Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

the CISG omit any reference to interest or at least to provide for a reservation to enable countries to opt out of the application of the interest provision. However these suggestions were not accepted and the final text encompasses Article 78, which obliges the party who delays payment to pay interest.31 Notwithstanding the traditional prohibition of interest in Islam, Article 226 of the Egyptian Civil Code provides that where the object of an obligation is the payment of a sum of money of which the amount is known at the time when the claim is made, the debtor shall be bound, in case of delay in payment, to pay to the creditor, as compensation for the delay, interest at the rate of 4 percent in civil matters and 5 percent in commercial matters. Such interest shall run from the date of the claim in court, unless the contract or commercial usage fixes another date.

Under Article 227 of the Egyptian Civil Code, the parties may agree on another rate of interest either in the event of delay in effecting payment or in any other case in which interest has been stipulated, provided that it does not exceed 7 percent. Article 231 establishes that a creditor may demand damages in addition to interest if it proves that the loss in excess of interest damages was due to bad faith on the part of the debtor. Thus, we see here express provisions of the Egyptian Civil Code, allowing interest in contradiction with the principle of prohibition of interest under Islamic law. This contradiction was brought before the Constitutional Court. The rector of Al Azhar University filed a case against the president and others, claiming that Article 226 of the Egyptian Civil Code contradicts Article 2 of the Egyptian Constitution. The court held that charging interest is prohibited by Shari’a, but Article 2 of the Constitution has no retroactive effect. Article 2 of the Constitution as amended in 1980 obliges the legislator to apply Shari’a law in respect of any future enactment. Therefore, Article 226 of the Egyptian Civil Code remains enforceable though contrary to Shari’a law. The decision has been widely criticized.32 In the end, the court implied that it is the duty of the legislature to amend prior laws to bring them into conformity with Islamic Law. Instead, a subsequent legislative amendment allows the Central Bank to stipulate the legal rate of interest rate.33 It is expected that the enforceability of CISG Article 78 will face future challenges.

VI. Influence of National Laws in Arab Countries on the Interpretation of the CISG

Judges in the Egyptian courts tend to resort to national legal concepts to articulate their understanding of international agreements. However, this tendency is difficult to confirm in the matter of the CISG, as there is only a single Court of Cassation case applying it. That case involved an Italian seller of marble and an Egyptian buyer. The buyer paid part of the price and refused to pay the rest of it. The seller brought a case before the First Instance Court, seeking the payment of the amount due.34 The seller presented two invoices showing the quantity of goods and the price. The First Instance Court applied Egyptian law to the dispute without paying any attention to the CISG. It ruled in favor

31United Nation Conference on Contracts for International Sale of Goods, Vienna, March 10–April 11, 1981, codified records UN, New York, 1980. Summary records of the First Committee, 34th meeting, April 3, 1980, nos. 10, 20, pp. 416, 418.

32Saleh Majid and Faris Lenzen, “Interest and Islamic Banking, Finance and Banking worldwide,” March 2011, available at http://www.mondaq.com/article.asp?articleid=53350.

33Article 51, paras. 2 and 3, Commercial Code No. 17 of 1999. See also Article 64.

34South Cairo First Instance Court, Commercial Circuit 14, December 24, 2002 (unpublished decision, on file with author).

of the seller and ordered the buyer to pay the price due. The buyer appealed to the Court of Appeals, and subsequently to the Court of Cassation, arguing that the seller failed to meet the burden of proving that the buyer took delivery of the goods.35 The Court of Cassation found that the lower court erred in applying domestic law to the dispute. It ruled that the CISG should govern the dispute and remanded the case to the appellate court to that effect.36 It emphasized the international nature of the CISG and the role that good faith plays in its application. It also emphasized that regard should be paid to the evidentiary rules of the CISG before resorting to the national law. The case, and the lack of subsequent CISG cases, illustrates that the parties and most Egyptian courts lack adequate knowledge of the CISG. To a great extent, this decision cautioned the lower courts to apply the CISG whenever applicable.

UNILEX cites two arbitral awards of the Cairo Regional Center for International Commercial Arbitration (CRCICA) that applied the CISG.37 The first dispute concerned a C&F contract for the sale of grains concluded between an Asian seller and an Egyptian buyer.38 When inspected at the port of destination, the Egyptian Agricultural Quarantine Department found the grain to be infested with insects. The buyer initiated arbitration proceedings.

