Data

Date:: 00-00-1998
Country:: Arbitral Award
Number:: 107/1997
Court:: Arbitration Institute of the Stockholm Chamber of Commerce
Parties:: Unknown

Keywords

DAMAGES FORESEEABLE LOSS (ART. 74 CISG)

Abstract

A Russian seller and a German buyer concluded a contract for the sale of steel bars. Two deliveries were made. A dispute arose as to the quality of the goods when a customer of the buyer returned the goods and the buyer refused to pay the price of the second delivery. After protracted discussions the buyer paid half of the outstanding amount. The seller commenced arbitral proceedings claiming for the balance of the contractual price. The buyer counterclaimed seeking for damages caused by the alleged non conformity of the goods.

The Arbitral Tribunal found that the goods delivered by the seller did not conform with the contractual specifications and set off the damages suffered from the buyer against the seller's claim for the balance of the price. The Arbitral Tribunal applied art. 74 CISG and underlined that under this provision the 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 which he then knew or ought to have known, as a possible consequence of the breach of contract.

The Arbitral Tribunal awarded the buyer the foreseeable losses consisting in costs for freight, insurance, duties, storage, expert examination of the goods and interest. The Arbitral Tribunal did not consider as normal foreseeable cost under art. 74 the expenses of a legal dispute of the buyer with a forwarder.

Fulltext

Summary

In June 1996 X and Y concluded a contract of sale (the Contract), according to which X undertook to deliver in all 190 tons of stainless steel bars for an aggregate price of DEM 690 000.

The following provisions of the Agreement are relevant to the dispute:

Article 3 [quality of goods]
The Quality of the goods sold under the present Contract shall be

Article 9 [unconditional obligation of the Buyer]
No claims put forward in respect of any consignment of the goods can be used by the Buyer as a reason for his refusal to accept the goods and to pay for them.

Article 11 [settlement of disputes]
The Seller and the Buyer will take all measures to settle any disputes and difficulties which may arise out of or in connection with this Contract in amicable way,.

In case of the parties being unable to arrive at an amicable settlement all disputes, they will be finally settled by the International Arbitration Court in Sweden in accordance with the rules of procedure of the said Court.

Appendix No. 1 to the Contract [technical requirements]
Technical requirement: According to Technical Agreement No 150-94 and its Add.

Only two out of several deliveries were made: the first in August 1996 duly paid by Y, and the second, in October 1996, at a price of DEM 234 000. The second delivery caused a dispute as to the quality of the goods, and on these grounds Y refused to make any payments. After protracted discussions between the parties, Y paid only half of the outstanding amount, DEM 117 000, in October 1997.

X believed that the quality of the goods delivered was in accordance with the terms agreed between the parties, and therefore it filed a request for arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce.

The parties agreed to have the dispute resolved by a sole arbitrator, to be appointed by the SCC Institute.

X requested an order for Y to pay the outstanding amount (the other half of the price), interest thereon as well as interest on the amount paid with delay (the paid half of the price) for the period of delay, and X's legal expenses and disbursements. Additionally, X requested that Y be ordered to bear, as between the parties, the costs of the arbitration. X claimed, inter alia, that even in the event that the goods should be found to have been faulty, Y was under a duty to pay the price in accordance with Article 9 of the Contract.

Y denied these claims and requested an order for X to compensate Y for legal costs and disbursements and to bear, as between the parties, the costs of the arbitration. Y argued that Article 9 of the Contract must be considered invalid, since a purchaser can never be compelled to accept and pay for goods which are found to be defective or not in compliance with the terms of the agreement.

Y referred to insufficient quality of the goods which had resulted in their return to Y from the subsequent buyer; that had caused Y several practical and legal complications due to storage of the returned goods, legal dispute with the goods forwarder, their re-selling at a lower price and loss of profit. Y's loss amounted to DEM 162 000. Therefore Y assumed that even if Article 9 should be held to be valid, Y had a counterclaim for damages, which was relied upon for the purpose of set-off.

Both X and Y accepted the sums claimed by the other party as reasonable expenses for the arbitration, should either of the parties be ordered to reimburse them.

The Sole Arbitrator came to the conclusion that the goods delivered by X did not conform to the Contract. As a result Y was entitled to damages in an amount, exceeding the amount claimed by X. The damages were set off against X's claim. The claim was rejected, and X was ordered to reimburse Y its legal costs and disbursements for the proceedings and ultimately bear the arbitration fee, costs and disbursements of the Sole Arbitrator as well as the compensation to the SCC Institute.

