SECOND ANNUAL

WILLIAM C. VIS

INTERNATIONAL
COMMERCIAL ARBITRATION MOOT

 

International Arbitral Centre
Federal Economic Chamber
Vienna, Austria

March 22-26, 1995

_________________________________________________________

THE PROBLEM

 

Further information:

International Commercial Arbitration Moot
Institute of International Commercial Law
Pace University School of Law
78 North Broadway
White Plains, NY 10603
U.S.A.

Tel: (914) 422-4402
Fax: (1-914) 422-4229

E-mail.iicl@genesis.law.pace.edu

 

Communications Corporation is incorporated in Equatoriana and as its only place of business in that country. It is a relatively small manufacturer of specialized telecommunications equipment, which it sells in twenty different countries. Specialty Electronics Corporation is a manufacturer of electronic components, which it sells to a number of manufacturers of various types of electronic equipment. It has only one factory located in Mediterraneo, where it is incorporated. It carries out all of its activities, including sales from the factory. Since 1982 Communications Corporation has purchased many of its requirements from Specialty Electronics.

Prior to the events described below, Communications Corporation would place an order by sending its purchase order to Specialty Electronics by mail. Specialty Electronics would send its confirmation form to Communications Corporation by mail. The purchase order and confirmation forms each had on the reverse side the "General Conditions of Purchase" and the "General Conditions of Sale" of Communications Corporation and Specialty Electronics respectively. These general conditions were not in complete agreement on a number of different points. One difference of importance in the two forms was that Communication Corporation's purchase order form had no forum selection clause whereas Specialty Electronics' confirmation form contained a forum selection clause, as described below. However, the differences in the general conditions had never caused any problems and had never been discussed by the two companies.

On 26 August 1991 Communications Corporation and Specialty Electronics entered into an agreement entitled "Master Sales Agreement". The Preamble to the agreement recited

that Communications Corporation of Equatoriana (hereafter "Buyer") has been purchasing various electronic components from Specialty Electronics Corporation (hereafter "Seller") since 1982;

that the two companies wish to use electronic data interchange (EDI) for the sending of purchase orders, invoices and similar routine business communications;

that it is desirable for Buyer and Seller to enter into a communications agreement specifying the manner by which they will communicate by EDI;

that it is convenient for the communications agreement to include the general conditions of purchase and sale;

that the International Electronics Association has prepared a model sales and EDI communications agreement, which Buyer and Seller have decided to adapt to their own use.

The operative clauses of the Master Sales Agreement were in two groups. The first group consisted of those clauses that were relevant to a contract of sale. The second group of clauses related to the technical requirements of communicating by EDI.

Among the clauses were the following:

1. This Master Sales Agreement governs (a) the use of electronic data interchange (EDI) for the placement of orders by Buyer and such other communications between Buyer and Seller for which standardized messages are set out in Annex II, as amended from time to time, and (b) the content of contracts entered into as a result of the placement of such orders by the Buyer.

2. Buyer will order all of its requirements of the electronic components listed in Annex I from Seller.

3. All communications between Buyer and Seller for which there is an appropriate EDI standardized message set out in Annex II shall be made by means of EDI.

4. The price to be paid by Buyer shall be that set out in the Seller's relevant price list less ten percent (10%), except that if the Seller offers a better price to any other purchaser, the same price shall be offered to Buyer.

***

16. The law applicable to this contract is the law of Mediterraneo.

17. Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.

(a) The arbitration shall be administered by International Arbitration Centre of Danubia. The International Arbitration Center shall also be the appointing authority.

(b) The number of arbitrators shall be three.

(c) The place of arbitration shall be Vindabona Danubia.

(d) The language to be used in the arbitral proceedings shall be English.

18. This agreement may be cancelled by either party on thirty (30) days notice.

The model agreement prepared by the International Electronics Association contained a footnote following what is clause 3 in the Master Sales Agreement. The footnote, which was retained in the Maser Sales Agreement, reads as follows:

The standardized messages in Annex II have been developed by the International Electronics Association. UN/EDIFACT is in the process of developing a full range of United Nations Standardized Messages (UNSM). Buyer and Seller intend to modify terms of Annex II by substituting the UNSM when UN/EDIFACT has adopted sufficient messages to make it practicable.

Specialty Electronics entered into similar agreements with a large number of its customers.

From 26 August 1991 until 28 February 1994 Communications Corporation placed its orders by use of EDI as agreed. On 14 November 1993 Specialty Electronics sent the following notice to Communications Corporation and to the other customers with which it had entered into a Master Sales Agreement:

For the past two years we have participated in the program of the International Electronics Association to use EDI to the greatest extent possible. Most of our customers, and some of our suppliers, have participated in the same program and have been using the standard messages developed by the International Electronics Association. We have been generally pleased with the results, as we are sure you have been as well.

