- Arbitral Award
- ICC Court of Arbitration - Paris
PAYMENT OF PRICE - BUYER'S OBLIGATION TO TAKE ALL MEASURES AND COMPLY WITH ALL CONTRACTUAL AND LEGAL FORMALITIES (ART. 54 CISG) - OPENING OF DOCUMENTARY CREDIT (LETTER OF CREDIT)
BUYER'S DELAY IN OPENING DOCUMENTARY CREDIT - NOT NECESSARILY FUNDAMENTAL BREACH
CONTRACT PROVIDING FOR PAYMENT OF 30% OF CONTRACT PRICE IN CASE OF TERMINATION 'BY FAULT OR REQUEST OF BUYER' - SELLER'S RIGHT TO DAMAGES NOT IMPAIRED
DAMAGES - SELLER'S RIGHT TO RECOVER DIFFERENCE BETWEEN CONTRACT PRICE AND PRICE OF SUBSTITUTE SALE
PRESERVATION OF GOODS - SELLER'S RIGHT TO RECOVER EXPENSES
INTEREST (ART. 78 CISG) - INTEREST RATE DETERMINED BY LAW OF STATE IN WHOSE CURRENCY PAYMENT IS TO BE MADE
An Italian seller and a Finnish buyer entered into a contract for the sale of a production line of foamed boards. As to the modes of payment, the parties agreed that after the inspection of the machine the buyer would open a documentary credit (letter of credit) in favor of the seller. The buyer failed to open the documentary credit at the agreed time. After three and an half months the seller declared the contract avoided and asked for damages in addition to the payment of a 'compensation fee' equivalent to 30% of the contract price, as provided for by the contract.
The sole arbitrator held that, although a delay in opening the documentary credit in itself does not necessarily amount to a fundamental breach, in the case at hand the seller was entitled to avoid the contract. In the arbitrator's opinion, the fact that the seller waited several months before declaring the contract avoided was to be considered as equivalent to the fixing of an 'additional period of time' for performance pursuant to Art. 63 CISG, with the result that the failure by the buyer to perform within that period of time entitled the seller to avoid the contract pursuant to Art. 64(1)(b) CISG.
Moreover, the seller was entitled to both payment of the contractually agreed 'compensation fee' and damages. According to the sole arbitrator the fact that the contract provided that 'If the agreement is terminated by fault or request of the purchaser - including force majeure - the supplier is entitled to a compensation fee of 30% of the price' had nothing to do with damages and therefore did not impair the seller's right to ask, in addition to the payment of that fee, damages for any losses it may have suffered.
The sole arbitrator awarded to the seller the expenses it had incurred from depositing the goods. The seller was also awarded the difference between the contract price and the price at which it resold the machinery to a third person.
As to interest the sole arbitrator expressly rejected the view according to which the applicable rate should be the rate in force in the State whose law is the law governing the contract or the rate in force at the place of business of the creditor. In his opinion, the rate of interest is linked to a precise currency, while it would be rather illogical to base interest for 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. In the case at hand the contract price had to be paid in a currency other than that of the seller's place of business (German Marks), and the applicable rate of interest was therefore the German one.
BREACH OF CONTRACT
The legal consequences of the described facts are the following:
Article 25 of the Vienna Sales Convention gives the following definition of fundamental breach: 'A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract.'
This general provision has to be read in connection with the provisions relating to the obligations of the buyer, which are stated in Part III, Chapter III of the Convention:
- Article 53 clearly obliges the buyer to pay the price. Buyer didn't pay the third down payment.
- Article 54 includes in this obligation to pay the price 'taking such steps and complying with such formalities as may be required under the contract.'
The fact that Defendant did not notify the letters of credit which were foreseen in the contract at the date of the inspection test falls into this broad definition of price payment according to the Convention.
However, the mere fact that a buyer has some delay in payment is not always in itself a fundamental breach. According to circumstances, delay on payment for the buyer or delay of delivery for the seller cannot be the cause of immediate avoidance of the contract.
Acting wisely, Claimant did not terminate the contract immediately after the date of the inspection test.
Claimant waited several months before declaring the contractual relations terminated.
In spite of the fact that it was absolutely clear that Defendant did not have financial resources, Claimant still waited.
The time period between November 28th, 1991 (date of equipment inspection) and March 10th, 1992 (date of termination) has to be analysed as the 'additional period' fixed by Seller as set out in Articles 63.1 and 64.1 (b) of the Convention.
Consequently, Claimant may 'declare the contract avoided ' as allowed by Article 64.1 (b).
The sole arbitrator approves the avoidance.
It could be helpful to emphasize that in the Vienna Sales Convention the power to avoid a contract belongs to the parties. It has not to be asked to a judge or an arbitrator. Nevertheless, it is the duty of the arbitrator to appreciate if the termination was rightly decided. In the present case, it was rightly decided and Buyer is justified to ask for compensation.
EXAMINATION OF THE DAMAGES CLAIMED:
This claim raises three connected problems: - the right of the creditor to interest - the starting point of interest, - the rate of interest.
The right to interest
Article 78 of Vienna Sales Convention 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 starting point of interest
Article 78 which declares: 'If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it' means that any delay in payment entitles the creditor to interest.
