Introduction
Orgalime Conditions
CISG
Potential arbitration-related issues arising from the Orgalime Conditions
Comment
The Orgalime Conditions (General Conditions for the Supply of Mechanical, Electrical and Electronic Products, S 2000) are often adopted by parties in international sales transactions. Adoption of the Orgalime Conditions includes the parties' agreement to apply the substantive law of the supplier's country and to arbitrate any disputes under the International Chamber of Commerce (ICC) Rules of Arbitration. Such transactions may also be subject to the United Nations Convention on Contracts for the International Sale of Goods (CISG).
Parties may avoid unnecessary procedural complications and potential issues relating to applicable substantive law by turning their minds to whether and to what extent the Orgalime Conditions and/or the CISG should apply to their international transaction at the time they enter into their contract. As is often the case when arbitration agreements do not address all of the generally accepted important terms (eg, applicable rules, place of arbitration, number of arbitrators and language of arbitration), once a dispute arises, reaching consensus on such matters can be challenging. Where the Orgalime Conditions or the CISG may apply to an international transaction, parties would be well advised to engage counsel experienced in addressing such issues at the outset, or at least as soon as a dispute arises.
Orgalime (originally Organisme de Liaison des Industries Métalliques Européennes and now the European Engineering Industries Association) was formed in 1954 and describes itself as "the European federation representing the interests at the level of the EU institutions of the European mechanical, electrical, electronic and metal articles industries as a whole".(1)It is based in Brussels and, according to its website: "Orgalime's member federations directly or indirectly represent some 130,000 companies of an industry employing 10.3 million people."(2) Despite Orgalime's European roots, the Orgalime Conditions are used in contracts involving companies from jurisdictions around the world. In general, the Orgalime Conditions are intended for the sale or purchase of capital goods manufactured for customers. However, most of the provisions are formulated for broader application to other kinds of goods.(3)
The Orgalime Conditions were first published in 1992 and were updated in 2000 and 2012.(4) In September 2000, the Orgalime General Conditions S 2000: Guide on Their Use and Interpretation was published to assist lawyers who encounter the Orgalime Conditions in connection with disputes or otherwise. Although it has not yet been updated to address the changes made in the 2012 version of the Orgalime Conditions, the guide remains a useful tool for the current version.(5)
The Orgalime Conditions themselves cover substantive contractual matters including acceptance tests, delivery of goods and passing of risk, delay in delivery, payment, liability for defects, allocation of liability caused by goods, force majeure, anticipated non-performance and consequential losses.
An aspect of the Orgalime Conditions of particular interest to some parties is its definition of what constitutes 'gross negligence' for the purpose of avoiding the limitation of liability provisions contained therein:
"Gross Negligence: an act or omission implying either a failure to pay due regard to serious consequences, which a conscientious contracting party would normally foresee as likely to ensue, or a deliberate disregard of the consequences of such an act or omission."(6)
Depending on the substantive law applicable to a particular transaction, the Orgalime Conditions' two-pronged gross negligence test may arguably provide a lower threshold. The Orgalime Conditions also address applicable law and dispute resolution.
The CISG was adopted by the United Nations in 1980; today 80 countries are party to it. The CISG's preamble describes the reasons for its adoption as follows:
"[T]he adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade."
The United Nations Commission on International Trade Law website describes its purpose as follows:
"The purpose of the CISG is to provide a modern, uniform and fair regime for contracts for the international sale of goods. Thus, the CISG contributes significantly to introducing certainty in commercial exchanges and decreasing transaction costs."
The CISG covers similar matters to the Orgalime Conditions – although differently with respect to many matters. Thus, where both may apply, parties should consider whether to derogate from, or modify, one or the other in order to avoid complications arising from potentially conflicting provisions. This is permitted by both – Article 6 of the CISG provides that "[t]he parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions"; and Clause 1 of the Orgalime Conditions provides that: "[t]hese General Conditions shall apply when the parties agree in writing or otherwise thereto. Any modifications of or deviations from them must be agreed in writing."(7)
If issues of potential conflicts between the Orgalime Conditions and the CISG arise in a budding dispute, then the parties may be faced with having to expend time and financial resources to resolve them. The best way to avoid such potential problems would be to address – at the contract drafting stage – which provisions, if any, of the Orgalime Conditions and/or the CISG will apply. A common approach is for parties to exclude the application of the CISG in its entirety to international transactions to which it would otherwise apply, but that may not be the optimal choice depending on the specific circumstances of a given transaction.
