Case digest
EDITOR: Daniel J. Morse [*]
ICC Arbitration Award
Case No. 8786 of January 1997
Facts. The Respondent clothing retailer [buyer] placed a number of orders with the Claimant clothing manufacturer [seller]. One month prior to delivery, the [seller] sent a number of samples to the [buyer]. [Buyer] returned its criticisms of all but two of the samples twelve days later. In response to the criticisms, [seller] sent new samples to [buyer]'s sub-agent, who in turn advised [seller] that the samples were acceptable. Ten days prior to delivery, the order was cancelled by [buyer]'s sub-agent. [Seller] initiated this arbitration requesting damages for accessories it could not otherwise use as well as loss of profit and costs. [Buyer] replied that the orders were seasonal and, as such, timely provision of acceptable samples and finished product was required. Upon being advised by [seller] that it could not deliver on time, [buyer] requested a reduction of price and a commitment from [seller] that it would deliver on time. When neither was forthcoming, [buyer] advised [seller] that the [buyer] would be cancelling the order due to [seller]'s fundamental breach.
Applicability of CISG. The Arbitrator determined that according to the Terms of Reference, the Vienna Convention and Swiss substantive law were applicable to the dispute.
The Arbitrator further concluded that a valid contract had been entered between the parties pursuant to Article 14 CISG since [seller] had accepted the General Conditions for Delivery [GDI] sent by [buyer]'s sub-agent and thus considered the following issues.
With respect to [seller]'s breach of contract
Concerning [seller]'s failure to submit samples on time. All of the orders from [seller] to [buyer] contain the language: "SAMPLES UNITL: END OF DECEMBER." Setting aside the either misspelling of "until" or typographical error of "unit L," the Arbitrator found that this statement could mean nothing other than that samples will be delivered to [buyer] by the end of December. Although [seller] initially acknowledged this conclusion, it later retracted such without any explanation regarding what could possibly be meant by the remark. [page 70] [**]
According to [seller], samples only had to be delivered ten to thirty days prior to production in the past and it was never contemplated that such samples were to be delivered by the end of December. In an attempt to support this contention, [seller] provided documents of earlier orders although none of the supporting documents contained delivery deadlines for the samples.
It was not contended by either [buyer] or [seller] that there had been delivery of the samples until 31 December 1994, and as such [buyer] concluded that [seller] had commited a fundamental breach of contract in accordance with Article 25 CISG. In so doing, [buyer] relied on the [GDI] to contend that untimely delivery is a fundamental breach. However, the arbitrator determined that timely delivery of the samples was not necessarily contemplated by the [GDI]. Although the [GDI] referred to timely delivery of the goods, it made no indication whether this was to apply to the samples as well. Goods are defined as "the merchandise to be delivered to [buyer]." Since samples are explicitly mentioned in the [GDI], it would follow that timely delivery of the samples, if required, would also be explicitly mentioned. However, because the only indication in the [GDI] was that the goods were to be timely delivered, it is unclear whether the same applied to the samples. Regardless whether such provision did apply to the samples, the Arbitrator determined that such a finding would be moot given that the [seller] had not, nor was about to, deliver the goods on time.
Concerning [seller]'s failure to deliver on time. Due to the late delivery of the samples, [seller] knew, or should have anticipated, that [buyer] could not have given the authorization for production by 29 March. The first set of samples was sent to [buyer] on 10 March and the subsequent corrected set on 23 March. As late as 29 March, [seller] declared that the delivery of the goods within the time limit set by the agreement had become impossible. However, it was the conduct of the [seller] which caused [seller]'s inability to deliver the final product on time. Had samples been promptly provided to the [buyer], [buyer] would have had time to accept or reject the samples in ample time for production to begin and delivery to be completed as agreed. However, as the [seller] had not given the [buyer] ample time to examine the samples and determine their appropriateness, [seller] had to bear the brunt of the responsibility for the failure to deliver the goods on time.
The question remained open, however, as to whether the [buyer] needed more time than usual to examine the samples and as such, caused the delay in the delivery of the final product. If such were to occur, then pursuant to Articles 61 and 62 CISG, [seller] may have been able to require that the [buyer] accept late delivery of the goods if the [buyer] had breached a contractual obligation. The [seller], however, was unable to offer any evidence to this effect pursuant to Article 60 CISG, and thus was unable to demand such a requirement.
What was not clear based on the [seller]'s allegations was how the [buyer] would have breached its obligations under Article 71 CISG, which allows a party to suspend its performance when the other party has commited a fundamental breach of its obligations. In the instant matter, it was the [seller] and not the [buyer] which commited the fundamental breach. [page 71] Furthermore, the [buyer] did not suspend its obligations, but rather terminated the agreement pursuant to Article 72(1) CISG. Thus, the [seller]'s reliance on Articles 35 and 39, which refer to situations where delivery has already taken place, are not applicable in the instant matter where delivery has never occurred.
Concerning [seller]'s anticipatory breach of contract. The facts in the instant matter clearly established that the [seller] had commited an anticipatory breach of contract in the sense of Article 71 CISG. By letter dated 29 March 29 [seller] advised [buyer] that, due to the [buyer]'s delayed examination of the samples (which the arbitrator had already determined was due to late delivery by the [seller]), [seller] would not be able to deliver the goods between 5 and 7 April as required by the contract. Article 33 CISG states: "The seller must deliver the goods: (a) if a date is fixed or determinable from the contract, on that date." Thus, the [seller]'s inability to comply with the delivery date set in the agreement in accordance with Article 33 CISG, allowed the Arbitrator to make an easy determination that the [seller] had committed an anticipatory breach as defined by Article 71 CISG.
