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Reproduced with permission of 5 Vindobona Journal of International Commercial Law & Arbitration (2001) 124-129.

Downs Investment Pty Ltd v Perwaja Steel SDN BHD [2000] QSC 421
(17 November 2000)

Bruno Zeller [a1]

This is only the second case in Australia, which relied entirely on the CISG.[1] Unfortunately most of the case is taken up with factual descriptions and very little legal argument. Simply put this case does not contribute towards a shared international methodology for interpreting the CISG nor does it display a sophisticated grasp of it.[2] The importance in this case is not so much in what has been said but rather what has not been said. The facts can be summarized as follows.

The plaintiff then dealing as Wanless Metal Industries Pty Ltd contracted with Perwaja Steel SDN, a Malaysian firm to sell 30,000 t of scrap steel. The contract was a standard form contract, which was used on previous occasions. However it was noted that several matters during subsequent discussions became part of the contract. Basically the original standard terms were changed.

A term of the contract stipulated that the buyer needed to approve the suitability of the ship prior to its charter. However evidence was accepted that as in previous dealings the seller was aware of the requirements of the buyer "it was unnecessary for Wanless to worry about submitting to Perwaja for its approval vessel details."[3] However a letter of credit had to be opened by the buyer before shipment was to be undertaken. [page 124]

After the contract was signed on May 21, 1996 Wanless was taken over by the current plaintiff and Perwaja changed its total management structure. Of importance in this case is that a letter of credit could now only be opened with the permission of an executive committee. Perwaja wrote subsequently that they do not intend to open a letter of credit for one month only and Wanless suggested that it could be for two months and the extra cost was taken over by Wanless. In the meantime the price for scrap metal fell substantially. Wanless also requested a deferment of shipment from, July to August, which was accepted by Perwaja.

Wanless in short chartered a vessel, which was communicated to Perwaja who still did not open a letter of credit. Of interest is that the seller wrote "Since you have already committed to a vessel perhaps you could ship the cargo first and we will pay you later or alternatively sell the shipment to another company. If you do it this way Perwaja will buy scrap metal from you under the new management."[4] Wanless rejected that suggestion and in the meantime Perwaja continued to frustrate Wanless by not opening a letter of credit despite the fact that Wanless gave the seller more than one additional period of time. In the end Wanless informed Perwaja that they intend to cancel the contract.

It is obvious even to a first year law student given the facts that a contract has been formed but it is disappointing to note that the rules as to the formation of a contract under the CISG were not even mentioned. Furthermore I would consider that this case clearly demonstrates a breach of good faith pursuant to article 7. Ambrose J. himself noted that the evidence indicates "a simple procrastination on the part of Perwaja."[5] Basically the evidence suggests that Perwaja did not intend to meet its obligations and at best suggested to re-negotiate the contract in view of the fall in price for scrap metal.[6] Such behavior, given the mandate of article 7, which regulates the interpretation of the convention, should at least have given rise to comments by Ambrose J. Good faith is an important principle but its importance is not only restricted to the CISG. Domestic jurisprudence is [page 125] increasing rapidly [7] and is referred to with increasing confidence in Australia and hence should not have been ignored.

Of interest is the fact that the defense argued strenuously that Wanless was in fundamental breach of the shipment clause by not obtaining approval from Perwaja in relation to the charter. Such an argument is doomed to fail under the mandate of the CISG specifically article 8. Under common law an argument may have been possible under the parol evidence rule. If we consider that Van Doussa J. in Roder Zelt [8] (the CISG applied to the contract of the sale of goods) found it important enough to point out that the pleadings "are expressed in the language and concepts of the common law, not in those of the Convention."[9] In Roder Zelt the defense also made only passing reference to the Convention. Van Doussa also added that the provisions of the Convention replace the common law concepts and common law remedies.[10] A comment, which also went unheeded in this case and it could be suggested that nothing much has been learned.

The establishing of the intent of the parties is of importance, which is contained in article 8. The CISG rules that if the subjective intent cannot be established the objective intent must be constructed using the "reasonable person in the same circumstances criteria". Ambrose J. did recognize that the party's intent was to change the term contained in the standard contract. However he did note that; "there was arguably [a] technical breach of the shipment clause" he dismissed this claim by pointing out that it was not a breach of an essential term.[11]

In effect under the CISG there was no breach at all as pursuant to article 8 the intent of the parties was clear. There was no need to gain approval from Perwaja as to the ship in question and furthermore it could only be understood from the actions of the buyer that he would not at a later stage rely on the original contractual term.[12] Ambrose J. did unfortunately use domestic terminology and reasoning to come to his decision. In this context it must also be mentioned that [page 126] article 7 demands that the convention is interpreted uniformly that is without recourse to domestic concepts and jurisprudence. However Ambrose J. did in his treatment of "repudiation" in context of article 72 (CISG) refer to domestic law, which is not allowable under the mandate of the CISG.

The positive outcome is that Ambrose J. did refer to scholarly writing and foreign jurisprudence though in a rather limited form. However the quoted case Helen Kaminski Pty Ltd v Marketing Products Inc. (US Dist. Ct. 21 July 1997) did not rule whether the failure of a letter of credit amounts to a fundamental breach or not. The case in question resolved the problem whether the CISG or domestic law is applicable as the question of validity had to be ruled upon. Cole J merely in an obiter noted that: "there does not appear to be any dispute that the failure to produce letters of credit was a fundamental breach."[13]

As far as the ruling on the breach of the contract is concerned, it is obvious that the principle of "Nachfrist" was not understood. The idea behind Nachfrist is that the seller should not be able to avoid the contract merely because the goods are not accepted or payment is not made on time. A contract can be avoided under the principle of fundamental breach pursuant to article 25. Under certain circumstances, such as when time is of the essence, late payment or opening of letter of credit may become a fundamental breach. Article 63 in itself is not a remedy, it clarifies a situation which otherwise would be unclear. If the seller is in a situation where there is uncertainty as to the existence of a reason to avoid the contract he can overcome this by fixing a Nachfrist. As far as the buyer is concerned the additional period is a final period however the seller is not barred from fixing additional periods if he so wishes or if he wants to respond to the buyers request for additional time.

