CISG CASE PRESENTATION

Facts

Respondent [seller] contracted to deliver an annual fixed quantity of metal concentrate to Claimant [buyer]. [Buyer] terminated the contract when [seller] failed to make delivery during the third year. [Buyer] referred the dispute to arbitration and sought damages for replacement purchases made, which were at higher prices. [Seller] asserted that it was relieved of its contractual obligations due to market condition changes during the third year. In addition, [seller] asserted that it was released from the contract by force majeure due to labor unrest and compulsory liquidation of one of its mines. [Seller] claimed it was justified in suspending deliveries because [buyer] refused to adapt the contract and withheld payment on a shipment, which [seller] sought to recover.

Applicable law

The Contract contained an arbitration clause that provided for ICC arbitration as follows:

"21. Applicable law and arbitration

"This Agreement shall be governed by and construed in accordance with the laws of Sweden. All disputes arising in connection with the Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce ICC by one or more arbitrators appointed in accordance with the Rules. The arbitration will be conducted in Stockholm, Sweden, in the English language." [page 58]

Applicable CISG provisions

Articles 49, 71, 72 (avoidance due to anticipatory breach)

At issue is whether [buyer] was entitled to withhold payment of the last shipment, and, if not, was [seller] permitted to suspend deliveries of the goods.

Article 71 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) allows the prejudiced party to either suspend or terminate his performance of a contract if he gives immediate or reasonable notice. According to Article 72, notice is not required only when "the other Party has declared that he will not perform his obligations." These requirements "which are a reflection of the rule of 'positive Vertagsverletzung' of German customary law [are] obviously motivated by a concern that the other Party is made clear of the position of its counter party, placing him in a position to provide assurance that he will in fact perform and thereby defeating the assumption of anticipatory breach and the concomitant threat to the orderly fulfillment of the contract." [page 58]

[Editorial note: Literally translated, the term positive Vertreagsverletzung means "positive breach of contract". It is a remedy based on case law that is available for all breaches of contract not provided for in the German Civil Code, i.e., the breach of accessory obligations and consequential damages.]

In February of 1994, [buyer] began making cover purchases, which leads to the assumption that there was an ipso facto avoidance of the contract rather than a suspension of avoidance under Article 71. "However, CISG does not recognize the concept of ipso facto avoidance, see, e.g. Documentary History of the Uniform Law for International Sales, Kluwer (1989):

"The contract is avoided as a result of the Buyer's breach only if "the Seller … declare(s) the contract avoided", /-/ Automatic or ipso facto avoidance was deleted from the remedial system in this Convention because it led to uncertainty as to whether the contract was still in force or whether it had been ipso facto avoided. Under Article 60 of [CISG] the contract is still in force unless the Buyer has affirmatively declared it avoided." [page 58-59]

Pursuant to CISG Article 72(2), [buyer] was required to give notice of its intent to declare the contract avoided and "issue a subsequent declaration of avoidance." [Buyer] gave a declaration of avoidance in a letter dated 23 January 1995. However, this declaration "was clearly not within a reasonable time after the circumstances giving right to avoidance had occurred and therefore inconsequential (Article 49(2) CISG)." In order to avoid a contract by reason of anticipatory breach, it must be "clear" that the other party will fundamentally breach the contract (Article 72(1) CISG).

"From the witness statements dealing with the events of the 16 December 1993 Meeting only the one issued by Mr. [X] addresses these [with] some specificity. In Mr. [X]'s written witness statement … - which is in essential respects confirmed in his examination at the final hearing - it appears that Mr. [Y] - representing the [seller] at the meeting - only expressed his wish to discontinue deliveries to the [buyer] and that - in the face of Mr. [Z]'s objection - the 'Parties agreed to continue negotiations early 1994 as at this particular moment concentrate market price for 1994 was not yet fixed.' In the opinion of the Sole Arbitrator this outcome of the meeting hardly constituted any alarming development in the Parties' relationship tantamount to any 'clear' indication of anticipatory breach. And in fact, further negotiations did take place not only on 10 March and 14 April 1994, but also on subsequent occasions throughout 1994. At no time is there any mention from either of the Parties of an avoidance of the Agreement throughout 1994 but, on the contrary, a request for performance of the Agreement was directed to the [seller] in the [buyer's] letter of 10 May 1994."

In the absence of "clear" reasons to assume anticipatory breach, the Arbitrator concluded "that [buyer] breached the Agreement by withholding payment for the Last Shipment." [page 59]. However, the Arbitrator held that this was not a fundamental breach of contract.