The arbitral panel reasoned that under C&F contracts, the risk passes to the buyer at the time the goods are loaded at the port of shipment and that the buyer had failed to prove that the defect existed at that time. The panel referred to CISG Article 36, but based its decision on the application of Incoterms. It did so without inquiring as to the applicability of the CISG to the dispute. Why the panel mentioned Article 36 and the extent to which it based its decision on its application is ambiguous.

The second arbitral award concerned a dispute between an Egyptian seller and a U.S. buyer for the sale of a certain amount of apparatuses.39 The contract provided that all issues are to be interpreted according to the conditions of the contract, the CISG, and Egyptian law. A dispute arose concerning the conformity of some of the supplied units and the seller’s nonperformance of his duty to obtain a bank guarantee. The buyer thus initiated arbitration, seeking damages. The arbitrator deviated from the autonomous interpretation rules of Article 7 of the CISG by applying the CISG in parallel with Egyptian law. He cited Article 45 of the CISG, but concluded that it did not differ from Egyptian law. As such, the arbitrator applied Egyptian rules concerning contractual liability and cited a decision rendered by the Egyptian Court of Cassation applying Egyptian law.

There are two other unpublished awards referencing the CISG.40 In the first case, again, the panel incorrectly applied the CISG. The panel reasoned that: “the provisions of the CISG [did] not apply to the exclusion of Egyptian national law but in addition to it.” The panel then noted that this was a nonissue because both texts coincided and

35Cairo Court of Appeals, Commercial Circuit 50, August 24, 2003.

36The case is still under review before the Court of Appeals.

37Bonell, UNILEX.

38Cairo Regional Center for International Commercial Arbitration (CRCICA), Cairo, Award No. 19/1990, April 13, 1991, published in Arbitral Awards for the Cairo Regional Center for International Commercial Arbitration (ed. Mohie Eldin and I. Alam Eldin) (Kluwer Law International, 2000), 23–7.

39Cairo Regional Center for International Commercial Arbitration (CRCICA), Cairo, Award No. 50/1994, October 3, 1995.

40Alexandria Center for International and Commercial Arbitration, case no. 6 for 2003.

consequently applied the Egyptian Civil Code (ECC) and the CISG “simultaneously.” The panel failed to provide the reasons why the seller’s act of reselling the goods was justified. Nothing in the award confirmed whether the seller properly exercised his right to avoid the contract under CISG Article 49, adequately performed his duty to preserve the goods as required under CISG Article 85, or fulfilled CISG Article 88’s requirement to notify the buyer of intent to sell the goods.

The second arbitral award involved a dispute between an Austrian supplier and an Egyptian buyer for the sale of electronic scales and spare parts.41 The contract neither contained a choice of law clause, nor expressly excluded the CISG. The panel failed to apply the CISG to the dispute, although it was applicable. The panel applied the Egyptian Civil Code instead. These arbitration decisions again demonstrate the extent to which the legal communities in Arab countries are unaware of the CISG and its rules.

VII. Scholarly Writings

In interpreting the CISG, scholars in the Arab world have been influenced by their culture and national legal systems. This part will look at the scholarship on the principle of good faith and barter contracts as examples of this influence.

A. Good Faith

Commentators disagree as to whether CISG Article 7(1)’s “observance of good faith in international trade” is a principle of interpretation and a rule of conduct. Some commentators argue for a narrow view of Article 7(1) as only applying to the interpretation of the CISG. The broader, majority view holds that good faith as a general principle of the CISG that imposes on contracting parties a general duty to act in good faith.

Influenced by their national legal systems, Egyptian scholars tend to adopt a broad interpretation of Article 7(1). They argue that good faith under the CISG addresses interpretive and regulatory issues.42 The Egyptian legal system is a combination of codified civil law rules and Islamic law. Good faith in both is broad in reach. Under the Egyptian Law, good faith is not considered a principle of interpretation of the law. It is rather an obligation that contracting parties have to fulfill pursuant to Article 148 of the Egyptian Civil Code.

Despite the fact that Islamic law does not use the term “good faith,” the concept is even broader in Islamic law. Good faith in Islamic law includes a duty to act altruistically. This is a natural approach because Islamic law does not sharply distinguish between law, morality, and religion. Private law addresses society’s interests, as well as those of the contracting parties. Islamic law goes beyond the narrow interests of contracting parties. For example, traders should pay due regard to the public interest, such as making products available to consumers at reasonable prices.

Islamic law imposes a general duty to act in good faith in all transactions. It requires parties to act in good faith during negotiations, contract formation, and performance.

41Decision issued September 18, 2006, ad hoc arbitration held at the premises of Egyptian National Committee for International Chambers of Commerce (Cairo).

42Shafik, Ittifaqiyat al-Umam al-Muttahidah bi-sha’n al-Bay’ al-Dawli lil-Bada’i: dirasah fi qanun al-tijarah al-dawli (The UN Convention on Contracts for the International Sale of Goods: A Study in International Commercial Law – in Arabic), Cairo 1988, p. 30.

For example, a party that enters into contract negotiations in order to gain access to another’s confidential information violates the Islamic law duty to act in good faith. In addition, a creditor bears a duty to give his or her debtor a grace period if he or she is unable to pay the debt.43 The broad scope that good faith has in both the civil law and Islamic law induces Egyptian commentators to attach a broad interpretation to CISG Article 7(1).

B. Barter Contracts

The question whether the CISG governs barter contracts is a matter of interpretation. John Honnold took the view that the exchange of goods is governed by the CISG.44 Egyptian commentators, interpreting the CISG against the background of their own legal culture, argue that the CISG does not apply to barter transactions.45 This argument is based on the distinction made in the Egyptian Civil and Commercial Codes between barter and sales contracts. Under Article 418 of the Egyptian Civil Code barter contracts are not considered sales.46 In addition, Article 88 of the Egyptian Commercial Code requires the consideration to be monetary in nature in order for the transaction to qualify as a sales contract. It provides that in cases where part of the consideration is nonmonetary, the contract is considered a sale if the value of the nonmonetary portion of the consideration does not exceed the monetary portion. With this background, Egyptian commentators assert that the CISG only applies to contracts where there is a monetary payment.

VIII. Influence of the CISG on Egyptian Law

Although the CISG has limited judicial application in Arab countries, it significantly influenced the drafting of the New Egyptian Commercial Code (Code), Law No. 17 of 1997. The repealed Commercial Code, enacted in 1883, did not contain any provisions regulating commercial sales. The civil law governed all sales contracts – consumer and commercial sales. Chapter II of the Code regulates commercial contracts. Chapter II is divided into seven sections preceded by a set of general principles. The general provisions provide a set of rules that apply to all types of commercial obligations.47 One section regulates commercial contracts, including commercial sales. The Code regulates commercial sales in a way that significantly differs from the way the Civil Code regulates noncommercial contracts. However, the Commercial Code is not all inclusive. In other words, the Civil Code applies in the absence of a governing rule in the Commercial Code.48

43For more examples, see Fatima Akaddaf, “Application of the United Nations Convention on Contracts for the International Sale of Goods (CISG) to Arab Islamic Countries: Is the CISG Compatible with Islamic Law Principles?,” 13 Pace International Law Review 1 (2001).

44John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention, 2nd ed. (1991), 102.

45Shafik, n. 42, p. 47.

46Article 418 of the Egyptian Civil Code defines sale as “a contract whereby the seller undertakes to transfer to the buyer the ownership of a thing or any other proprietary right in consideration of a price in money.”

47Articles 47–71, Commercial Code.

48The Egyptian Commercial Code is divided into five chapters. Chapter 1 lays the general provisions on which the code is based; chapter 2 deals with commercial obligations and contracts; chapter 3 regulates banking transactions; chapter 4 provides for the rules governing negotiable instruments; Chapter 5 deals with bankruptcy.

a noncontractual cause of action (tort or in unjust enrichment). The question has been debated in the legal literature.8 In 2009, the Israeli Supreme Court weighed in on this issue in Pamesa v. Mendelson.9

The case before the court concerned a contract for the sale of tiles between Pamesa Ceramica, a Spanish manufacturer (seller), and Mendelson Engineering, an Israeli importing company (buyer). The tiles were purchased from the seller in 1996, and were sold by the buyer to an Israeli construction company (builder) who installed them in one of its buildings. The tiles proved to be defective and had to be removed and replaced. The builder brought an action against the buyer alleging nonconformity and demanded compensation for the full cost of their replacement, as well as for loss of reputation. The buyer then sent a third party notice to the seller.