Concerning [seller]'s fundamental breach of contract. Since the [GDI] expressly stated that the failure to timely deliver the products was a "fundamental breach of contract," an issue which was not contested by either party, the Arbitrator concluded that the [seller] had committed an anticipatory and fundamental breach.
The Arbitrator noted that a delayed delivery is not only a fundamental breach in the [GDI], but also in the CISG. Article 25 CISG provides as such when the delay "results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result." A decision rendered by the German Oberlandesgericht [Appellate Court] Hamm dated 8 December 1980, in a case involving fashionable ladies wear, has already determined that a delayed deliver of seasonal products generally constitutes a fundamental breach of contract. Thus, [seller] was left with little, if any, argument. [page 72]
With respect to [buyer]'s lawful termination of the agreement
Since the [buyer] had terminated the agreement within hours of learning that the [seller] would be unable to deliver the goods within the time limit specified in the agreement, such termination was in accordance with Article 72(1) CISG which provides: "If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided." As discussed above, the avoidance by the [buyer] was in response to a fundamental breach and therefore valid.
[Seller]'s reliance on Article 72(2) CISG was unfounded since the [buyer] is under no obligation to request a bond from the [seller]. Likewise, the [seller] could not rely on Articles 46, 47 and 49 CISG since the [buyer] is under no obligation to allow the [seller] additional time to deliver the goods where the [seller] has commited a fundamental breach. Finally, the [seller] could not rely on Article 26 CISG which requires that an avoidance of a contract is only effective if made by notice to the other party. The fax sent from the [buyer] to the [seller] avoiding the contract was presented by the [seller] itself who acknowledged receipt thereof, and therefore it was readily apparent that notice was provided.
[Seller]'s final contention is that the [buyer] acted in bad faith by not allowing late delivery in this instance where the [buyer] had accepted late delivery in past dealings with the [seller]. The arbitrator concluded that reliance by the [seller] on its past dealings with the [buyer] when the latter accepted late delivery was not warranted, particularly where the documentation of the past dealings did not make time of the essence. Such past dealings where timely delivery was not required do not preclude the [buyer] from entering agreements with the [seller] in the future where time is of the essence.
With respect to [buyer]'s damages
Concerning the damages incurred by [buyer]. Relying on Article 74, sentence one, CISG, which provides: "Damages for breach of contract by one party consist of a sum equal to the loss of profit, suffered by the other party as a consequence of the breach," the Arbitrator deemed that the [buyer]'s claim for loss profits, indirect loss of profits, travel costs and design expenses were reasonable. He then turned to the issue of foreseeability. [page 73]
Concerning the foreseeability of [buyer]'s damages. Article 74, second sentence, CISG provides: "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."
The loss of profits claimed by the [buyer] were foreseeable to the [seller]. Although the [seller] offered as evidence several contracts entered between the parties for which the [buyer] did not claim damages for late delivery, this merely proved that the ]seller] did not foresee that the [buyer] would actually make a claim for damages. The evidence did not support a conclusion that the [seller] knew at the relevant time, i.e., at the conclusion of the subject contract, that the defendant would make such a claim. To the contrary, the [seller] should have known that the goods were to be sold in the [buyer]'s retail store and also that the goods were seasonal in nature. Accordingly, late delivery would mean that the goods could only be sold for reduced price once they were out of season and therefore profits would be lost.
Concerning [buyer]'s possibility of buying replacement goods. [Buyer] does not have to bear the burden of a reduction in damages pursuant to Articles 75 and 76 CISG since the [seller] admitted that the goods involved would need to be ordered at least three to four months in advance to meet delivery deadlines. As such, since the [seller]'s anticipatory breach was on 29 March and the [buyer] required delivery for 5-7 April to meet the peak sale time for the products involved, it was easily determined that the [buyer] would not have sufficient time to purchase replacement goods. [pages 74-75]
Concerning [buyer]'s measures to mitigate the loss. Article 77 CISG provides: "A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated."
The [seller] did not offer any evidence which would suffice to hold that the [buyer] did not take necessary measures to mitigate damages. The evidence revealed that on March 24, [buyer]'s agent learned that the [seller] would have difficulty making timely delivery. Accordingly, [buyer]'s agent forwarded a proposal to [buyer]'s sub-agent to accept late delivery from [seller] for a reduction in price of 10%. The [seller]'s own admission that a reduction in sale price would be warranted where seasonal goods were sold at the end of the season would seem to imply that such a proposal would have been acceptable to the [seller]. Thus, there was insufficient evidence that the [buyer] failed to take measures to mitigate damages and therefore its recovery would not be reduced pursuant to Article 77 CISG.
Furthermore, [seller]'s reliance on Article 79 CISG, which provides: "A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control." As discussed above, the impediment was well within the [seller]'s control considering that the entire chain of events which lead to the non-performance of the contract was commenced by the [seller]'s delayed delivery of the samples. Thus, the failure to perform was well within the [seller]'s control.
Concerning interest. Since the [seller] learned for the first time the total amount claimed by the [buyer] in its counterclaim at the arbitration, and given that the [buyer] was entitled to legal fees from the [seller], the Arbitrator concluded that the [buyer] would only be entitled to interest at a rate of 5% from the date that this award was entered into force.
FOOTNOTES
* Daniel J. Morse is a member of the Bar of the State of New York. He is associated with the law firm Hardin, Kundla, McKeon, Poletto & Polifroni. Go to Case Table of Contents
Pace Law School
Institute of International Commercial Law - Last updated February 15, 2007
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography