holds a different view. The indication of the law of a contracting state (or that of a state within a federal state in which the CISG entered into force) does not per se exclude the CISG’s application (see Travelers Property Casualty Company of America et al. v. Saint-Gobain Technical Fabrics Canada Limited, 474 F.Supp.2d 1075 (D.Minn. 2007), since, as mentioned earlier, “a signatory’s assent to the CISG necessarily incorporates the treaty as part of that nation’s domestic law” (BP Oil Intern., Ltd. v. Empresa Estatal Petroleos de Ecuador, 332 F.3d 333, 337 (5th Cir. 2003)). Not only, the view taken here does not make the chosen national law irrelevant: the law chosen will be applicable to the issues not governed by the CISG itself (to the extent to which the parties are allowed to make a choice in respect of those issues pursuant to the conflict of laws rules of the forum), such as fraud, duress, etc.
In light of the above, the CISG’s provisions should ultimately apply to decide upon the existence of the agreement to arbitrate contained in the standard contracts terms. But this is for reasons only in part referred to by the Court of Appeals. After affirming that the CISG’s Art. 1(1)(a) requirement is met, the court should also have examined whether the parties had (implicitly) excluded the convention. It failed to do so. In any case, had the court done so, it should still not have held that the parties had excluded the CISG. There are two reasons: the choice of law clause contained in the standard terms referenced in the sales contracts refers to the “laws of the State of New York”, which in and by itself does not lead to the exclusion of the CISG. But even if one were to hold a different view (see, e.g., American Biophysics v. Dubois Marine Specialties, 411 F.Supp.2d 61 (D.R.I. 2006), in light of the CISG’s rules on incorporation of standard contract terms outlined earlier, it must be doubted that the standard contract terms (including the choice of law clause in favor of “the laws of the State of New York” and the arbitration clause) had at all become part of the contract.
Franco Ferrari is the director of the Center for Transnational Litigation, Arbitration and Commercial Law at NYU School of Law.