The court of first instance accepted both the claim and the third party notice.10 The court refused to accept the seller’s defense that the buyer’s claim against it was barred under Article 39(a) of the ULIS (CISG). The reason given by the court for rejecting the seller’s defense was two-fold. First, there was evidence that the seller had been aware of defects in its products, and thus was not allowed to rely on Article 39.11 Second, even assuming that the contractual cause of action was barred, recovery could still be given under a theory of negligence.12

On appeal to the Supreme Court, the seller asserted that the contractual claim of the buyer against it was barred and further, the buyer should not be allowed to rely on an extracontractual cause of action. The issue here is whether a buyer suffering from a nonconformity of goods should be allowed to seek a tort remedy, even when his or her contractual remedies are barred under the prescription rules of the ULIS or the CISG. The court held that the nonconformity claim was time barred.13 The court emphasized that even though the case was formally resolved according to ULIS, the same decision would apply to the CISG.14 The court extensively referenced CISG literature in rendering its decision.

In analyzing the concurrent liability issue, the Supreme Court adopted an interpretive approach that viewed the resolution of the issue as depending first and foremost on an internal interpretation of the CISG, rather than on domestic law.15 This decision reflected

8See, e.g., the debate between Honnold and Schlechtriem on products liability: John O. Honnold, Uniform Law for International Sales under the 1980 United Nations CISG, 3rd ed. (The Hague: Kluwer Law International, 1999), 74–6 (arguing that allowing concurrent liability would decrease uniformity, would ruin the balance of justice designed by the CISG, and might encourage judges to use domestic law); and compare Peter Schlechtriem, “The Borderland of Tort and Contract – Opening a New Frontier?,” 21 Cornell International L.J. 467, 473–6 (1988) (arguing tort actions should be barred only when they are brought to protect an “economic interest,” as opposed to “property interests,” existing independently of any contractual relationship).

9CA 7833/06 Pamesa Ceramica v. Yisrael Mendelson Engineering Technical Supply Ltd. (17.03.2009) Nevo Legal Database (Isr.) (hereinafter the Pamesa case), available at http://cisgw3.law.pace.edu/cases/090317i5

.html.

10CC (Hi) 137/01 Yaakov and Tovi Eisenberger Building and Public Works Co. Ltd. v. Yisrael Mendelson Engineering Technical Supply Ltd. (20.08.2006) Nevo Legal Database (by subscription) (Isr.).

11See ULIS, §40.

12Eisenberger v. Mendelson, at para. 18.

13See infra, VI.C.

14Pamesa case, paras. 17–18, 23.

15The court cited with approval Schlechtriem’s view that “The question whether the ground of liability in question falls within the scope of the CISG must be clarified by interpretation and, since the CISG defines

an important, if subtle, policy choice by the court. It testifies to the courts’ preference to allow the CISG to determine its own applicability. It is not at all obvious, from a legalistic point of view, that the CISG should be given priority over domestic sources of law in the area of noncontractual liability.

The second step in the courts’ analysis was to analyze the relevant CISG provisions. The court referenced CISG Article 4. It noted that Article 4 made it clear that the CISG would apply, under its own terms, only to rights and obligations arising from the contract of sale. Legal issues arising not from the agreement but from other facts and events were to be decided according to domestic law.16 At first blush, this analysis argues that the CISG does not apply to any obligations arising from tortuous conduct. The court, however, reasoned that such a literal interpretation would mean that the CISG would be completely ignored in any tort action. Such a sweeping approach would circumvent and frustrate the goals of the CISG, at least in those cases where the tortuous conduct is based on issues that are regulated under the CISG.17 However, because there is no consensus in the cases or CISG commentary, the court resorted to domestic law on the general issue of competing causes of action.18 However, Israeli case law did not provide a definitive answer. In S. Solondz Ltd. v. Hatehof Iron,19 the Supreme Court explicitly rejected the buyer’s attempt to recover on an alternative tort theory, reasoning that by denying recovery in contract on the basis of nonconformity, the domestic sales law barred a tort action based on the same nonconformity.20

The Supreme Court in Pamesa referenced academic criticism of the Solondz case and demonstrated that in practice this position was not always implemented.21 According to the court, in these circumstances, and in light of the importance of harmonizing the Israeli position with those of other jurisdictions, adherence to the restrictive view adopted in the Solondz case was not absolute.22

In light of the indeterminacy of domestic law on the issue at stake, the court then considered the issue on its merits. It offered a general analytic distinction between contractual and noncontractual interests. Under this “interests” approach, the court considered whether and to what extent the interests protected by the extracontractual cause of

its own scope, it is the CISG itself which must be interpreted.” Id., para. 53, quoting Peter Schlechtriem,

Commentary on the UN CISG on the International Sale of Goods (CISG) (1998).