[Seller's] failure to comply with CISG Article 64

If the buyer breaches the contract, the seller has two options according to Article 64 of CISG. The seller may either declare the contract avoided immediately if the breach is fundamental or he may fix an additional period (so-called "Nachfrist") for performance by the buyer of his obligations according to Article 63 of CISG. [Seller] failed to adopt either of these options. [page 59-60]

CISG Articles 74-77 (damages)

Articles 74-77 of CISG deal with the recovery of damages for breach of contract. An aggrieved party may seek damages for breach of contract after the contract has been performed or, in cases of avoidance, before contractual obligations are fully performed.

Article 74 provides that "damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

"Article(s) 75 and 76 of CISG address the situation where a contract has been avoided and where damages are based on factual or hypothetical substitute transactions, respectively, while Article 77 imposes a general duty for the prejudiced party to mitigate its damages."

[Buyer] requested damages in the amount of the price difference between the contract price and the price of the substitute purchases that were made.

These damages can only be recovered if the contract was properly avoided in accordance with the provisions of CISG. Article 75 of CISG states:

"Article 75 (Damages in case of avoidance and substitute transactions). If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer had bought goods in replacement or the seller had resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

The contract was avoided on 23 January 1995, and "no substitute transactions undertaken prior to a reasonable time after that date can be taken into account for purposes of establishing a duty of indemnification based on substitute transactions."

[Buyer] cannot recover damages under CISG Article 76. "[A]part from the requisite that a declaration of avoidance must have been made - "a party that has entered into a substitute transaction within the meaning of Article 75 […] must proceed under that provision and cannot claim damage under Article 76" (Flechtner, "Remedies under the Convention", 8 J.L.& Com. 101 (1988))."

Therefore, the Arbitrator concluded that [buyer] could invoke neither Article 75 nor Article 76 as a basis for damages.

"However, it remains to be explored whether or not damages cannot be awarded on the basis of the fundamental provisions relating to damages pursuant to Article 74 CISG, i.e. based on the assumption which has to be made in the absence of a declaration of avoidance from either party, i.e. that the Agreement was still in force during the year of 1994." [page 60]

If [buyer's] purchase of metal concentrate in substitute transactions was a measure undertaken to mitigate damages pursuant to Article 77 CISG, the following argument could be made:

• "The procurement of an annual volume of 15,000 dmt [metal] concentrate constitutes a marginal contribution (5-10 per cent) to the aggregate input of materials in the processing operation of the [buyer's] … smelter plant. It may therefore be assumed that the variable cost for processing this marginal quantity of [metal] concentrate only to a negligible extent exceeds the landed cost of the [metal] concentrate itself. From this may follow that the loss of profit - in terms of the marginal or gross contribution foregone - which the [buyer] would have suffered if it had chosen not to procure [metal] concentrate in substitute transactions would have been significantly greater than the difference between the price according to the Agreement and the price obtained by the [buyer] in the substitute transaction.

• "This assumption would appear to obtain support by the fact that the [buyer] in fact did go ahead and procure [metal] concentrate in substitute transactions - exposing itself to financial risk - which would not - based on reasonable commercial judgment - have been undertaken in the absence of their economic viability.

• "On the basis of these general considerations the assumption made here obviously carries a high degree of verisimilitude. However, more important for the assessment of the [buyer's] request for damages is whether the measures taken by the [buyer] in purchasing [metal] concentrate in substitute transactions constituted the most appropriate action under the circumstances taking into consideration the aggrieved Party's duty to mitigate damages resulting from the other Party's breach of contract. For purposes of carrying out this assessment there are no materials available to the Sole Arbitrator which shed any light on the cost consequences of any alternative action undertaken by the [buyer], such as the gross contribution arising from sales of processed goods resulting from the processing of [metal] concentrate in the [buyer's] … smelter plant. Hence, there is no information made available to the Sole Arbitrator in the course of this arbitration addressing issues like unit cost for processing or price levels during the relevant time period for processed goods making use of [metal] concentrate. [pages 60-61]

However, it is the responsibility of "the party who argues that the aggrieved party has not taken appropriate steps to prevent unnecessary damage from occurring which carries the burden of proof for his allegation in this regard. In this arbitration it has not been argued that there would have been any alternative course of action open for the [buyer] which would have produced a less costly outcome than the one actually chosen by the [buyer]."

Therefore, the arbitrator concluded that the price difference between what was agreed upon in the contract and what was paid in the substitute purchases "must be relevant for purposes of establishing the indemnifiable damages suffered by the [buyer]." [page 61]