Table of Memorandum for Claimant

2nd Place Memoranda for Claimant



Ruprecht-Karls-Universität

Heidelberg


Fifth Annual

Willem C. Vis

International Commercial Arbitration Moot


_________________________________________________________


International Arbitral Centre Federal Economic Chamber Danubia


April 1998


Memorandum of Claimant


Speculative Drilling, Co.

123 Water Street

Petroleum City

Mediterraneo

 

v.

 

Deep Well Drilling, Inc.

1 Deep Well Place

Industrial City

Equatoriana


________________________________________________________________

Jens Haubold - Christiane Kirchhof - Jens Lüpkes - Ilse Vlamynck - Valerie Willems





Statement of Facts

Claimant, Speculative Drilling Company („Speculative"), an oil development company incorporated in the country of Mediterraneo, engaged in good faith negotiations with Respondent, Deep Well Drilling, Inc. („Deep Well") for the purchase of an oil rig („Oil Rig #23") located in Field Active #1 in the country of Polarity. Speculative had plans to develop an oil field in Polarity Active #2. Contractual obligations with the government of Polarity, provided that drilling must start no later than December 1, 1997. Oil Rig #23 was the only rig available within this time-frame to serve Speculative’s purposes.

As a result of these negotiations, which were conducted from March 15 until May 9, 1997, Deep Well transmitted a draft contract to Speculative on May 13, 1997. The draft contract provided for the sale of Rig #23 to Speculative for E$30,000,000, with payment of the purchase price in two stages. The first payment of E$3,000,000 was due within ten (10) days of the conclusion of the contract, and the balance of E$27,000,000 was due no later than five (5) working days prior to delivery of the rig. A bank guarantee in the amount of E$33,000,000 was due within ten (10) days of the conclusion of the contract. The draft contract also provided for the seller’s right to avoid the contract for failure either to make the first payment or to issue the bank guarantee. The buyer had the right to cancel delivery, subject to payment of a penalty. An arbitration clause was also included.

On May 21, Speculative responded to the draft contract with a written inquiry regarding a possible reconsideration of the purchase price. Deep Well, in a telefax dated June 3, characterized this mere inquiry as a rejection and withdrew the offer. Speculative considered the exchange of letters as a „misunderstanding", stating that „[u]nder the conditions that prevailed when we sent you the letter we thought that your offer of E$30,000,000 was somewhat high ...". Speculative accepted the offer of E$30,000,000 by telefax on June 5. On June 6, Deep Well confirmed that it had withdrawn the offer.

Considering the contract as concluded, Speculative immediately, on the same date as the acceptance, issued instructions to the Farmers and Merchants Bank to arrange the bank guarantee of E$33,000,000 at the General Credit Bank of Equatoriana. On June 9, these instructions were sent, but on June 12 the General Credit Bank requested additional assurances. As a result, the bank guarantee was not opened until June 18.

At 10:45 on June 11, Speculative instructed the Farmers and Merchants Bank to transfer the first installment of E$3,000,000 to the Equatoriana Industrial Credit Bank. This payment was received on June 13 at 14:00, within the contractual deadline, and was credited on June 17 at 10:30 because June 14-16 included a weekend and a legal holiday. After this amount was credited to its account, Deep Well refused to accept the payment and transferred the money back to Speculative’s account at the Farmers and Merchants Bank.

In a letter on June 24, Deep Well acknowledged that it was „understandable" that Speculative believed there was a contract. Deep Well claimed, however, that the payment and bank guarantee were due on June 15 but the payment was not credited until June 17 and the bank guarantee was not opened until June 18. As a result, Deep Well noted that it had the right to avoid, although it did not expressly do so.

On June 28, 1997, Speculative petitioned the Commercial Court of Mediterraneo requesting arbitration under the draft contract and an order precluding the sale of Rig #23 to a third party. In a hearing before the court, Deep Well agreed to arbitrate the dispute, provided that Speculative agreed to post an additional guarantee to cover possible loss of profit. The guarantee was posted on July 10. On July 15, the Commercial Court rendered a decision ordering the parties to proceed to arbitration and ordering Deep Well not to sell the rig to a third party until April 14, 1998.

On August 6, 1997, Speculative filed its Notice of Arbitration and Statement of Claim with this Tribunal, requesting that the Tribunal: (1) declare that a contract for the sale of Rig #23 exists; (2) order Deep Well to deliver Rig #23, should Speculative decide to take the rig; and (3) order Deep Well not to sell the rig to a third party prior to September 30, 1998.

Following the conclusion of the contract, the oil rig market has tightened considerably. In addition, Deep Well determined that Rig #23 could be sold earlier than expected and, on September 17, entered into a contract to sell the rig to Oceania Oil Ltd. for E$40,000,000, conditional on Deep Well’s ability to deliver the rig by April 30, 1998.