16Pamesa case, para. 53.

17Id., para. 54. The court goes on to cite Honnold’s position that “Domestic rules that turn on substantially the same facts as the rules of the CISG must be displaced by the CISG; any other result would destroy the CISG’s basic function to establish uniform rules” (quoting John O. Honnold, Uniform Law for International Sales under the 1980 United Nations CISG, 2nd ed. (Deventer: Kluwer Law & Taxation, 1991), 122).

18Id., para. 58.

19CA 465/80 S. Solondz Ltd. v. Hatehof Iron Industry Ltd. [1984] IsrSC 38(3) 630 (hereafter referred to as the Solondz case).

20Id., 636–7.

21The vast majority of these cases concerned disputes over nonconformity of apartments, which in Israel are regulated mainly by the Sale (Housing) Law, 5733–1973, 27 LSI 213 (1972–73) (Isr.) rather than the Sale Law, 5728–1968, 22 LSI 107 (1967–68) (Isr.) (hereafter referred to as the sales statute). Arguably, this enabled some of the courts to distinguish their case from the Solondz case.

22Pamesa case, para. 69. The court’s assertion that “domestic law does not contain a clearer determination than the one that exists in international law” is unconvincing. Under the Israeli legal system, a ruling of the Supreme Court is a binding source of law, regardless of any deviations from it by some lower courts. It would have been better if the court either distinguished the Pamesa case from the Solondz case or expressly rejected Solondz.

action are identical to those protected by the contractual one. The court reasoned that this could be done in two ways. First, on the abstract level, the interests created by the agreement itself must be distinguished from those that are typically protected under the law of tort.23

Second, in the context of a negligence claim against a manufacturer, a distinction must be drawn between the latter’s role as seller and as manufacturer. Negligence in the performance of any particular contractual obligation made by the manufacturer to a specific buyer is within the domain of the CISG. In contrast, a manufacturer also owes a duty of care towards, the public in general, which should be viewed as an independent source of obligation. Therefore, the breach of such obligations would not be subject to the specific limitations and conditions imposed by the CISG.

In implementing these distinctions, the court allowed the buyer to claim and litigate an alternative cause of action in negligence against the manufacturer:

In the case before us, the claim is that Pamesa was negligent in manufacturing the tiles and it shipped a product that a reasonable manufacturer would not have marketed. If Pamesa was indeed negligent in this way, this is not a negligent performance of an obligation under the contract, but a negligent performance of a general duty of care of manufacturers that does not derive from the agreement between the parties.24

Therefore, a cause of action based on negligence is not barred a priori because a parallel contractual cause of action was barred under the CISG.25

In two subsequent Supreme Court cases, the analysis in the Pamesa was noted. In

Harel Insurance Co. Ltd. v. BTR Environmental Ltd.,26 the court implemented and reinforced the rule it laid down in Pamesa. In Harel, a buyer of an oil filter claimed damages for the financial loss resulting when the filter exploded. The buyer sued the seller, who was not the manufacturer of the filter. The buyer’s claim was dismissed in the court of first instance, based on an alleged distinction under the CISG between sellers and manufacturers, held that a supplier (seller) is not liable for defective goods produced by the manufacturer.

The distinction between manufacturer and downstream seller of goods was rejected by the Supreme Court as unsound and inconsistent with the CISG. The court held that even if the contractual claim was barred under the CISG, the trial court erred in failing to explore the possibility of buyer’s claim on an alternative cause of action in negligence against the supplier and the manufacturer. Under the Pamesa analysis, a tort claim founded on negligence in manufacturing was distinguishable from a claim founded on a negligent performance of a purely contractual duty; the barring of the latter kind of claim should not necessarily impede the seller’s concurrent liability in tort.27

23For example, a buyer’s interest in compensation for a tangible consequential loss (either a property loss or a personal injury) caused by a defective product would be considered a “tort interest.” On the other hand, the interest of the same buyer in being compensated for the direct economic loss embodied in the defect itself should generally be regarded as a purely economic and thus a “contractual interest.”

24Id., para. 71.

25However, the Supreme Court was not convinced that there had been sufficient evidence to maintain the negligence claim. Therefore, in the end, the buyer’s claim against the seller was dismissed. See id., paras. 78–80.

26CA 9422/06 Harel Insurance Company Ltd. v. BTR Environmental Ltd. (17.01.2010) Nevo Legal Database (by subscription) (Isr.) (hereafter referred to as the Harel case).

27Id., paras. 17–19.