CISG CASE PRESENTATION

Case identification

DATE OF DECISION: 19920000 (1992)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Case report does not identify presiding arbitrator(s)

CASE NUMBER/DOCKET NUMBER: 7585 of 1992

CASE NAME: Case report does not identify parties to proceedings

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (claimant)

BUYER'S COUNTRY: Finland (defendant)

GOODS INVOLVED: Machinery for a production line of foamed boards

ARBITRATION: ICC International Court of Arbitration case no. 7585 of 1992

Case law on UNCITRAL texts (CLOUT) abstract no. 301

Reproduced with permission from UNCITRAL

An Italian seller of machinery for a production line of foamed boards, plaintiff, sued the Finnish buyer, defendant, for damages and interest as the buyer had failed to make the third down payment to it and to notify the relevant letters of credit on the required date.

The contract contained a clause providing that the CISG was applicable to it. The arbitral tribunal held that according to articles 1(1) CISG and 100 CISG, the CISG was applicable in its entirety (Finland had made a reservation upon ratification, declaring that it would not be bound by Part II of the CISG) with a statutory nature, because the conflict of laws rules expressed in the 1955 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods (Italy and Finland ratified this Convention) led to the application of Italian law, which, after ratification of the CISG, incorporated the provisions thereof. Therefore, the express choice of the CISG in the contract had not deprived the CISG of its statutory character.

The arbitral tribunal approved the seller's declaration of avoidance of the contract in accordance with article 64(1)(b). It held that the buyer, by failing to notify the letters of credit on the date required, had not complied with the requirements of articles 53 CISG and 54 CISG regarding the buyer's obligation to pay the price. Reading article 25 CISG, which defines a fundamental breach, in connection with articles 53 CISG and 54 CISG, the arbitral tribunal stated that the mere fact that a buyer had some delay in payment was not always in itself a fundamental breach. In this case, the seller waited several months before declaring the contractual relations terminated, in spite of the fact that it was clear that the buyer did not have the financial resources. The arbitral tribunal regarded the period between the buyer's default and the declaration of avoidance by the seller as an "additional period" fixed by the seller under articles 63(1) CISG and 64(1)(b) CISG.

On the basis of articles 78 CISG and 84 CISG, the arbitral tribunal determined that the seller was entitled to claim interest on any sum that was in arrears. Stating that the CISG had not solved the question of the rate of interest, the arbitral tribunal further determined that as the financial aspects of the sale were linked with the German Mark, the applicable rate of interest was the German one.

The arbitral tribunal found that the damages claimed by the seller, namely, on the one hand damages for preservation of the undelivered machinery and costs and expenses (legal costs, arbitration), and on the other hand, damages for loss of profit, should be considered as foreseeable according to article 74 CISG, as such damages were usual in situations of avoidance of a contract for breach of one party. Citing article 77 CISG, the arbitral tribunal awarded the total amount claimed by the seller for the first category of damages. The damages for loss of profit were held to be covered by article 74 CISG. The arbitral tribunal held that, according to article 75 CISG, the seller, who had resold the machinery, was entitled to recover the difference between the contract price and the price of the substitute transaction.

Referring to the first clause of article 7(2), the arbitral tribunal granted the seller, in addition to damages, the "compensation fee" contained in the contract's penalty clause.

Editorial remarks

EDITOR: Albert H. Kritzer

CISG issues ruled upon:

Applicability, contract vs. statutory basis for applying the CISG. The contract provided that the CISG applies (contractual election of the parties). The tribunal deemed it appropriate to determine whether there was also a statutory basis for applying the CISG.

"a) When the Convention is only applicable because it has been chosen by the parties, it has the same nature as an agreement. As with all contractual agreements, some of its provisions can then be avoided by the law declared applicable by the conflict of laws rules in the absence of choice. A different result would ensue had the parties chosen a national law incorporating the Vienna Sales Convention.

"b) When the Convention is applicable because it has been ratified, it has the same nature as a Statute or an Act of Parliament."

In this case, based on Articles 1(1) and 100, the tribunal concluded that there was also a statutory basis for applying the CISG.

Payment, buyer's obligation to pay the price (enabling steps: obligation to obtain letter of credit). Article 53 sets forth buyer's obligation to pay the price. Article 54 states that this obligation "includes taking such steps . . . as may be required under the contract". Buyer did not obtain a letter of credit on the date required. Failure to do so was termed a breach of contract.

Avoidance/Fundamental breach/Notice fixing an additional final period for performance ("Nachfrist" notice). Reading Article 25 in connection with Articles 53 and 54, the tribunal stated that delay in payment (failure to obtain the required letter of credit) "is not always in itself a fundamental breach. According to circumstances, delay on payment for the buyer of delay of delivery for the seller cannot be the cause of immediate avoidance of the contract."

Seller waited over three months before declaring the contract avoided, "[i]n spite of the fact that it was absolutely clear that [buyer] did not have financial resources." The tribunal regarded the period between default and the declaration of avoidance as an "'additional period' fixed by seller" in accordance with Article 63(1) and held that seller was entitled to avoid the contract as provided in Article 64(1)(b).