Argument

  1. Jurisdiction And Applicable Law
    1. Jurisdiction
    2. Speculative, with the agreement of Deep Well, invokes this Tribunal’s jurisdiction to resolve the instant dispute. It is indisputed that this Tribunal has jurisdiction based on the agreement of the parties to proceed to arbitration. Indeed, the parties have agreed on three occasions that all conflicts arising from the contractual relationship should be resolved through arbitration. The parties first agreed to arbitration, within the meaning of Art. 7 (2) UNCITRAL Model Law on Commercial Arbitration (UNML), in Art. 9 of the contract. Subsequently, the parties agreed before the Commercial Court of Mediterraneo to arbitrate this specific dispute. Finally, Speculative and Deep Well agreed to arbitrate in their exchange of Statements of Claim and Defense. The seat of the arbitral tribunal is Danubia, which has enacted the UNML. The UNML and the UNCITRAL Arbitration Rules (UNCITRAL Rules), which the parties have chosen, provide the governing procedural law.

    3. Applicable Law (Substantive Issues)
      1. CISG
      2. In Art. 8 of the contract, the parties have selected the United Nations Convention on Contracts for the International Sale of Goods (CISG or Convention) as the applicable substantive law. This choice of law is binding on the Tribunal pursuant to Art. 28 UNML. Even if the choice were invalid, the CISG would apply automatically (Art. 1 (1) (a) CISG): both states involved are signatories of the CISG and the contract involves a sale of goods between parties with places of business in different states. An oil rig falls within the definition of a „good" under the CISG. Even though the rig is a fixed structure when in use, it can be detached from its foundation and transported to another location. Consequently, it is movable within the meaning of Art. 1 CISG and therefore a good that is subject to the CISG.

      3. UNIDROIT Principles

    The principles of international commercial contracts formulated by the International Institute for the Unification of Private Law (UNIDROIT Principles) are an authoritative compilation of general principles of law governing international commercial contracts. Even though the UNIDROIT Principles do not have the status of national or international law, and are therefore not a binding instrument, the parties can always select them as substantive rules applicable in arbitral proceedings. Arbitral tribunals are not bound by strict choice of law rules: the parties can even request a decision ex aequo et bono. Therefore, a fortiori, tribunals give effect to the parties’ decision to apply general principles of international commercial law, as accepted in the commercial world and as compiled in the UNIDROIT Principles. Here, the parties have agreed in the contract that „general principles of law governing international contracts" apply as supplemental rules to the CISG. By inserting this choice of law provision, the parties have necessarily designated the UNIDROIT Principles, officially titled „Principles of International Commercial Contracts", as applicable to this transaction.

    The UNIDROIT Principles have three important functions in the instant case. First, the UNIDROIT Principles cover issues that fall outside the scope of the CISG. Second, the Principles fill gaps within the CISG: a solution may be found either by analogy with the Convention’s specific provisions or on the basis of general principles underlying the uniform law as a whole. When these latter principles are not clear, the UNIDROIT Principles provide the relevant guidance. Finally, the Principles provide an important means of interpreting international uniform law, such as the CISG.

  2. A Contract Exists Between The Parties
    1. The Parties Concluded A Contract
    2. According to Art. 23 CISG, the conclusion of a contract requires an offer and an acceptance. Deep Well made an offer in its letter and draft contract of May 13, 1997 that meets all the requirements of Art. 14 CISG.

      1. Speculative did not reject the offer
      2. A rejection would terminate the offer under the CISG (Art. 17). Speculative’s letter of May 21, 1997, which was a simple inquiry, does not constitute a rejection under the CISG. Nor could one reasonably interpret Speculative’s letter as a rejection of Deep Well’s offer.

        Article 19 (1) CISG governs rejections by modification. This provision, however, only applies to „a reply to an offer which purports to be an acceptance" and attempts to change the terms of the offer. By their letter of May 21, Speculative did not purport to accept the offer with modifications. Instead, Speculative merely inquired as to the price of the rig. In such cases Art. 19 CISG does not apply.

        In stark contrast to the laws of some countries, a mere inquiry for alteration of the contract terms is generally possible under the CISG and must be distinguished from a counter-offer or a rejection. Whether a declaration is a rejection of the offer or just an inquiry that does not affect the offer is to be decided by interpretation according to Art. 8 CISG. Under the circumstances prevailing at that time, it was obviously not Speculative’s intention to terminate the offer. A fair and objective reading of the letter supports this interpretation.

        From the last sentence of the letter - „we would ask you again to consider it" - it is clear that Speculative had no general objections to Deep Well’s offer. Nor did Deep Well consider Speculative’s letter as a rejection. That conclusion is evident from Deep Well’s answer on June 3, 1997, in which they „decided to withdraw" their offer. A withdrawal of the offer presupposes that a valid offer existed and had to be withdrawn to avoid a valid acceptance. Thus, if Deep Well viewed the May letter as a rejection, a withdrawal of the offer would have been impossible.

        Even if there were doubt as to the interpretation of Speculative’s letter, any doubt should be resolved in Speculative’s favor. To enable the parties to continue negotiations without endangering the validity of the offer, a rejection should be expressed clearly. This rule also finds support in the UNIDROIT principles, which, as mentioned above, are an essential tool for interpreting the CISG. These principles provide:

        „[i]n absence of an express rejection the statements by, or the conduct of, the offeree, must in any event be such as to justify the belief of the offeror that the offeree has no intention of accepting the offer. A reply on the part of the offeree which merely asks whether there would be a possible alternative (e.g. ‘Is there any chance of the price being reduced?’, [...]) would not normally be sufficient to justify such a conclusion."

        Speculative’s letter of May 21, 1997 falls within this category and therefore does not constitute a rejection.

      3. Deep Well could not withdraw or revoke the offer
      4. In its letter on June 3, 1997, Deep Well stated its intent to „withdraw" the offer of May 13. A withdrawal under Art. 15 CISG involves a specific situation in which a cancellation of an offer reaches the offeree before the offer does; in such cases, the offer does not become effective. The instant case, however, cannot be characterized as a withdrawal.

        Assuming that this case involves a „revocation" within the meaning of Art. 16 CISG, and not a „withdrawal", a „revocation" would nonetheless be impossible under the conditions set forth in Art. 16 CISG. Although offers are generally revocable under the CISG (Art. 16 (1)), they may become irrevocable under certain conditions (Art. 16 (2) (a) or (b)). In this case, the offer was irrevocable and therefore Deep Well’s letter of „withdrawal" was without effect.

        First, an offer cannot be revoked when it states a fixed time-period for acceptance (Art. 16 (2) (a)). This is precisely what Deep Well did in its letter of May 13, 1997, which accompanied the draft contract. The letter, which was sent to Speculative attached to the draft contract, must be considered part of Deep Well’s offer. In that letter, Deep Well stated „we expect to hear from you by June 10". Based on this phrase, it is clear that Deep Well established a time-limit for acceptance. It is also apparent that this time-limit was an important deadline for Deep Well. The words „[...] we would like to bring this negotiation to a close" and „[i]n the light of our extensive negotiations [...]" indicate that Deep Well intended to hold the offer open until June 10.

        This time-limit for acceptance makes Deep Well’s offer irrevocable. According to Art. 16 (2) (a) CISG, establishing a fixed time for acceptance is one method of making an offer automatically binding. When an offer includes such a time-limit, the original intention of the offeror on the revocability is of no importance. The mere creation of a time-limit is sufficient to render an offer irrevocable.

        The legislative history of Art. 16 (2) (a) further supports this interpretation: during the CISG draft negotiations, the United Kingdom proposed an amendment, which provided that the mere existence of a fixed time period for acceptance was insufficient to render the offer irrevocable. This proposal was explicitly rejected by the conference.

        Furthermore, construing Art. 16 (2) (a) in the context of the CISG as a whole, the existence of a time-limit in itself must be read as creating an irrevocable offer. There are two possible readings of Art. 16. Under the first and most widely accepted reading, Art. 16 provides that stating a fixed date renders the offer irrevocable. If this view is rejected, Art. 16 means simply that the offer lapses once the stated time period expires. Such a reading is unpersuasive, as another provision of the CISG (Art. 18) provides for precisely this situation. Thus, to avoid rendering Art. 18 redundant, Art. 16 must have another effect, i.e., that the statement of a fixed period binds the offeror to the offer.

        The language of Art. 16 (2) CISG establishes a clear rule that offers containing a fixed date for acceptance are irrevocable. A contrary reading of this provision, i.e., to require additional, unspecified conditions, would not only contradict the clear language of Art. 16 (2) CISG, but would also undermine Art. 7 (1) CISG, which establishes international conformity as the primary standard for the interpretation of the CISG. In order to preserve uniformity and reliability in international commercial transactions, a clear and unambiguous interpretation is necessary.

        Even if the time-limit for acceptance does not create an absolute rule of irrevocability, the CISG at a minimum creates a strong presumption of irrevocability. This presumption is not rebutted in the present case as there is no indication in Deep Well’s statements and behavior that it wanted the offer to be revocable. Deep Well’s letter of May 13 must be interpreted according to Art. 8 CISG. Article 8 (1) provides that the statement and conduct of a party must be construed according to its intent, when the other party knew, or should have known, what the intent was. In the instant case, Art. 8 (1) is inapplicable, because Deep Well’s intent regarding revocability was neither clear nor ascertainable. Consequently, Art. 8 (2) CISG provides the governing rule: statements by one party must be interpreted according to the understanding of a reasonable person, similarly situated to the other party. As a company having its place of business in Mediterraneo, it was not unreasonable for Speculative to consider the offer as irrevocable because in its country offers are generally binding. Any other company in the same situation as Speculative - that is, a business in Mediterraneo - would have assumed that the offer was irrevocable. Businessmen generally are not aware of such technical differences between national laws.

        In addition, under Art. 16 (2) (b) CISG, Deep Well could not revoke the offer once Speculative reasonably relied on the offer and acted accordingly. Speculative relied and acted upon the offer: Speculative never entered into negotiations with third parties and arranged its planning around the availability of Oil Rig #23. Speculative also commenced preparations with its bank to provide adequate financing for the purchase. Speculative’s reliance was reasonable, because Deep Well itself wanted to give time to take the measures required, as it stated in its letter of May 13: „[t]hat should give you sufficient time to make the necessary financial arrangements".

        Summing up these arguments, it becomes quite clear that Deep Well could not revoke the offer. As a result, its letter of June 3 had no effect whatsoever on the original offer.