Contrary to what is sometimes provided in several legal systems, the right to interest doesn't need a formal notice (cf. la mora del articolo 1224 del Codice Civile Italiano; la mise en demeure of Article 1153 of the French Civil Code).
For the above reasons, Seller is entitled to interest from the date on which Buyer had to pay (the date of acceptance test and the expected date of installation).
Rate of interest
The question of the rate of interest is not solved in the Convention. The Diplomatic conference did not agree on this issue (See Official Records I p. 138; II p. 223-226, p. 388-392, 415-419, 429-430).
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.
In the present case, the parties agreed that the price had to be paid in German Marks. The first and the second down payments had been paid in DM. The same currency was used for the payment of the bank guarantee issued by Seller.
Clearly, the financial aspects of the sale are linked with the German Mark. The applicable rate of interest is therefore the German one.
The other claims are
- 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.
Referring to these claims, Article 74 of the Vienna Sales Convention 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.'
This article limits the amount of damages to the foreseeable loss.
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 do not fall into the scope of the exclusion provided in the second sentence of Article 74 (which excludes non-foreseeable loss).
- The first part of the claim (charges for storage.... costs and expenses) belongs to the category of the well known Roman law damnum emergens.
The Convention, at 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 Seller to expenses of carriage and storage in a warehouse, to care and maintenance.
Claimant sent to the sole arbitrator invoices for these costs. The invoices referred also to modification of electrical equipment for the needs of the new buyer. Claimant has based the conversion from Italian Lira to German Marks of these costs on the rate of 1 DM for 784, 760 Italian Lira.
The sole arbitrator therefore awards the total amount of DM [...].
The other part of the claims consists of loss of profit. These claims belong to the category of lucrum cessans of Roman law. As above said, this sort of claim is expressly stated in Article 74 of the Convention.
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.' This provision is applicable to the present case.
Claimant sent to the arbitrator an invoice ... evidencing that it had resold the machinery to another firm of Turin. The agreed price was ITL 1,800,000,000 (the resale is a domestic sale, the price of which is payable in Italian Lira). The difference between the price of sale to Defendant and the price of resale, is the loss of profit, ITL 900,000,000:
ITL 900,000,000: 784,760 (rate of exchange) = DM 1,146,847.
These figures are supported by the evidence submitted and are not disputed by Defendant.
At the hearing, Claimant gave to the arbitrator a written statement asking for the payment of the compensation fee provided by the contract, equivalent to 30% of the price of equipment.
There is a construction difficulty referring to the meaning of the wording 'compensation fee.'
Article XX of the contract is drafted as follows: 'If the agreement is terminated by fault of the supplier before the goods have been delivered, the purchaser will be returned any sum he has previously transferred to the supplier as down payment, without interest.
If the agreement is terminated by fault or request of the purchaser--including force majeure--the supplier is entitled to a compensation fee of 30% of the price.
The wording 'compensation fee' is not usual in legal vocabulary. From the point of view of the claimant, it is 'a price, a consideration other than and in addition to damages suffered.'
This particular contract clause has to be interpreted in accordance with the Vienna Sales Convention rules and 'in conformity with the general principles on which it is based ' as it is provided in Article 7 of the Convention.
The arbitrator notices that Article XX draws a distinction between Seller's and Buyer's situation in cases where the contract is terminated by an act originated by one or other party.
If the cause of the termination is the fault of Seller, Buyer will be returned the money he has previously transferred to Seller. Is this a lump sum compensating for all the damages he could have suffered?
In the opinion of the arbitrator, Article 19.3 is not precise enough to be construed in such a way that it means a renunciation of the right to be compensated as stated in Article 74 of the Vienna Sales Convention.
On the contrary, Article XX of the contract clearly states that Buyer has no right to the interest based on the money momentarily transferred to Buyer. This is an express exception to the Convention Article 84.1 provision.
In the sole arbitrator's opinion, a similar reasoning from Seller's side, leads to the following solutions:
In the absence of an express wording meaning that the right to interest as provided by Article 78 of the Vienna Sales Convention is excluded, interest has to be recovered.
Referring to damages, the wording 'compensation fee' has not the meaning of a lump sum for compensation. Again, as the sole arbitrator stated for the benefit of Buyer, Article XX of the contract has not a language precise enough to be construed in such a way as meaning a renunciation to the right to damages expressly given by Article 74 of the Convention.
The wording 'compensation fee' has to be interpreted as an amount of money payable in consideration of the termination of the contract independently of any damages suffered by Seller.
It has to be paid independently of any contractual liability on behalf of Buyer. It is expressly stated in Article 19.3 of the contract that compensation fee is due even in a 'force majeure' situation.
According to Article 79 of the Convention, a party has not to pay damages 'if he proves that the failure was due to an impediment beyond his control.'
The mere fact that the compensation fee has to be paid in such a situation evidences that it has a nature different from damages in compensation of a loss.
The conclusion is that Defendant has to pay the provided 'compensation fee' (30% of the price) added to the damages. '}}
Published in English:
- The ICC International Court of Arbitration Bulletin Vol.6/N.2 - November 1995, 60-64
Commented on by:
- H. Muir Watt, L'applicabilité de la Convention des Nations Unies sur les contrats de vente internationale de merchandises devant l'arbitre international, Revue de Droit des Affaires Internationales, 1996, 401-406}}