In implementing Article 63(1), there is a conflict among commentators as to whether the fixing of an additional time period by the seller must be done in such a way as to make it clear to the buyer that the additional period sets a fixed and final limit on the date for performance or whether no such unequivocal warning is necessary.* This arbitral opinion appears to support the latter view, as the tribunal simply states: "The time period between November 28th, 1991 (date of equipment inspection) and March 19th, 1992 (date of termination) has to be analyzed as the 'additional period' fixed by Seller as set out in Articles 63(1) and 64(1)(b) of the Convention."

* Will and Honnold support the former view; Knapp and Enderlein & Maskow support the latter view. Will and Knapp, Bianca-Bonell Commentary (1987) 315 and 461; Honnold, "Uniform Law for International Sales Under the 1980 United Nations Convention, 2d ed. (1991) 370; Enderlein & Maskow, "International Sales Law" (1992) 238.

Without reference to Articles 63(1) and 64(1)(b), another provision of the CISG that could have been relevant to the results reached is Article 64(1)(a) on the theory that delay of over three months in providing the required letter of credit is a "fundamental breach" of contract.

Interest (right to, accrual of, rate of). The tribunal stated:

"Article 78 . . . provides that the creditor is entitled to interest 'without prejudice to any claim for damages.' The purpose of this provision is to make a distinction between interest and damages and to give compensation for the financial loss due to the mere fact that delay in payment has a financial cost. The same general idea is at the origin of Article 84 which obliges the seller who is bound to refund the price, to pay interest on it from the date on which he received money. The practical consequence for the present case is that Seller is entitled to claim interest on any sum that was in arrears."

The tribunal allowed interest from the date payment was due.

This was a contract between a seller from Italy and a buyer from Finland with payment to be made in the currency of a third country. In ruling on the rate of interest, the tribunal stated:

"The question of the rate of interest is not solved in the Convention. . . . Several solutions are conceivable: the rate in force in the state whose law is applicable; the rate in force in the place of business of the creditor; the rate in force in the place of procedure.

"The arbitrator shares another view. In his opinion, the rate of interest is linked to a precise currency. It would be rather illogical to base interest for the delayed payment of a price agreed in strong currency on the legal rate in force at a place of business located in a country which has a high inflation figure and, consequently, a high rate of interest. The same reasoning would lead to the exclusion of the law applicable to the contract, the lex fori, or that of the place of payment. . . .

"Clearly, the financial aspects of the sale are linked with the German Mark. The applicable rate of interest is therefore the German one."

Damages/Mitigation of damages. Two categories of damages were claimed: "on the one hand, damages for storage, care and maintenance of the non-delivered machinery and costs and expenses (legal costs, arbitration); on the other hand, damages for loss of profit."

Commenting on the fact that Article 74 "limits the amount of damages to the foreseeable loss", the tribunal stated: "The claims under the present case are usual in situations of avoidance of a contract for breach of one party. They should therefore be considered as foreseeable" and elaborated as follows:

"The first part of the claim (charges for storage . . ., costs and expenses) belongs to the category of the well known Roman law damnum emergens. . . . Article 77 states that the 'party who relies on a breach of contract' has a duty 'to mitigate the loss, including loss of profit, resulting from the breach.' In the present case, the size of the machinery and its specification obliged Buyer to expenses of carriage and storage in a warehouse, to care and maintenance. [Also allowed was the cost of] modification of electrical equipment for the needs of the new buyer."

"The other part of the claims consist of loss of profit. These claims belong to the category of lucrum cessans of Roman Law. . . . [T]his sort of claim is expressly stated in Article 74 . . . A specific provision in Article 75 gives the seller who resells the goods the right to 'recover the difference between the contract price and the price in the substitute transaction.'" Loss of profit was calculated on this basis.

Penalty clauses/Gap-filling. There are two parts to Article 7(2): a part that calls for settlement of questions concerning matters governed by the CISG which are not expressly settled in it in conformity with the general principles on which the CISG is based; and a part that calls for settlement of such matters in conformity with the law applicable by virtue of the rules of private international law. The second part of Article 7(2) applies where the CISG does not contain applicable general principles on the matter.

In resolving a penalty clause issue, the tribunal referred to the first part of Article 7(2), but not the second part.

The facts are: the contract specified different rights in the event it is "terminated by fault".

• Buyer's rights: In the event of termination by the buyer before the goods have been delivered, where seller is at fault buyer is entitled to a refund of his own payment "without interest".
• Seller's rights: "If the agreement is terminated by fault or request of the purchaser -- including force majeure -- the buyer is entitled to a compensation fee of 30% of the price."

At issue was seller's right to the compensation fee plus damages. Seller's position was, the compensation fee is "a price, a consideration other than in addition to damages suffered." Advising that the contract clause at issue has to be interpreted in accordance with the CISG and "in conformity with the general principles on which it is based" as provided in Article 7, the tribunal reasoned that:

The section on buyer's rights is not a compensation for damages suffered. The fact that it rules out a right to interest expressly given to the buyer under Article 84(1) is significant. And there is evidence that the compensation fee also "has a nature different from damages in compensation of a loss". The fact that the reference to "force majeure" rules out Article 79 damages claims by buyer is significant in this respect. Seller is entitled to the compensation fee in addition to damages pursuant to Article 74.

CITATIONS TO OTHER ABSTRACTS OF DECISION