      5. Speculative accepted the offer

      By fax of June 5, 1997, Speculative accepted Deep Well’s offer within the meaning of Art. 18 (1) CISG. Starting from this moment, a valid contract existed between both parties.

    3. Deep Well Did Not Avoid The Existing Contract
    4. In its letter of June 24, Deep Well claimed that it had a contractual right to avoid the contract. It is beyond dispute that Deep Well had no statutory basis for such a right, because there was no fundamental breach of contract, as required by Art. 64 (1) (a) CISG. Nor was Deep Well entitled to exercise its contractual right of avoidance. The avoidance clause in the contract required either that Speculative fail to make the initial payment (Art. 3 and 1) or to establish the bank guarantee in a timely manner (Art. 3 and 2). Because neither precondition for avoidance existed, Deep Well could not exercise its right to avoid the contract.

      1. Speculative’s initial payment was timely
        1. The bank’s receipt of the payment was sufficient
        2. Article 1 of the contract states that the initial „payment will be made within ten days of the conclusion of the contract," which occurred on June 5. The payment was received by Deep Well’s Bank on June 13, and credited to Deep Well’s account on June 17. As discussed below, this payment was timely.

          In construing this term, it is important to consider the purpose of the time-limit and the contract as a whole. Under the terms of the contract, Speculative has the option to buy the rig until September 30, 1998. Thus, the first payment was earnest money to preserve Speculative’s interest in the rig. To fulfill this function, Deep Well did not need access to the money, it simply needed an expression of Speculative’s intent to preserve its purchase option. The bank’s receipt of the money on June 13 was sufficient for this purpose.

          Even if the Tribunal does not accept this interpretation of the contract, the general principles of law governing international contracts produce the same result - the bank’s receipt of the payment is sufficient to meet the deadline. In Art. 8 of the contract, the parties agreed that these general principles of law should govern when the CISG does not provide an answer. The CISG does not govern the precise questions at issue here, i.e., when a payment by transfer is completed. Consequently, according to the choice of the parties, the general principles of law control.

          The first important compilation of these rules is found in the UNIDROIT Principles. According to Art. 6.1.8 (2) of these principles, an obligation is discharged when the transfer to the obligee´s financial institution becomes effective. In the instant case, the transfer became effective when Deep Well´s bank received the money on June 13. Although the UNIDROIT Principles do not expressly define the term „effective," they do provide a framework: specifically, a transfer becomes effective sometime after the obligor issues instructions to his bank, but before the money is actually credited to the obligee’s account. The rationale behind this rule is that the receiving bank is acting as the agent of the obligee; notions of fundamental fairness require that the obligee alone must bear the consequences of the banking practices of the institution he himself selected. Because Deep Well chose as its agent the Equatoriana Industrial Credit Bank with its early cut-off times, the delay in crediting the amount based on the internal decision of the bank cannot be charged against Speculative. Thus, the payment was effective when the money was received by Deep Well’s bank.

          An additional indication that the UNIDROIT Principles correctly reflect international business practice is apparent from the fact that the UNCITRAL Model Law on International Credit Transfer adopted the same rule: Article 19 provides that a credit transfer is completed when it is accepted by the beneficiary’s bank. As a result, the internal banking rules of Deep Well’s bank are of no relevance. To decide otherwise would result in intolerable uncertainty and arbitrary results in international commerce. Moreover, consideration of national banking practices in an international commercial context would cause further uncertainty and confusion.

          Thus, Deep Well cannot exercise its right to avoid the contract based on a late payment of the first installment. Under international principles, Speculative’s payment was timely, i.e., within ten days of the conclusion of the contract, once Deep Well’s bank received the bank transfer. It follows, therefore, that Speculative did not default on its payment obligation and the preconditions for Deep Well’s right of avoidance were not met.

        3. Alternatively, Speculative´s payment was not due until June 17

        Alternatively, Speculative’s payment was timely because, under the CISG, the time-limit was extended until the next business day, i.e., June 17. Article 7 (2) CISG states that: „questions concerning 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 ".

        The CISG provides no explicit rules concerning payment deadlines, even though this issue lies within the scope of the CISG. The Convention governs, inter alia, the rights and obligations of buyers and sellers (Art. 4). One essential obligation is the payment, including the time and circumstances of payment. Because the question of payment deadlines is an issue within the scope of the CISG, but not expressly covered therein, the principles underlying the CISG are instructive.

        A general principle concerning deadlines is derived from Art. 20 (2) (2) CISG, which governs the expiration of time periods for acceptance of an offer. As a rule, deadlines do not expire on a non-business day or holiday. Rather, the period of acceptance is automatically extended and expires on the first following business day. There is broad consensus among scholars that this legal principle applies by analogy to all questions regarding the expiration of deadlines under the CISG. This opinion that Art. 20 (2) (2) expresses a general principle finds support in the legislative history of the CISG. By adopting Art. 20 (2) (2), the authors of the CISG intended to incorporate the existing international practice. Article 20 (2) (2) was modeled after Art. 2 (2) of the UNCITRAL Arbitration rules, which applies to deadlines in general. Furthermore, common sense dictates that the rationale behind Art. 20 (2) (2) is equally valid in the instant case: if the end of the time period falls on a holiday or non-business day at the place of business of the offeror, and acceptance requires a letter or telegram, the party cannot communicate his acceptance on these days. Consequently, a party cannot avail himself of the entire time period. Moreover, the party may not know of the other party’s official holidays, and cannot be expected to take these holidays into consideration. Here, Speculative faced an analogous situation: when its payment was due, the means of transferring the payment was not available because the banks in Equatoriana were closed on the weekend and the following Monday, which was an official holiday.