An interesting point can be added. Ambrose J. did note that: "The refusal to establish a timely letter of credit was clearly a fundamental breach within the meaning of article 25 and article 64(1)(a) of the Convention."[14] However it must be noted that it is not only article 64(1)(a) that is applicable but also subsection (b), which prescribes that a contract can be avoided if the buyer does not [page 127] "perform his obligation to pay the price ..."[15] To define the buyers obligation to pay the price is contained in article 54 which includes the opening of a letter of credit. Such an approach would perfect the avoidance remedy as it clarifies that to provide a letter of credit is part of the performance of the buyer. Article 63 and 64(1)(b) note that failure to perform the obligations amounts to a fundamental breach. Ambrose J. did note the relevant articles but failed to show why as he did not elaborate on these issues.

However a point must be added. If we consult the Secretary Commentary on the 1978 Draft article 50 [draft counterpart to article 54] paragraph 3 notes that "article 54 does not require the buyer to undertake that his efforts will result in the issuance of a letter of credit ..."[16] At first glance it appears that the comment by the Secretariat is in direct conflict with article 54. Article 64(1)(b) does refer to "price" and allows a contract to be avoided if the price is not paid. However the Commentary suggests that article 54 does not require the buyer to guarantee that his efforts even to pay the price must be successful. If the Secretariat is correct in their interpretation of article 54 then price is not a cause to declare the contract avoided. The question then is how material performance pursuant to article 63 and 64 needs to be interpreted. I believe that the solution is that the comments by the Secretariat are wrong. The important point is that the facts of the case, linked to articles 9 (customary practices) and article 7 (good faith), would indicate clearly that the seller allowed a "reasonable time" therefore the principle of fundamental breach can be used.

Another point worth mentioning is the fact that Ambrose J. in calculating the damage also included interest at 9%. It would have been instructive to be told how that 9% was arrived at. It appears that article 78 of the CISG, which states; "if a party fails to pay the price ... the other party is entitled to interest" has been overlooked

Bonell as the sole arbitrator in a Vienna Arbitration proceeding [17] posed the question whether the rate of interest should be subject to domestic law or gap [page 128] filling pursuant to general principles underlying the Convention. He concluded by stating that the second view, that is gap filling, is the correct approach because: "the immediate recourse to a particular domestic law may lead to results which are incompatible with the principle embodied in Art. 78 of the CISG, at least in the case where the law in question expressly prohibits the payment of interest. One of the general principles underlying the CISG is that of "full compensation" of the loss caused (cf. Art. 74)."[18] Magnus on the other hand rejects that the rate of interest is subject to gap filling and therefore should be dealt with under domestic law. [19]

In sum it can be said that in Australia the significance of the CISG as an international sales law has not been fully appreciated if case law is any indication. Considering the ever-growing jurisprudence and academic writing on the CISG, which is obtainable on the net [20] one would assume that in future these aids to interpretation would be consulted and utilized. [page 129]


FOOTNOTES

a1. Lecturer in Law, Victoria University, Melbourne

1. The U.N. Convention on Contracts for the International Sale of Goods (1980) also referred to as the Vienna convention or the CISG

2. Fletchner, H.M., "The U.N. Sales Convention (CISG) and MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, S.p.A.: The Eleventh Circuit Weighs in on Interpretation, Subjective Intent, Procedural Limits to the Convention's Scope, and the Parol Evidence Rule", 18 Journal of Law and Commerce (1999) 259-287, at 260

3.Downs Investment Pty Ltd v Perwaja Steel SDN BHD [2000] QSC 421 (17 November 2000) at note 7 This case can also be found on [http://www.austlii.edu.au]

4. Id at note 42

5. Downs Investments Pty Ltd. at note 73

6. Id, at note 75

7. See specifically for a summary South Sydney District Rugby League Football Club v News Ltd [2000] FCA 1541 (3 November 2000) in [http://www.business.vu.edu.au/cisg]

8. Roder Zelt und Hallenkonstruktionen GmbH v Rosedown Park Pty Ltd (1995) ACSR 153

9. Id at 12

10. Id at 13

11. Id at note 66

12. Article 8(2) and (3). Also see Germany; Bundesgerichtshof, 25 November 1998, VIII ZR 259/97 [http://cisgw3.law.pace.edu/cases/981125g1.html]

13. Helen Kaminski Pty. Ltd. v. Marketing Australian Products, Inc. d/b/a Fiona Waterstreet Hats: Case No. 96B46519, Adversary Proceeding No. 97-8072A [http://cisgw3.law.pace.edu/cases/970721ul.html]

14. Downs Investments see supra note 1, at 62

15. Article 64(1)(b) CISG

16. Guide to CISG article 54 [http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-54.html]

17. Austria 15 June 1994, Vienna Arbitration proceeding SCH-4318, see fn

18. Id

19. Magnus, U., "General Principles of UN-Sales Law", Rabels Zeitschrift Vol 59 (1995) Issue 3-4 (October)

20. <http://www.business.vu.edu.au/cisg> links from this site will direct researches directly to other sites world wide notably Pace University.


Pace Law School Institute of International Commercial Law - Last updated August 3, 2006
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