UN/EDIFACT has now approved a significant number of EDI Standardized Messages (UNSM). Since those messages are designed for use by all economic sectors, it would be an advantage for all concerned to begin using the UNSM. At this general meeting in Zurich in October the International Electronics Association recommended that the industry begin using the UNSM. We are in complete agreement with that recommendation. We are sure that such a move will facilitate the wider use of EDI.

Therefore, beginning on 1 March 1994, we will implement the UNSM that have status 2, i.e., that have been adopted by UN/EDIFACT. We attach to this letter a list of all UNSM with status 2 along with instructions for their implementation.

You should modify Annex II of your copy of the Master Sales Agreement accordingly.

For technical reasons we will not be able to support both UNSM and messages in Association format. Therefore, if you are not prepared to use the UNSM as of 1 March 1994, you may send purchase orders or other communications to us in paper-based form until you have made the necessary adjustments.

For various technical reasons Communications Corporation did not implement the UNSM until 11 March 1994.

During 1993 Communications Corporation developed a new mobile communications base station, which it designated the X-23. The base station incorporated the A-14 resonator manufactured by Specialty Electronics. The A-14 had been on the market since early 1990, and Communications Corporation had used it in another of its products, which had been subsequently discontinued. The A-14 resonator was a well engineered product and it functioned properly in the

X-23 base stations that Communications Corporation had designed. During the development of the X-23, the engineers from Communications Corporation consulted extensively with the technical personnel of Specialty Electronics concerning the use of the A-14 resonator.

On 3 March 1994 Mr. Tempus purchasing manager of Communications Corporation, telephoned to Mr. Fugit, sales manager of Specialty Electronics, and told him that Communications Corporation had just signed a contract to sell to World Wide Telecommunications its X-23 mobile communications base stations.

World Wide is a telecommunications company with contracts to provide mobile telecommunications in five different countries. Mr. Tempus told Mr. Fugit that the contract between Communications Corporation and World Wide called for the delivery of 50 units within two months for testing purposes. He explained that the contract stated that, if the 50 units met the contract performance specifications, Communications Corporation was to provide an additional 10,000 units within the next two years. Communications Corporation was very interested in the contract because in addition to the significant profit Communications Corporation expected from the contract itself, this would be the first sale of this new model. A sale to World Wide Telecommunications would establish the X-23 base station in the market.

Mr. Tempus continued that, as Mr. Fugit perhaps knew the A-14 was on Annex I to the Master Sales Agreement and Communications Corporation had previously ordered it regularly, but Communications Corporation had not ordered any A-14s for the past six months. In order to manufacture the 50 mobile base units immediately, they would like Specialty Electronics to send 120 A-14 resonators by air. However, as Mr. Fugit might be aware, Communications Corporation had not as yet implemented the UNSM and could not, there fore,

send the proper EDI purchase order. Instructions for the future delivery of additional resonators would be given as soon as World Wide had finished its testing and had established a delivery schedule for the additional X-23 base stations.

Mr. Fugit replied that he would have the 120 A-14 resonators sent that same day. He suggested that Mr. Tempus should send a paper-based purchase order to document the order. Specialty Electronics sent the A-14 resonators the same day, 3 March 1994. They were received by Communications Corporation on 9 March 1994.

Communications Corporation also sent its purchase order on 3 March 1994. Specialty Electronics received it on 8 March 1994, and replied the same day by sending its confirmation form. The purchase order and the confirmation form were the same forms that had previously been used, and that both companies had continued to use with other companies with which they did not communicate by EDI. The purchase order contained no provision in its General Conditions of Purchase relevant to the solution of this dispute. However, clause 14 of the General Conditions of Sale on the rear of the confirmation form stated that "Any action arising out of this contract shall be brought only in the Commercial Court of Mediterraneo." Communications Corporation received the confirmation form on 17 March 1994, and filed it without reviewing the General Conditions of Sale.

Communications Corporation assembled the 50 X-23 mobile base stations after routine testing of the A-14 resonators. They were delivered to World Wide Telecommunication son 12 April 1994. When World Wide Telecommunications tested the 50 X-23 mobile base stations, they did not work properly in certain rare, but important, situations. Although rare, the situations in which the X-23 did not work properly were well within its published performance specifications. As a result, on 5 May 1994 World Wide notified Communications Corporation that they would not take the 10,000 additional units.

The contract price for the X-23 mobile base stations that World Wide Communications had agreed to pay was $425 per unit. Direct cost of manufacturing the units would have been $145 per unit, of which $50 represented the price of the resonators. Indirect costs using the formula generally employed by Communications Corporation would have been $210 per unit.