        The application of Art. 20 (2) (2) CISG by analogy is not precluded by any contradictory clause in the contract. In Art. 1 of the contract, the parties used both the general term „days" and the more specific term „working days". In establishing the payment at issue here, the parties used the term „days". Based on this choice of language, one could argue that the parties intended that this payment period would be calculated without regard to non-business days and holidays. This argument is flawed, however, because the issue is not whether non-business days are included within the ten day time period (Art. 20 (2) (1)), but whether the time period is automatically extended when it ends on a non-business day (Art. 20 (2) (2)). Because the parties remained silent on the latter issue, the language cannot be used to exclude application of Art. 20 (2) (2) CISG.

        Hence, even in the unlikely event that this Tribunal determines that reception by the bank is insufficient to meet the deadline, Speculative’s payment was nonetheless timely. Under the general principles of the CISG, the time-limit was extended until the next business day, i.e., June 17. Speculative’s payment was credited on that date and met the deadline.

      2. Deep Well had no right to avoid the contract based on the bank guarantee
      3. Article 2 of the contract provided for the establishment of a bank guarantee within ten days of the conclusion of the contract. As soon as possible after the conclusion of the contract, Speculative commenced preparations with its bank to issue the guarantee. Usually, bank guarantees take three or four days to be issued. Because Speculative’s bank had no corresponding bank in Equatoriana, the bank guarantee was not issued until June 18, technically beyond the June 17 deadline. This de minimis delay did not provide Deep Well with a basis for avoidance.

        The principle of „Good Faith" has particular importance within the Convention (Art. 7 (1) CISG). Its application, however, is not limited to the construction of the CISG, but logically applies in equal measure to the interpretation of agreements between parties, which are governed by the CISG. A good faith interpretation cannot be limited to the CISG itself, because it is impossible to draw a clear distinction between the Convention and the agreement of the parties. Furthermore, the principle of good faith is a cornerstone of the CISG. Many provisions of the Convention embody the notion of good faith relations between the parties. The principle of good faith is therefore a „general principle of law" within the meaning of Art. 7 (2), and thereby governs party relations. As a result, both Speculative and Deep Well had an obligation to act in good faith under the terms of the contract. Deep Well would not have acted in good faith if it had avoided the existing contract, as it is apparent that Speculative did all it could to perform its obligations under the contract.

        Moreover, in the instant case, it would be unfair to allow Deep Well to avoid the entire contract based on a minor delay. The avoidance of the contract would produce a disproportionally harsh result considering that Deep Well did not suffer any harm. The purpose of a bank guarantee, as opposed to a payment, is to provide security. The beneficiary of a guarantee cannot use the money and therefore does not suffer any economic detriment due to a one day delay.

        It is also important to consider that the minor delay in issuing the bank guarantee was not due to a bad faith action by Speculative. Speculative’s actions were reasonable, considering that it had established prior bank guarantees within three or four days. In any event, even if Speculative had known that additional steps were necessary to establish a bank guarantee in this case, it could not have taken these steps in the allotted time. The procedure for establishing a bank guarantee in this case was extremely complicated due to the unavoidable negotiations between the two banks. It was objectively impossible to issue the bank guarantee within the time-limit.

        In sum, considering Speculative’s good faith efforts and the absence of injury, the minimum delay in issuing the bank guarantee is not sufficient to justify Deep Well’s attempted avoidance of the contract.

      4. Deep Well did not effectively avoid the contract

    Even assuming, but not conceding, that Deep Well had the right to avoid the contract, it did not effectively do so because its letter from June 24 did not meet the criteria of Art. 26 CISG and Art. 64 (2) (a) CISG.

    Deep Well’s letter did not meet the requirements of Art. 26, which provides that a contract may be avoided only if appropriate notice is given to the other party. Article 26 applies not only to grounds of avoidance listed in the CISG, but also to grounds of avoidance agreed upon by the parties in a contract. Inherent in Art. 26 CISG is a requirement that, at a minimum, the notice must establish clearly and unambiguously that a party intends to avoid the contract. This requirement is essential for two reasons. First, considering the harsh consequences of avoidance, an unambiguous declaration is necessary to avoid a misunderstanding, which would have serious consequences. Second, a precise declaration of intent is necessary to ensure certainty in commercial transactions in general.

    Deep Well’s letter of June 24 did not provide a clear statement of its intent to avoid the contract. In this letter, Deep Well stated simply „[a]s you know, [...] we would have the right to avoid the contract". Deep Well did not, however, specifically state that it intended to exercise its right of avoidance. This vague statement was insufficient under Art. 26, especially considering the serious consequences of avoidance for Speculative. As a result, the attempted avoidance was ineffective.