Potential arbitration-related issues arising from the Orgalime Conditions
The Orgalime Conditions provide the applicable substantive law to a given transaction and for arbitration of all disputes:
"Disputes and Applicable Law
46. All disputes arising out of or in connection with the Contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules
47. The Contract shall be governed by the substantive law of the Supplier's country."
In a recent case the operation of Clause 47 resulted in the application of British Columbia law to the substance of the parties' dispute. As a result, the CISG, which has been adopted by British Columbia, also had to be considered in the context of that dispute. Thus, the parties had to consider issues of substantive law in relation to the specific terms of their contract (which adopted the Orgalime Conditions), the terms of the Orgalime Conditions and the terms of the CISG, including any potential conflicts among them. Generally, parties that address such potential conflicts prior to a dispute arising – that is, when concluding their transaction – are more likely to save time and money, and avoid potentially unwanted substantive complications, than those who do not.
The same applies to arbitration-specific issues. The arbitration agreement contained in the Orgalime Conditions does not contain the parties' agreement on three commonly accepted important terms: the place of arbitration, the number of arbitrators and the language of the arbitration. Each of these is likely to give rise to disagreement between disputing parties, which almost invariably results in lost time and extra costs. Although the ICC Rules of Arbitration provide a mechanism for resolving disputes over such problems (eg, the ICC Court will designate the place of arbitration if the parties have not agreed),(8) parties can avoid them altogether by addressing these issues in their contract adopting the Orgalime Conditions. For example, the parties could include language such as: "the parties agree that Clause 46 of the Orgalime Conditions is amended to include that the place of arbitration is [X], the number of arbitrators is [Y] and the language of the arbitration is [Z]."(9) A failure to designate the place of arbitration is potentially the most problematic omission because the place of arbitration is not merely where the proceedings may physically occur,(10) but denotes the applicable arbitration law and the courts that have supervisory jurisdiction over the arbitration proceedings. For example, if the place of arbitration is Vancouver, then the law is the International Commercial Arbitration Act(11) and the court is the Supreme Court for British Columbia. Parties that choose Vancouver would be fortunate to find themselves in an arbitration-friendly jurisdiction. Other potential places of arbitration, over which parties may find themselves arguing once a dispute has arisen or in which the parties may find themselves by operation of the ICC Rules of Arbitration, may be less friendly.
The CISG does not address dispute resolution forum selection.
Parties should consider whether the substantive provisions of the Orgalime Conditions are appropriate for their transaction before adopting any of them into their contracts. Parties should also consider whether the CISG could or should apply, or should be derogated from in whole or in part.
To limit unnecessary procedural disagreements, which inevitably increase costs and cause delay, parties should address important arbitration agreement terms that are not included in Article 46 of the Orgalime Conditions, including the place of arbitration, the number of arbitrators (and constitution of the tribunal generally) and the language of the arbitration, at the time they conclude any contract incorporating the Orgalime Conditions. Parties, including corporate counsel, faced with these issues would benefit from consulting with experienced arbitration counsel, in particular after a dispute has arisen.
For further information on this topic please contact Craig R Chiasson at Borden Ladner Gervais LLP by telephone (+1 604 640 4084), fax (+1 604 622 5915) or email ([email protected]). The Borden Ladner Gervais LLP website can be accessed at www.blg.com.
Endnotes
(1) www.orgalime.org/page/about-us#sthash.ysr8yKLt.dpuf.
(2) www.orgalime.org/page/about-us#sthash.vxJq2DfM.dpuf
(4) www.orgalime.org/publication/s-2012-general-conditions-supply-mechanical-electrical-and-electronic-products-ex-s-2000.
(5) Ibid. See also, Orgalime Guide, pp. 5, 6.
(6) Orgalime Conditions, Clause 2, "Gross Negligence" (formerly contained in Clause 15 of the 2000 version).
(7) The CISG can automatically apply to an international transaction depending on, among other things, the places of business of the parties to the contract and the subject matter of the transaction (see CISG, Articles 1 to 5).
(8) ICC rules, Article 18(1). The ICC rules also provide for a default to one arbitrator unless the ICC Court concludes that the circumstances warrant three (Article 12(2)), and that the tribunal has the power to determine the language of arbitration (Article 20).
(9) This is intended as an example only and does not constitute legal advice. It, or other wording addressing these issues, should not be adopted without first consulting legal counsel familiar with the terms of the specific transaction.
(10) The term 'may' is intentional because, under the ICC Rules, the tribunal has the power to conduct hearings or meetings, and to deliberate, in locations other than the place of arbitration. Doing so, however, does not affect the legal implications of the place of arbitration.
