Application of CISG in Arbitration in China: A Case Study with CIETAC

Key takeaways:

A study on how the CISG is applied by CIETAC sheds light on the ins and outs of its application in arbitration in China.
In nearly 90% of the CISG-related cases handled by CIETAC, the CISG was applied pursuant to subparagraph (1) (a) of Article 1 of the CISG.
If the parties expressly choose the CISG as the governing law, as long as it is a foreign-related contract under Chinese laws, the CIETAC tribunal shall apply the CISG in strict compliance with the agreement of the parties, regardless of whether both parties have their places of business in contracting States of the CISG.
In terms of the validity of contracts, a matter not covered by the CISG, the arbitral tribunals usually determine the applicable law in accordance with the Doctrine of the Most Significant Relationship in private international law and take it as the basis for determining the validity thereof.

China International Economic and Trade Arbitration Commission (“CIETAC”) is one of the most respected international arbitration institutions in China and handles the largest number of cases relating to the United Nations Convention on Contracts for the International Sale of Goods (CISG).

The CISG database of Pace University records a total of 384 CISG-related cases handled by CIETAC for the period from 1988 to 2021. In the arbitral award database of CIETAC, there are 553 awards relating to the CISG for the period from 2002 to 2020.

We can, therefore, observe how the CISG is applied by CIETAC as an example to learn about the ins and outs of its application in arbitration in China.

Mr. Wang Chengjie (王承杰), Deputy Director General and Secretary-General of CIETAC, published the paper, “Application of the CISG in CIETAC Arbitration”, (<联合国国际货物销售合同公约>在贸仲仲裁中的适用) in “People’s Judicature” (人民司法) (No. 31, 2021).

The highlights are summarized below.

I. How the CISG is applied by CIETAC

1. Automatic application

Where the parties have their places of business in different contracting States of the CISG, and the parties have not excluded the application of the CISG, the CIETAC tribunal will automatically apply the CISG. The governing law to matters not covered or not clarified by the CISG is to be determined in accordance with private international law rules.

According to incomplete statistics, in nearly 90% of the CISG-related cases handled by CIETAC, the CISG was applied pursuant to subparagraph (1) (a) of Article 1 of the CISG.

The typical wording of such arbitral award is as follows: “the arbitral tribunal notes that the Claimant has its place of business in France, while the Respondent has its place of business in China, and that both France and China are contracting States of the CISG. Meanwhile, neither the Claimant nor the Respondent has ruled out the application of the CISG in the disputed contract or during the hearing. Therefore, pursuant to Article 1 of the CISG, the CISG applies to the disputed contract between the Claimant (with its principal place of business in France) and the Respondent (with its principal place of business in China) “.

2. Application by agreement

If the parties expressly choose the CISG as the governing law, as long as it is a foreign-related contract under Chinese laws (specifically, the PRC Contract Law and the PRC Law on the Application of Laws to Foreign-related Civil Relations), and in accordance with the Article 47(2) of the CIETAC Arbitration Rules, the CIETAC tribunal shall apply the CISG in strict compliance with the agreement of the parties regardless of whether both parties have their places of business in contracting States of the CISG.

The form of such agreement can be an explicit stipulation in the sales contract, a clear statement of the application of the CISG during arbitration proceedings, or direct citation of the CISG to make a claim.

3. Application of the CISG prevails

In practice, it is common for parties whose places of business are in different contracting States to stipulate in the contract that both the CISG and the Chinese laws apply or that the Chinese laws apply.

(1) When the parties agree that both CISG and Chinese laws apply

CIETAC holds that the CISG shall prevail over Chinese domestic laws. Therefore, the arbitral tribunal will apply the CISG preferentially. For matters not covered by the CISG, the arbitral tribunal will apply Chinese laws.

(2) When the parties agree that Chinese law shall apply exclusively

Under circumstances where the parties agree that Chinese law shall apply exclusively, the tribunal generally still considers that the CISG shall prevail. Meanwhile, as the parties have agreed on the Chinese laws as the governing law, the matters not covered by the CISG, such as the validity of a contract, shall be governed by the Chinese laws.

4. Application by Reference

Where the CISG is not the governing law in the dispute, the arbitral tribunal may also cite the CISG subject to the requirements of specific cases.

II. How CIETAC determines the validity of contracts

The CISG has made it clear that it will not be applicable to the validity of the contract. It is common practice for CIETAC tribunals to determine whether a contract is lawful and valid before confirming whether the contract can be deemed as the basis for solving the dispute.

The arbitral tribunal will usually determine the applicable law in accordance with the Doctrine of the Most Significant Relationship in private international law and take it as the basis for determining the validity thereof.

III. How CIETAC identifies a material breach

Article 25 of CISG is a special provision on the material breach of contract and limits the circumstances where the parties to the contract may request termination of the contract because of minor defects in performance.

The arbitral tribunal holds that only if the breach of one party causes damage to the other party and results in the frustration of the contract purpose could it be regarded as a material breach and the contract could be terminated.

In particular, the arbitral tribunal usually finds that:

(1) A material breach is different from a common breach, which is premised on the frustration of the contract purpose.

(2) The buyer cannot claim that the seller is in material breach of the contract just because one of the results is not ideal, unless the purpose of the contract cannot be realized. And the purpose of the contract can only be analyzed and understood according to the content of the contract, and can not be arbitrarily expanded.

(3) It is clear that the failure of meeting the parties’ expectations is caused or mainly caused by the breach of contract.

(4) If the relevant performance defect is remediable, or the non-breaching party can remedy it by itself and claim the corresponding loss against the breaching party, it shall not constitute a material breach.

(5) The purpose of a sales contract is not the same as the subject matter of the contract, but has a broader meaning, including the expectation of one party to all the mutual consents reached under the contract, such as the time and methods of performance.

IV. How CIETAC determines damages

The CISG damages regime interpreted by the CIETAC arbitral tribunal is basically consistent with the UNCITRAL Digest of Case Law on the United Nations Convention on the International Sale of Goods in 2016.

V. How CIETAC reviews electronic evidence

In 2013, China withdrew its reservation to Article 11 of the CISG, that is, China no longer required parties to enter into contracts for the international sale of goods in writing. This means that electronic evidence is already acceptable in China in cases relating to the CISG.

The arbitral tribunals respect the commercial practices of the parties in concluding contracts through electronic data exchanges such as emails, online chat history, mobile phone short messages, WeChat, electronic signatures, and domain names.

As for the authenticity of electronic evidence, the CIETAC arbitral tribunal will usually judge the identity of the evidence sender, the reliability, continuity, and integrity of the source, and make a final decision on whether to accept the evidence after taking into account the case facts and other relevant evidence.

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