Upon investigation, the defect in the X-23 mobile base stations was found to lie with the A-14 resonators. Unknown to Communications Corporation, Specialty Electronics had modified the A-14 resonators. This modification did not change any of the published technical specifications. However, the A-14 was now incompatible with other components of the X-23 in certain performance situations.

As soon as the source of the problem was discovered on 24 May 1994, Mr. Sturm, president of Communications Corporation called Mr. Drang, president of Specialty Electronics, and angrily told him that loss of the contract with World Wide Telecommunications was the fault of Specialty Electronics. He asked how Specialty Electronics could change its products without notifying its customers. Specialty would have to pay Communications Corporation for all the profit that it lost on the World Wide contract, and then some. Mr. Drang in turn got angry and told Mr. Sturm that the A-14 did everything Specialty Electronics had said it would do.

In the atmosphere created by the presidents of the two companies, every attempt at negotiation by the lawyers for the two companies failed.

On 4 September 1994 Communications Corporation brought suit against Specialty Electronics in the Commercial Court of Equatoriana "for breach of the oral contract of sale entered into between them on March 3, 1994". Specialty Electronics appeared and requested the court to dismiss the action because of the choice of forum clause in the confirmation form sent by Specialty Electronics on 8 March 1994.

On 15 September 1994 the court dismissed the action brought by Communications Corporation stating "Although this court would ordinarily be an appropriate forum for a contract dispute between these two parties, the contract between them contains a valid provision that precludes the courts of Equatoriana from exercising jurisdiction over this case." Communications Corporation has not appealed the decision of the Commercial Court.

On 3 October 1994 Communications Corporation sent Specialty Electronics a notice of arbitration pursuant to Article 3 of the UNCITRAL Arbitration Rules. The notice of arbitration included all of the particulars required by article 3(3) of the UNCITRAL Arbitration Rules. (For the purposes of the Arbitral Moot, assume that the statements made pursuant to article 3(3)(e) and (f) by Communications Corporation were consistent with whatever appears in your statement of claim.) The notice of arbitration also included the name of the arbitrator to be appointed by the claimant, as provided in article 3(4)(b).

Specialty Electronics replied to Communications Corporation on 5 October 1994 that it would contest the jurisdiction of the arbitral tribunal. It said that, if Communications Corporation intended to pursue its claim in litigation, it should bring suit in the Commercial Court of Mediterraneo.

Since Specialty Electronics did not appoint an arbitrator, on 16 November 1994, pursuant to article 7(2) of the UNCITRAL Arbitration Rules the International Arbitration Centre of Danubia did so. On 22 November the two arbitrators so appointed named the third arbitrator.

Communications Corporation informed the aribitral tribunal as constituted that it would file its statement of claim on 7 December 1994.

Relevant Legal Rules

Resolution of the dispute between Communications Corporation and Specialty Electronics depends upon the existence of certain legal texts or legal rules in one or more of the three countries involved: Equatoriana, Mediterraneo and Danubia. The existence of the following legal texts and rules are before the arbitral tribunal and may be relied upon in written or oral argument without further proof.

Equatoriana, Mediterraneo and Danubia are all parties to the United Nations Convention on Contracts for the International Sale of Goods and none of them has filed any declarations or reservations to the convention.

Equatoriana is a party to the Convention on the Limitation Period in the International Sale of Goods as amended by the 1980 Protocol. It has not made any of the declarations permitted by articles 34 to 38 of the Convention. For contracts of sale that are not subject to the Convention, there is a statute of limitations of four years. Under the law of Equatoriana the statute of limitations is a matter of procedure. The expiration of the statute of limitations does not extinguish the claim; it only precludes the claimant from bringing an action in court. Since the statute of limitation is a matter of procedural law, it applies to all claims brought in the courts of Equatoriana.

Mediterraneo is not a party to the Convention on the Limitation Period in the International Sale of Goods.

Article 2213 of the Civil Code of Mediterraneo provides (in an official English translation):

The period of extinctive prescription for obligations arising out of a contract of sale is six months from the date on which the obligation arose. An obligation in respect of a failure to perform a contractual obligation arises when the performance was due, or if it was performed in a defective manner, at the time of defective performance.

Article 2214 of the Civil Code of Mediterraneo provides:

The obligation of the debtor shall cease to exist upon the expiration of the period for an extinctive prescription. The debtor may renounce his right to rely upon the extinctive prescription, either tacitly or expressly, after the period of prescription has begun to run.