    Furthermore, Deep Well was precluded from exercising its alleged right of avoidance under Art. 64 (2) (a). Under limited circumstances, a party may have a right to avoid a contract for late performance. However, once the obligation is performed, and the party becomes aware of performance, the party may no longer avoid the contract. This result is logical. Once a party has received the performance, he no longer has an interest in avoiding the contract on this basis. Moreover, international commerce requires that the performing party know for certain that the contract exists. Here, Speculative’s payment was credited on June 17 and the bank guarantee was opened on June 18. It is clear that Deep Well was aware of these payments before its alleged avoidance; indeed, it recognized these payments in its June 24 letter. Thus, to the extent that Deep Well’s letter can be construed as an avoidance, it was ineffective.

    In conclusion, Deep Well did not effectively avoid the contract. Because the preconditions for avoidance did not exist, Deep Well had no basis for the alleged avoidance. Moreover, the form of this notice was ambiguous, and therefore inadequate under the CISG. Finally, Deep Well was precluded from avoiding the contract, because it was already aware that Speculative had performed its obligations. Thus, the contract remained in effect.

  3. Remedies
    1. The Tribunal should grant declaratory judgment
    2. Arbitral tribunals have the same authority to grant declaratory judgments as national courts. As there is a valid contract, an award recognizing the existence of the contract is an appropriate remedy. Hence, it should be granted.

    3. The Tribunal should order Deep Well to deliver the rig
      1. Specific performance is an appropriate remedy
      2. According to Art. 30, the very obligation of the seller in international sales contracts is delivery of the purchased object to the buyer. The natural remedy in case of non-delivery is specific performance as provided for in Art. 46 (1) CISG, therefore Deep Well should be ordered to deliver.

        Deep Well has committed a breach of contract , hence Speculative has the right to request specific performance according to Art. 45 (1) (a) and 46 (1) CISG: breach of contract in the sense of Art. 45 (1) means failure to perform. A failure to perform covers not only cases in which the seller did not deliver in the past, but also when the seller refuses to perform in the future. This general principle of the CISG can be derived from Art. 71 and 72 CISG: More specifically, Art. 72 (1) and (3) extends the right to avoid a contract for non-performance beyond an existing breach to cases in which the other party has declared his intention not to perform his obligations. Because the right of avoidance makes no distinction between these two types of breaches, there should be no distinction made in the remedy phase: in fact Art. 72 authorizes the drastic remedy of avoidance without distinguishing between an actual breach and an announcement of a future breach of contract. All the more because specific performance is a less stringent remedy than avoidance, future and actual breaches should be treated equally. Thus, the remedy of specific performance is appropriate when a party has declared its intention to breach the contract. As non-delivery of the rig on September 30, 1998 would certainly constitute a breach of contract, the same is true for seller’s denial, prior to the date of delivery, that he has such an obligation.

        To begin, Deep Well has denied and still denies the existence of its contractual obligation in its totality. This alone is a sufficient reason to grant specific performance because it proves Deep Well’s unwillingness to fulfill its obligation. In such a situation, it is unreasonable to expect Speculative to await the date of delivery before bringing an action for performance. This would burden Speculative with the risk of not getting what Deep Well has promised. That means, Speculative would lose Oil Rig #23 and would be left only with an action for damages, which is an entirely inappropriate remedy in this case.

        Secondly, in its letter dated June 6, 1997, Deep Well credibly threatened to sell the rig in the near future. Delivery of the rig to any third party would make it impossible for Deep Well to fulfill its obligation under the contract with Speculative. Indeed, Deep Well has concluded a contract with a third party (Oceania Oil Ltd.) for the sale of the rig, thereby ignoring the stay of sale ordered by the Commercial Court of Mediterraneo. Even though this contract was conditional, it manifested Deep Well’s intention not to fulfill its contractual obligation to deliver the rig to Speculative. Both facts constitute Deep Well’s failure to perform.

        Thirdly, Deep Well has made clear in its statement of defense that it has no intention to deliver the rig, even if the Tribunal finds that a contract exists. Citing the ability to increase its profit from the sale of the rig as hardship, Deep Well requests that this Tribunal excuse its non-performance. As a result, it is quite obvious that a declaratory judgment regarding the existence of a contract is not by itself sufficient to protect Speculative’s interests.

        Arbitral tribunals are empowered to issue such orders of specific performance. Article 28 CISG, which allows national courts to deny specific performance if their domestic law so requires, does not prevent a grant of specific performance in this case. There is no national law of arbitral tribunals - tribunals are created by agreement of the parties. Moreover, Art. 28 explicitly refers to „a court", and not to arbitral tribunals. As a consequence, this provision cannot be applied. Even if it were applied by analogy, the result would not change: Art. 28 CISG must be understood as referring to the law applicable to each single proceeding.

