Case commentary (January 2000). Reproduced with permission of the authors.
Arbitration Institute of the Stockholm Chamber of Commerce
Arbitration award, June 5th, 1998 
Francis Limbach and Brandon Ahearn
An American company (seller), specialized in industrial stamping equipment, concluded a sales contract with a Chinese vehicle manufacturer (buyer) regarding a rail press. The construction of the press was carried out by the seller in its Chicago plant, where the press was then disassembled for transportation and delivered to buyer. According to the contract, the buyer was to re-assemble the press in China under the limited "installation supervision" of seller's engineers who were sent to China for that purpose. The press was re-assembled at the buyer's place of business and went into operation January 10, 1993. No particular incident occurred for nearly three years. On November 10, 1995, due to the improper installation of an anti-loosening device by the buyer, the press broke down. The buyer contacted the seller in order to restore operation of the press, however, the seller denied all liability. Buyer conducted the necessary repair work but the press could not be operated again until August 15, 1996. In February 1997, the buyer requested arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce. The issue posed: "Is the seller liable in damages for the November 10, 1995 failure of the press delivered by the seller under the contract dated February 21, 1990?". In its separate award, the Tribunal considered the seller liable for the non-conformity of the press.
Decision and annotation
Art. 24 of the Rules of the Arbitration Institute permits parties to choose the law to be applied in a dispute. Both agreed that the contract should be governed by the provisions of the CISG.
The Tribunal found that the improper installation of the anti-loosening device "P-52" by the buyer caused the breakdown of the press. The P-52 had been installed by seller as a substitute of part "A-5750", the original device specified for the press. The seller's service manual specified the A-5750 and made no mention of the P-52 replacing the latter. It was assumed by the Tribunal that the specified A-5750, considered to be technically "fool proof", would have avoided the risk of the improper installation which caused the breakdown. It also found that a properly installed P-52 would also have avoided the breakdown of the press, meaning that the substitution itself did not constitute a non-conformity. The central point was that unlike the A-5750, the P-52 was inherently subject to possible improper installation against which the seller did not give any warnings or instructions. Thus, even though the seller did not guarantee the correct re-assembly of the press, the substitution of the anti-loosening device, combined with the failure to warn of its potential improper installation made the substitution "potentially dangerous" and constituted a non-conformity in respect to Art. 35 CISG.
The second issue concerned the possible preclusion of the buyer's claim under Art. 39(2) CISG. This provision states that, "the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer". Here, the breakdown of the press occurred almost three years after its delivery. However, an exception arises under Art. 40, preventing a seller from relying on -- among others -- Art. 39(2) CISG if the lack of conformity relates to facts which he knew or could not have been unaware of and which were not disclosed. The buyer argued that the seller had this awareness and therefore this exception applied. The seller counter-argued that both parties had contractually replaced Arts. 35, 38 and 39 CISG by another contractual liability system and that they therefore implicitly replaced Art. 40 CISG as well. The Tribunal refuted seller's argument, stating that even if the parties had waived these first provisions, the conclusion could not be drawn that Art. 40 would also have been implicitly waived. Indeed, even if the buyer had agreed to a modification or even a waiver of its CISG recourse, it can hardly be imagined that the buyer would also have intended to accept non-conformity of the seller's performance of which the seller would have been aware.
The Tribunal gave a second, more astonishing argument for the applicability of Art. 40. It stated that even if the parties had intended to waive this provision, its principles should nevertheless be applicable since a derogation from Art. 40 would lead to a so-called "internal gap" as understood by Art. 7(2) CISG. Art. 7(2) states, in pertinent part, that "matters governed by this Convention which are not expressly settled in it, are to be settled in conformity with the general principles on which it is based". One has to admit that the Tribunal's conclusion appears not to be easily compatible with the parties' intention. In case of their intended exclusion of a specific CISG prescription, it seems obvious that they did not want to create a legal gap to be filled with general principles, one of which precisely re-establishes the derogated prescription.