Danubia is a party to the Convention on the Limitation Period in the International Sale of Goods as amended by the 1980 Protocol. It has not made any of the declarations permitted by articles 34 to 38. In addition, it has adopted articles 1 and 4 to 30 of the Convention into its domestic law to govern all contracts of sale not governed by the Convention in a statute entitled "An Act on the Limitation Period in the Sale of Goods". (All article numbers in the Convention were retained in the Act.) However, the period of time in article 8 for contracts of sale not governed by the Convention is six months. Article 30 of the Act adopted article 30 of the Convention in the following modified form:

The acts and circumstances referred to in articles 13 through 19 which have taken place in another State shall have effect for the purposes of this Law, provided that the creditor has taken all reasonable steps to ensure that the debtor is informed of the relevant act or circumstances as soon as possible.

Danubia has enacted the UNCITRAL Model Law on International Commercial Arbitration. All three States, Danubia, Equatoriana and Mediterraneo, are parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In all three States, a convention to which the State is a party is effective as domestic law before the courts without the need for domestic legislation beyond any necessary parliamentary authorization to ratify or accede to the convention.

A note on electronic data interchange

The Problem is influenced by the fact that Specialty Electronics Corporation and Communications Corporation have agreed to communicate by means of electronic data interchange (EDI). Although the lawyers representing the two parties in this dispute might not know prior to the dispute much about the reasons for communicating in this way, the technical requirements or the effect on business practice, they would promptly be informed by their clients. This note is intended to furnish the basic information that the clients would tell the lawyers, if they did not already know it.

The linking of computers to telecommunications allows individuals and companies to communicate with other persons in two significantly different ways. E-mail, which many universities currently have available through the Internet, permits the sending of unstructured messages. It is particularly useful for the sending of short informal communications. In effect, it does the same thing that telex does, only faster and more conveniently.

The term EDI is used when the messages are sent in a structured format. For example, the official definition of UN/EDIFACT is:

United Nations rules for Electronic Data Interchange for Administration, Commerce and Transport. They comprise a set of internationally agreed standards, directories and guidelines for the electronic interchange of structured data, and in particular that related to trade in goods and services, between independent computerized information systems.

A message is structured by defining fields and the means by which data is entered into those fields. In the paper-based world a form that has blanks to be filled in is a structured message. The use of a structured EDI message allows the recipient computer to recognize the message type and the data. The recipient can create new messages for internal or external use without re-entering the data. This saves time and money, and reduces the possibility of error in data re-entry by the recipient.

EDI can be used only if the sending party and the recipient party are both prepared to send and receive using the same message formats. In the early stages of EDI message formats were devised largely by trade associations. That is the case in the Problem where the fictitious International Electronic Association devised a set of EDI messages that were then used by Specialty Electronics and Communications Corporation in the communications between themselves.

It is obvious, however, that message sets prepared by a trade association have limited use. Every business deals with suppliers of raw materials, parts and services, as well as customers, in other trades. In order for all parties to communicate amongst themselves it is necessary to have a universally agreed message set. That is the function of the real and important UN/EDIFACT. The decision to develop EDIFACT was made in 1985. The first message for trial use was adopted in 1987. By 1993 messages covering all major business functions had been approved. It was In this context that in October 1993 the International Electronics Association recommended to its members that they begin to use EDIFACT standard messages rather than those prepared by the Association.

Among the legal consequences arising out of the use of EDI for sending purchase orders and acknowledgements are those in regard to the applicable general conditions. In some countries a significant amount of trade is conducted under standard form contracts or general conditions prepared by the relevant trade association. In other countries, and quite often in international trade involving manufactured goods, there are no standard form contracts or general conditions that are widely used. In such a case the purchase order form may have on its face, or more likely its reverse side, the buyer's standard conditions of purchase. The seller's order acknowledgement form will contain the seller's general conditions of sale. This leads to the often discussed "battle of the forms". In case of dispute it may be necessary to determine whether the clauses on the purchase order or on the acknowledgment form will prevail, or whether they cancel each other and the general law of sales will be applied.

There is almost no cost in printing the general conditions on the relevant forms and there is no additional cost in mailing or storing a form with such printing rather than a form without it. That is not true with EDI. The structured messages anticipate that there will be no data exchanged other than the variable data in the relevant message, e.g. description of the goods, quantity, price per unit and in total, method of payment, shipping date, etc. The standard message may include a field for free form messages, but the use of that field for general conditions would increase the telecommunications cost of transmission and the cost of storing the message in the computers of both the sender and the receiver. It is not done.

That means that trading partners have the choice of relying upon the general law of sales for the non-negotiated terms of their transactions entered into by EDI or of agreeing ahead of time on the general conditions that are to govern their contracts. Specialty Electronics Corporation and Communications Corporation chose the latter solution by entering into the Master Agreement.

Further information about how EDIFACT has been developed and how it can be used in commerce and administration may be obtained from:

Trade Facilitation Sector
Economic Commission for Europe
Palais des Nationals
CH-1211 Geneva 10
Switzerland

Tel: +41-22 917 2457
FAX: +41-22 917 0036