        In the present case, the bodies of law governing procedural issues are the UNCITRAL Rules and the UNML adopted by Danubia. Neither law provides rules for specific performance, nor do they contain provisions excluding that remedy. For this reason Art 19 (2) 1 UNML applies, and the Tribunal is free to handle the case „in such manner as it considers appropriate". As established above, specific performance is the only adequate remedy to meet the requirements of the case. Accordingly, the Tribunal should grant this relief.

        The remaining applicable rules buttress the argument for specific performance as well. As stated above, by choosing „general principles of law governing international contracts", the parties have agreed to the application of the UNIDROIT principles. Article 7.2.2 recognizes the principle of specific performance as a remedy for non-delivery. All conditions provided for in Art. 7.2.2 are met in the present case. With all conditions of Art. 7.2.2 fulfilled, specific performance is a mandatory remedy under the UNIDROIT Principles.

        National legal systems, such as those of Equatoriana or Mediterraneo, have no effect on the question at issue as they do not provide the applicable law. In any event, no legal system would object to specific performance in the present case. In Civil Law countries, it is considered to be the natural remedy. In Common Law countries, it is granted as a special remedy when certain conditions are met, the main one being the uniqueness of the purchased object. As to the present market situation for rigs in Polarity, rig #23 can be compared to real estate for which specific performance is generally accepted.

        Considering all these arguments, the Tribunal should find that Speculative is entitled to specific performance. Deep Well has made clear that it does not intend to deliver the rig, even if a contract exists. Nothing in national law prevents this result, because national laws are not applicable in these proceedings. Finally, the UNIDROIT Principles support the award of specific performance.

      3. Hardship is no obstacle to specific performance

      All reasons advanced by Deep Well to explain why it could not deliver are entirely unfounded and present no obstacle to specific performance. The principle of pacta sunt servanda as a general principle of contracts is nevertheless applicable when a contract becomes more onerous for one of the parties.

      Article 79 CISG, which provides relevant exemptions to performance, does not affect Deep Well’s obligation to perform: the provision prevents parties only from exercising the right to damages. The provision does not affect the parties’ right to specific performance. Specific performance is precluded when performance is factually impossible (impossibilium nulla est obligatio). Here, however, specific performance is factually possible, because Deep Well is still in possession of the rig, and there are no practical impediments to delivery.

      Article 79 CISG leaves no room for the application of other principles, such as the idea of „hardship", „Wegfall der Geschäftsgrundlage", „imprévision" or „eccessiva onerosità sopravvenuta" developed in national legal orders, as the CISG is exhaustive on the question when an obligation comes to an end.

      But even if an exception to this rule were possible, there are no reasons why performance would cause hardship or be an unbearable burden to Deep Well. The mere fact that Deep Well could dispose of the rig sooner than anticipated at the time of the contract is not hardship; it is a risk Deep Well accepted when it drafted the contract. Such standard risks involved in commercial contracts do not generally constitute hardship.

      Similarly, an increase in the price of oil rigs, as for any other good, are common in the international market; they are foreseeable by both parties and provide no reason for canceling delivery: This risk was assumed completely by Deep Well. Indeed, it was one of the very goals of the contract to provide Speculative with a rig at a specified time and at a fixed price.

      The announcement of Polarity’s Minister did not change the situation fundamentally: The granting of the concession and subsequent delivery of the rig to Speculative has never been certain, even before the conclusion of the contract. This uncertainty underlies the whole contract. It is precisely because of that uncertainty that Deep Well agreed to Speculative’s contractual right to cancel delivery. Deep Well was compensated for this risk by the liquidated damages clause, providing for a payment of 10 - 15% of the purchase price, in case Speculative chooses not to buy the rig (Art. 6 of the contract).

      Even if the Tribunal were to find that delivery in accordance with the provisions of the contract burdened Deep Well unbearably, Deep Well would not be excused from performance. At most, the appropriate remedy would be the adaptation of the contract, i.e., alteration of the contract price.

      For the foregoing reasons, Speculative is entitled to delivery of the rig. Changes in the rig’s availability and market price do not constitute hardship. Nor do the political decisions in Polarity affect the contract. These risks were accounted for in the contract terms, including a liquidated damages clause.

    4. The Tribunal should order Deep Well not sell the rig to any other party
    5. An order to Deep Well not to sell the rig to a third party constitutes an interim measure.

      1. The Arbitration Tribunal has authority to grant interim measures
      2. Article 17 UNML and Art. 26 UNCITRAL Rules give an arbitral tribunal power to issue interim measures. The parties have agreed on these rules as stated above.

        According to these provisions, the Tribunal has authority to issue any remedy it deems appropriate. Thus, a stay of sale is a possible remedy, as established by several cases decided in arbitration as well as in court proceedings. It is obvious that the sale of a unique chattel to a third party, in violation of an existing contract, will always harm the buyer. This ill effect can, and should be, avoided by an order in the form of an interim measure precluding the sale.

        Article 17 UNML and Art. 26 UNCITRAL Rules establish that arbitral tribunals have authority to grant interim measures. The prerequisites for interim relief are satisfied in this case. Under these provisions, a tribunal must decide on the necessary interim measures unless the parties have otherwise agreed. In the present case, the parties have neither restricted the competence of the Tribunal in the contract itself nor in the context of their dealings. Deep Well has never referred to injunctive relief either in the negotiations preceding the contract or in the dealings thereafter. As there is no agreement whatsoever, it lies within the Tribunal’s discretion to determine what measures are appropriate.

