INAUGURAL
INTERNATIONAL COMMERCIAL ARBITRATION MOOT

Vienna, Austria
March 18-20, 1994

 

PROBLEM

Sexto Chip Company is a manufacturer of integrated circuits used in computers, generally referred to as computer chips. For the past ten years each new generation of Sexto chips has become the industry standard. It usually takes eighteen months to two years from the time the Sexto chips are first placed on the market, thereby becoming available for study by Sexto's competitors, before competing chips are available that meet the performance standards of Sexto chips. Once competing chips become available in quantity, the price for the Sexto chips normally begins to fall significantly.

Quinto Computer Company is a manufacturer of personal computers. It has established a good reputation for manufacturing quality machines at the forefront of personal computer technology. It has specialized in producing computers based upon Sexto chips.

Quinto is incorporated and has its principal place of business in the country of Equatoria. Sexto is incorporated and has its principal place of business in the country of Mediterraneo. Although both companies sell their products in a number of countries, neither has significant assets or operations in any country other than its home country. Both Equatoria and Mediterraneo are party to the United Nations Convention on Contracts for the International Sale of Goods (Vienna 1980) and to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York 1958). Neither State has declared any reservations to the two conventions.

Since early 1992 Sexto has been developing a new chip, named the SuperSexto. As is usual in the industry, it has shared development information with its major customers, of which there are eight including Quinto, so that they might design new computers that would take advantage of the features of the SuperSexto. On January 15, 1993 Sexto signed contracts with its eight major customers in which Sexto agreed to sell and the computer manufacturers agreed to purchase a minimum quantity of SuperSexto chips during the "introductory period". It was understood by all parties, though not made part of the contracts, that during the "introductory period" Sexto would not sell the SuperSexto chip to any computer manufacturers other than the eight major customers. The "introductory period" runs from September 1, 1993 to July 1, 1994. Based upon past experience, Sexto expects that during the introductory period it will deliver to its eight major customers approximately twice as many chips as had been contracted for. The commercial success of the chip will depend on the quality of the chip, the extent to which the computers that are designed around it take advantage of the new features the chip has to offer and the extent to which rival chip manufacturers duplicate the features of the SuperSexto chip or develop competing chips based upon other designs.

In exchange for the right to receive a guaranteed amount of the SuperSexto chips during the introductory period, each of the computer manufacturers made three major commitments: (1) to develop a line of computers that would use the SuperSexto chip, (2) to assure that all advertisements for the computers would state that there was "SuperSexto inside" and (3) not to disclose for a period of five years from the beginning of the ten-month introductory period the technical characteristics of the chips to any other firm. Although the non-disclosure provision was binding for a period of five years, it was of particular importance to Sexto in the period prior to and for the first two years after the public introduction of computers based on the SuperSexto chip so as to hinder any of Sexto's competitors from developing chips of their own with comparable features.

The contract between Quinto and Sexto was written in English. It was negotiated between the head offices of the two companies and was signed on January 15, 1993. In addition to the provisions described above, the contract provided that during the introductory period Sexto would sell and deliver and Quinto would purchase and take delivery of a minimum of 2,500 SuperSexto chips per month, i.e., a total of 25,000 chips, at a factory price of US$ 525 per chip, or a total minimum purchase of US$ 13,125,000. The essentially identical contracts with the seven other computer manufacturers required Sexto to deliver to them a total of 175,000 SuperSexto chips during the introductory period. All eight contracts contained the Model Arbitration Clause referred to in the UNCITRAL Arbitration Rules. The contract between Quinto and Sexto provided that any such arbitration should be conducted in English and take place in the country of Danubia. Danubia has adopted the UNCITRAL Model Law on International Commercial Arbitration and is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The contracts with the other seven computer manufacturers called for arbitration in various places, but none of them provided for arbitration in Danubia.

By August 15, 1993 Sexto had manufactured and placed in its warehouse ready for shipment 220,000 chips. On August 15 there was a fire in the Sexto factory and warehouse. Of the 220,000 chips already manufactured, only 80,000 survived the fire and are in condition to be used. The factory was sufficiently damaged that Sexto does not expect to be able to resume production until July 1, 1994. Sexto anticipates that for the first three months, i.e., July, August and September 1994, it will produce 30,000 chips per month. After that time it should be able to produce a minimum of 50,000 chips per month. Sexto has no other means of manufacturing the SuperSexto chip during the relevant time periods.

