Interest in Contracts for the International Sale of Goods: Hasn’t the Time for a Uniform Application Come Yet?

Uluslararası Satış Sözleşmelerinde Faiz: Yeknesak Uygulamanın Vakti Gelmedi mi?

Ahmet Cemil YILDIRIM

Article 78 of the CISG addresses the issue of interest, however, it does not answer how to determine the interest rate. The majority of the courts consider the determination of the interest rate as an issue outside the scope of the CISG, i.e. a gap intra legem. Therefore, they apply domestic law to fill the gap, without examining whether there is an applicable general principle. This practice is erroneous and contrary to the CISG because the legislative history of Article 78 and its location in the Convention demonstrates that the gap in this article is a gap praeter legem. Again, the majority of the courts apply the interest rate in creditor’s country, and this practice is also supported by part of the literature. This practice is outdated and again, contrary to the CISG.Nevertheless, a uniform solution for the determination of the rate of interest is already available within the four corners of the CISG and Article 7.4.9 of the UPICC may be used to supplement this solution. Arbitral case law demonstrates that this solution has already been adopted in the practice of international arbitration.

Contracts for the International sale of Goods, Interest, Uniform Application, Article 78 of the CISG, Article 7.4.9 of the UPICC.

CISG’nin 78. maddesi faiz konusunu düzenler, ancak faiz oranının nasıl belirleneceğinden bahsetmez. Mahkemeler çoğunlukla faiz oranının belirlenmesi konusunu CISG’nin kapsamı dışında, intra legem boşluk olarak değerlendirir. Dolayısıyla bu konuda uygulanacak genel bir ilke olup olmadığını araştırmadan, iç hukuk hükümleriyle bu boşluğu doldururlar. Bu uygulama hatalı ve CISG’e aykırıdır, çünkü 78. madenin yasama geçmişi ve Konvansiyon içerisindeki konumu bu maddedeki boşluğun aslında bir praeter legem boşluk olduğunu gösterir. Yine mahkemeler çoğunlukla alacaklının ülkesindeki faiz oranını uygularlar ve bu uygulama doktrinin bir kısmı tarafından da desteklenmektedir. Bu uygulama günün şartlarına uymamaktadır ve yine CISG’e aykırıdır.Bununla beraber, faiz oranının belirlenmesi için yeknesak bir çözüm CISG’nin metninin içerisinde mevcuttur ve UPICC’in 7.4.9 maddesi de bu çözümü desteklemek için kullanılabilir. Tahkim içtihatları bu çözümün uluslararası tahkim uygulamasında zaten benimsenmiş olduğunu göstermektedir.

Uluslararası Satış Sözleşmeleri, Faiz, Yeknesak Uygulama, CISG madde 78, UPICC madde 7.4.9.

Introduction

It has been forty years since the United Nations Convention on Contracts for the International Sale of Goods (CISG)¹ has been adopted, and thirty-two years since it entered into effect. There are 93 signatory states to the CISG as of April 2020.² Undoubtedly, the CISG is one of the most successful Uniform Law documents in terms of its global adoption and widespread application. However, it is also a fact that it includes many gaps, which pose a serious problem in its uniform application. Uniform practices regarding at least some of these gaps might reasonably be expected to develop through case law and literature in the last three decades. This paper aims at questioning how far we still are from developing a uniform application regarding one of the most important gaps in the CISG, and where did we fail.

Article 78 of the CISG addresses the issue of interest, and stipulates “[i]f a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74.” This article leaves many questions, especially the method to determine the rate of interest, unanswered.

Unsurprisingly, this provision has been widely applied by courts despite its incompleteness,³ since in most cases tribunals award a sum of money with interest to one of the parties. The lack of a method for determination of the rate of interest led to a variety of approaches and, therefore, hindered the development of a uniform application in this regard. The fact that uniformity is still missing in the application of such an important provision of the CISG signifies an important failure of the efforts towards harmonization of international sales law.

Yet agreement was not even reached in literature and case law as to whether the gap in Article 78 is a gap praeter legem or a gap intra legem; i.e. whether the issue of the rate of interest is covered but not settled in the CISG, or excluded from its scope.

In the first section of this paper, I will briefly examine the reasons for this gap in light of its legislative history. The second section will address the scope of Article 78 and especially its connection with the provisions on damages. In the third section, I will discuss whether the gap in Article 78 is a gap praeter legem or a gap intra legem. In the fourth and fifth sections, I will examine the solution adopted by the “majority” of the courts and the possibility of reaching a uniform solution.

I. Reasons for the Gap: A Glance at the Legislative History of Article 78 of the CISG

Article 83 of the Uniform Law on the International Sale of Goods of 1964 (ULIS), the antecedent of Article 78 of the CISG, does not have a gap regarding the determination of the rate of interest. Article 83 of the ULIS provides that in case of delay in the payment of the price the seller shall be entitled to interest “at a rate equal to the official discount rate in the country where he has his place of business or, if he has no place of business, his habitual residence, plus 1%.”⁴ Unlike the CISG, the ULIS does not address “any other sum that is in arrears,” but only the price. Therefore, there is a gap also in Article 83 of the ULIS, which is different than the one in Article 78 of the CISG, and which seems easier to be filled through analogy.

It has not been possible to keep the formula of the ULIS in the CISG due to conflicting economic interests of different countries at the time of the Diplomatic Conference at which the CISG was approved. In developing (and mainly socialist) countries the interest rates were fixed by governments and were relatively low, whereas in liberal and industrialized countries they were determined by the market, and were much higher. The trade of raw materials from socialist and developing countries to liberal and industrialized countries used to represent a significant part of international trade at that time. As a result, socialist countries led by Czechoslovakia objected to a reference to the interest rate in creditor’s country, which would be low for them in many instances. These countries favored the interest rate in the debtor’s country instead. Liberal countries, especially Denmark, Finland, Greece, and Sweden, on the other hand, favored the interest rate in creditor’s country, which would be more advantageous for them. The Federal Republic of Germany proposed the determination of a fixed interest rate as a minimum. This proposal was not adopted since its application would be practically impossible.⁵

The controversies at the Diplomatic Conference did not end there: Egypt proposed a provision allowing signatory countries to make a reservation regarding the issue of interest for religious reasons. This proposal was not adopted either.⁶ Egypt signed and ratified the CISG anyway, but there is not yet any case reported from Egypt relating to Article 78 of the CISG so far.⁷ Now the effect of Article 78 in countries that prohibit interest for religious or public policy reasons remains an open issue.⁸

The delegates who participated in the Diplomatic Conference considered also the United Kingdom’s proposal to delete any reference to interest and to add a statement to expressly exclude the question of interest from the scope of the Convention. This proposal was put aside in favor of keeping the matter of interest within the Convention.⁹ The legal effect of the rejection of this proposal will be discussed below in section III.

The First Committee decided to establish a working group to seek a compromise. The working group drafted three proposals, one on the basis of the interest rate in the creditor’s country and two based on the interest rate in the debtor’s country.¹⁰ One of these proposals was approved by the First Committee but failed to receive a two-thirds majority in the Plenary Meeting.

Finally, a second working group was established and drafted a proposal establishing the right to receive interest on sums in arrears in general terms. This draft was approved and became Article 78 of the CISG. Therefore, the gap in Article 78 is a modest conclusion of the failure of solid discussions about a method for the determination of the applicable interest rate.

We must question now, to what extent the arguments in these discussions are relevant in today’s international business environment. If they are not, what prevents the courts and literature from developing a uniform application; difficulties in overcoming the discrepancies between different approaches to the issue, or ineffectiveness of courts in adopting uniform solutions? We will discuss this question below, in sections IV and V.

II. Scope of Article 78 and its Connection with the Provisions on Damages

Although Article 83 of the ULIS is the antecedent of Article 78 of the CISG, there are important differences between their scopes and positions in their respective texts. These differences have significant consequences. First of all, Article 78 of the CISG is more comprehensive than its antecedent, since it covers interest in case of delay in the payment not only of the price but also of “any other sum that is in arrears.”¹¹

Second, and more importantly, although Article 83 of the ULIS was located among the provisions regarding damages, Article 78 of the CISG is located under an independent section titled “interest.” In common law systems, interest is regarded as a component of damages, which is based on lost use of capital. This change in the position of the provision addressing interest is especially relevant to make clear that the authors of the CISG do not regard interest as a kind of damages.¹²

Besides, the phrase “without prejudice to any claim for damages recoverable under article 74” makes the CISG’s authors intent to differentiate between interest and damages even more clear. As a result, an injured party may claim damages or interest or both depending on the specific circumstances of the case.¹³ For instance, if a delay in the payment of a sum in arrears does not constitute a breach, the injured party will be entitled to interest anyway without having to prove any breach.¹⁴

Even though Article 78 is the modest product of solid discussions in the Diplomatic Conference, its location, its wording, and its legislative history make clear that the issue of interest is covered by the CISG, and that it is differentiated from damages. These findings are relevant to solve the problem of determination of the rate of interest as will be demonstrated below.