        The granting of preliminary measures will not injure the rights of any third party, as protected by Art. 17 UNML in conjunction with Art. 26 UNCITRAL Rules. It is deemed obvious that an arbitral tribunal, as a private institution created by the agreement of two or more parties, cannot bind parties who have not agreed to participate in the proceedings. Acknowledging this principle, there would be no effect on a third party caused by the Tribunal´s order. The only other party involved is Oceania Oil Ltd., and it would not be affected directly by the order, because the order would bind only Deep Well. The only possible effect is an indirect one. The fact that the contract between Deep Well and Oceania Oil, Ltd. is conditioned upon Deep Well being able to deliver, i.e., being free of a stay, is insufficient to defeat interim measures. If such a condition were sufficient, one party could easily undermine the entire proceeding and prevent an award of interim relief.

        Consequently, the Tribunal has the power to grant a stay of sale. Such interim measures are generally enforceable under Art. III of the New York Convention. The issue of enforcement, however, is irrelevant, because it has no bearing on the authority to issue the order, and must be dealt with separately. The enforcement issue is not within the Tribunal’s competence and has therefore no impact on the present proceedings. Furthermore, the history of arbitration clearly shows that the authority of arbitral awards does not depend entirely on their enforceability. The parties generally abide by the terms of the award; the non-complying party reduces its credibility when it violates an order.

      3. Speculative is entitled to interim measures
      4. An arbitral tribunal grants interim measures when deemed necessary (Art. 17 UNML). In the present case, interim relief in the form of a stay of sale is necessary to protect Speculative from irreparable harm. Without such a stay, Deep Well would be free to sell the rig to another party, thereby making specific performance impossible, and rendering this action superfluous. Because specific performance is the only adequate remedy for Speculative’s injury, interim measures are necessary to preserve the option of the Tribunal to issue the remedy of its choice.

        The court order of the Commercial Court of Mediterraneo expires on April 14, 1998. This Tribunal, however, is not expected to issue its final award until after this date. Thus, to preserve Speculative’s remedies, this Tribunal should grant interim measures until it issues its final decision or until September 30, whichever comes first.

        Under the facts of this case, Speculative is entitled to interim relief. A stay of sale is warranted when necessary to preserve goods, especially when the goods are unique or irreplaceable. Here, Oil Rig #23 is the only rig currently available that will satisfy Speculative’s needs. If no stay is granted, and this Tribunal ultimately declares that a contract exists, the parties will not be able to fulfill the terms of the contract, and the contract will lapse. Consequently, Speculative could lose the entire drilling concession with Polarity and millions of dollars in revenue. If Speculative does not start drilling on schedule, it must pay a penalty to the government of Polarity. Ultimately, Speculative’s damages could be so high that Deep Well may lack the funds to compensate Speculative.

        In contrast, Deep Well will not suffer a significant detriment if the stay of sale were granted, even supposing the Tribunal found that the contract exists. At most, Deep Well may be unable to deliver the rig to Oceania Oil, Ltd. in April, which would render that contract null. The market for oil rigs, however, is currently very favorable to Deep Well, and there should be no difficulty in finding another buyer, perhaps even at a higher price. Even if Deep Well does suffer damages, Speculative has opened a bank guarantee in the amount of E$20,000,000 designating Deep Well as the beneficiary. If necessary, Speculative is willing to extend this bank guarantee, which currently expires on May 30, 1998, thereby complying with its obligation under Art. 17 subparagraph 2 UNML.

      5. Speculative is entitled to a stay of sale until September 30, 1998

        Under the terms of the contract, Speculative has an option to purchase the rig until September 30, 1998. To preserve Speculative’s interests, it is necessary to prevent the sale of the rig to a third party. Interim measures provide such protection until the date of the final award. If the Tribunal issues its final award before September 30, the interim measures lapse, thus leaving Speculative unprotected. Therefore, it is important that, in formulating its final award, the Tribunal include a permanent stay of sale until Speculative’s decision to take the rig or September 30, 1998, whichever comes first.

Requests for Relief

Therefore, may it please this Tribunal to enter the following relief

- Declare that a contract of sale of the oil drilling rig was entered into between Deep Well as seller and Speculative as buyer on the terms contained in the Deep Well offer of May 13, 1997 and accepted by Speculative on June 5, 1997;

- Order Deep Well to deliver the drilling rig to Speculative if Speculative should decide to take the rig in accord with Art. 5 and 6 of the contract;

- Order Deep Well not to sell the drilling rig to any other party as an interim measure prior to issuance of the final award;

- Order Deep Well not to sell the drilling rig to any other party prior to the determination to be made by Speculative in accord with Art. 6 of the contract;

- Order Deep Well to bear the costs of the proceeding as the losing party in accord with Art. 38 and 40 UNCITRAL Rules.

Respectfully submitted,

 

Jens Haubold Christiane Kirchhof Jens Lüpkes

 

Ilse Vlamynck Valerie Willems