On August 17, 1993 Sexto wrote identical letters to the eight computer manufacturers, including Quinto. The letter stated in the relevant part

"In view of the impossibility of launching the SuperSexto chip in volume as had been expected, we have decided to delay shipping the SuperSexto chips until our factory is back in production and a sufficient inventory has been established to meet the commitments we have made to you and to the seven other manufacturers with whom we have signed firm supply contracts for the introductory period. We assure you that we will notify you as soon as possible when the new introductory period will begin."

On August 20, 1993 Quinto answered

"We cannot accept your decision to delay shipping the SuperSexto chip to us. Quinto has spent a considerable amount of money developing the Kaiser Karl Quinto line of computers using the SuperSexto chip. We have built a completely new factory to produce these computers. As you are well aware, the factory cannot be used for any other purpose during the projected delay.

"Our contract with you was for the bare minimum number of chips we exected to need during the introductory period. If we receive only the minimum number contracted for, we will be far behind our expected production and profit goals. Any delay in receiving the minimum number of SuperSexto chips you have committed yourselves to deliver would lead to intolerably large losses. These are losses that Quinto cannot afford and for which we would hold you responsible.

"Since Sexto has in stock sufficient SuperSexto chips to meet its contractual obligations to us, we insist that you deliver the chips you have contracted to deliver to us within the time period promised."

Sexto replied on August 28, 1993

"We regret the inconvenience that is being caused to you, as well as to the other manufacturers to whom we have contracted to deliver SuperSexto chips. However, since Sexto cannot meet its contractual obligations to everyone, it would not be fair to give Quinto a competitive advantage by shipping SuperSexto chips to you before we are able to ship them in quantity to everyone.

"As you know, our decision not to make partial shipments of the chips that were not destroyed in the fire was based on the fact that our competitors would then be able to start to develop chips that would meet the technical specifications of the SuperSexto chip. That would be neither to your advantage nor to ours.

"We assure you that we will inform you as soon as we have a reasonable estimate as to when we will be able to begin shipping the SuperSexto chip."

On September 6, 1993 a report was issued by the fire department of Sextoville which said that the fire had been caused by an electrical short circuit for which Sexto could not be blamed. The report also noted that there was no legal requirement to have an automatic sprinkler system or automatic fire alarm in the warehouse or factory. However, both were common in factories and warehouses in Mediterraneo and both were required by Sexto's fire insurance policy. Both been turned off on August 10, 1993 by Sexto to permit installation of new and improved systems. The new sprinkler and fire alarm systems had been scheduled to be turned on upon completion of the installation on August 20, 1993. According to the report, if either the new or the old alarm and sprinkler systems had functioned, the fire would have been extinguished before any significant damage had occurred.

On October 1, 1993 Quinto sent to Sexto a notice of arbitration pursuant to article 3 of the UNCITRAL Arbitration Rules. By mutual agreement of the parties, Quinto did not include in its notice of arbitration a statement of the relief or remedy sought, as called for by article 3(3)(f) of the Rules, but will include it in the statement of claim under article 18(2). The arbitral tribunal has been constituted by mutual accord of Quinto and Sexto. The time limits in the UNCITRAL Arbitration Rules for submitting the statement of claim and statement of defence were modified by the parties to conform to those stated in the rules for the competition.

Quinto is prepared to show that prior to signing the contract on January 15, 1993, it shared with Sexto the following estimated financial data. Quinto is prepared to certify that the actual expenditures to date and estimated future costs and expenditures are consistent with the data. Sexto is prepared to accept the validity of the figures, for whatever value they may have in this arbitration.

In addition Quinto is prepared to show that it will have spent US$ 1,500,000 on advertising and similar items that cannot be used unless the Kaiser Karl Quinto is ready for shipment within three months of the projected date of November 1, 1993.

The parties have stipulated that, to the extent that interest might be relevant, the applicable rate would be 8% per year.

Article 1623 of the Commercial Code of Mediterraneo, which is in Chapter 8 entitled "Sales of Goods", provides:

"When the seller fails to perform the contract as agreed, the buyer may require the seller to perform the contract if the goods are unique or if other appropriate circumstances are present."

Article 835 of the Code of Civil Procedure provides:

"A court that is requested by a buyer of goods to order performance of the contract as provided in article 1623 of the Commercial Code, shall enter such an order."

In a consistent line of decisions the Supreme Court of Mediterraneo has explained that article 835 is mandatory if the court finds that the goods are unique and that the court may exercise its discretion only when it must determine whether "other appropriate circumstances are present."

Article 1273 of the Commercial Code of Danubia and article 932 of the Code of Civil Procedure are drafted in identical terms. They have been interpreted by the courts in the same manner as in Mediterraneo.