The Tribunal was much more careful with its third argument. Underlining that Art. 40 CISG constitutes a "safety-valve" directed by the principle of "fair trading" , it stated that "even if an explicit derogation was made (...) it is highly questionable whether such derogation would be valid or enforceable under various domestic laws or general principles for international trade practices." It seems that the Tribunal applied Article 4 CISG, according to which the Convention is not concerned with the validity of contractual provisions it governs. It is interesting to notice, though, that the Tribunal did not attempt to determine the applicable national sales law under which the derogation of Art. 40 would be considered invalid. Instead, it acknowledged that no national sales law would seriously allow such a derogation. In effect, the Tribunal therefore designates Art. 40 CISG a compulsory rule in spite of Article 6 which gives the parties the right to derogate from any of its provisions. This interpretation is shared by some scholars, asserting that "no-one may exempt himself from the consequences of his own deceit or even his gross negligence" . As Art. 40 is based on the idea of fair trading or good faith, it is interesting to notice that other Rules, such as the Principles of European Contract Law, edited by the Lando Commission, and the UNIDROIT Principles for International Commercial Contracts allow any stipulated derogation of their prescriptions except precisely the principle of good faith (see article 1.106(2) for the prior and article 1.7(2) for the latter).
Having decided that Art. 40 CISG was applicable, the Tribunal then had to determine if its conditions had been satisfied. Prior to its determination of "knew" and "could not have been unaware", it outlined the different scholarly positions in this area. Scholars seem to agree that a seller's actual knowledge of the non-conformity should fall within the scope of Art. 40, however, many hesitate to punish a seller for ignorance due only to gross negligence. Many argue that "slightly more than gross negligence", "approaching deliberate negligence"  should be the standard. The Tribunal did not advocate any one of these, instead it declared the article's text to be an instrument to "alleviate the burden of proof on the buyer in respect of the seller's awareness, a burden that otherwise often would be impossible" . One must admit that this conception should lead to the same results as the "slightly more than negligence" theory .
In this matter, the Tribunal concluded that it appeared from the facts that awareness of the seller seemed "more likely" than unawareness. Art. 40 CISG being thus applied, buyer's claim was not precluded by Art. 39(2) CISG and seller was thus liable for the breakdown and the damages of the rail press.
If the decision acknowledging the applicability of Art. 40 makes sense, however, the Tribunal's determination that seller's awareness was more probable than its ignorance is questionable. The Tribunal justified its holding by stating: "What is relevant is that seller cannot have been unaware of the fact that proper installation was critical, the fact that the possibility of improper installation by buyer could not be ruled out, the fact that there was a clear risk that this could lead to serious failure of the press . . .". One of the arbitrators stressed in a dissenting opinion that Art. 40 CISG should be applied not only in "special circumstances", as stated by the other arbitrators, but rather in "exceptional circumstances". It is difficult to comment on the appropriateness of the considered evidence. It would have been helpful for the reader if the Tribunal had compared its conclusion with the conclusion of the Oberlandesgericht of Karlsruhe, Germany which, in a similar case, stated that a seller's simple knowledge of the facts that lead to a non-conformity of goods did not necessarily imply the knowledge of the non-conformity itself .
1. Decision in English language on the CISG-database of the Pace University (http://www.cisg.law.pace.edu/).
2. Other authors refer to "good faith" ("bonne foi"): Neumayer/Ming, Convention de Vienne sur les contrats de vente internationale de marchandises, Lausanne (Switzerland), 1993, Art. 40 para 1.
3. See Schlechtriem/Schwenzer, Commentary on the UN Convention on the International Sale of Goods, 1998, Art. 40 para 11.
4. See Oberlandesgericht (Regional Court of Appeal) of Munich, Germany, March, 11, 1998, Entscheidungen zum Wirtschaftsrecht [EWiR] 1998, p. 549, annotated by Claude Witz in French lanuage, Recueil Dalloz 1999, Sommaires commentés, p. 356, abstract in English language on the CISG-database of the Pace University (http://www.cisg.law.pace.edu/); see also Schlechtriem/Schwenzer, Art. 40 para 4 and Neumayer/Ming, Art. 40 para 2.
5. See also Oberlandesgericht (Regional Court of Appeal) of Karlsruhe, Germany, June, 25, 1997, Betriebsberater [BB] 1998, p. 393, annotated by Peter Schlechtriem in German language, annotated by Claude Witz in French language, Recueil Dalloz 1998, Sommaires commentés, p. 310, abstract in English language on the CISG-database of the Pace University (http://www.cisg.law.pace.edu/).
6. This view seems to be shared by Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 2nd ed., paras 260 and 229 and by Schlechtriem/Schwenzer, Art. 40 para 4.
7. Oberlandesgericht Karlsruhe, June 25th, 1997, see note 5.
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