Findings of the Arbitral Tribunal
Before the various issues in this arbitration are discussed in detail, it should be recorded that at the oral hearing the parties have unanimously declared that Russian law should be applied as the governing law of the Contract. The parties are further in agreement that the application of Russian law entails the application of the 1980 Vienna Convention (the Convention) on the International Sale of Goods, since the Russian Federation is a signatory to the Convention, which has been incorporated into Russian legislation.

(1) Applicable law

(2) Contradictory provisions in the contract regarding technical specifications. Non-conformity of goods delivered.

Claimant's position
On 26 June 1996, the parties concluded the Contract, according to which Claimant undertook to deliver in all 190 tons of stainless steel bars for an aggregate price of DEM 690 000. However, only two deliveries were made, the first in August 1996, for which full payment has been made by Respondent, and the second . . . at a price of DEM 234 000. This second delivery took place on 11 October 1996, when the bill of lading for the delivery was issued. The invoice in the corresponding amount had been issued on 6 October 1996 ..."

However, payment was not made on time. A dispute arose as to the quality of the goods delivered by Claimant, and for this reason Respondent refused to make any payments. After protracted discussions, Respondent paid half of the outstanding amount, DEM 117,000, on 21 October 1997. No further payment has been made.

The decision by Respondent to withhold payment was unjustified, since the quality of the goods delivered was in accordance with the terms agreed between the parties. This is so for the following reasons.

The agreed quality of the goods is specified in the Contract. . . Article 3:

The Quality of the goods sold under the present Contract shall be in full conformity with Addendum and Technical Agreement.

Appendix No 1 to the Contract states:
Technical requirement: According to Technical Agreement No 150-94 and its Add.
The Technical Agreement No 150-94 is a document, issued in May 1994 by the producer of the steel bars, company Z. This document concerns steel of a quality referred to as AISI 304. Part of the Contract was for the deli-very of steel of this quality.
There is another document, also issued by producer Z, which concerns steel of a quality named AISI 316 Ti. Part of the deliveries under the Contract, including the deliveries for which the amount in dispute is due, concerned steel of this quality. This document has been signed by representatives of Z and Respondent. By signing the document, Respondent acknowledged that the technical specifications therein applied to the deli-feries made by Claimant to Respondent under the Contract.

Both Technical Agreements contain a section headed Assortment. Under this heading, the diameter of the respective steel quality is indicated, as well as the allowed tolerances in respect of the diameters. In each case the tolerances vary between - 0,2 and - 0,4 mm.

The steel delivered corresponded to these specifications and the deliveries, therefore, were made in accordance with the terms agreed between the parties.

In Appendix No 1 to the Contract, under the heading Description of goods, the words Stainless steel bars in bundles, peeled (h 11) appear. The term h 11 a designation found in a European standard quality system and defines the allowed tolerances with regard to a range o diameters of peeled steel bars. The tolerances according to h 11 are smaller than the ones stated in the Technical Agreements, and the goods delivered did not correspond to the tolerances defined by h 11. The term h 11 also appears in the bill of lading and in the invoice.

However, h 11 was not the specification agreed between the parties. h 11 was included in the documents only for the following reason.

Claimant and Respondent have maintained a business relation for some time. An agreement for the sale of steel was concluded some time before the Contract, which is the subject of the dispute in this arbitration. The previous agreement also concerned steel, which corresponded to the Russian but not the European tolerances. However, when the invoice for those deliveries (dated 6 March 1996) was submitted by Claimant, Respondent returned it with the remark that a new copy was needed, containing the words h 11. The reason for this request was the fact that import to Germany of steel with a specification other than h 11 may cause problems with the customs authorities. In order to help Respondent to overcome these problems, Claimant issued a new invoice containing the words h 11. When the Contract was signed and the documents under the Contract were issued, Claimant continued to include the words h 11. However, this had nothing to do with the agreement between the parties, which instead is included in the Technical Agreement referred to in the Contract. Furthermore, prior to the delivery, Claimant orally made it clear to Respondent that the goods were not going to correspond to the European h 11 standard. This was impossible for the simple reason that Z did not produce steel of that particular quality.

In Claimant's view, Respondent's unwillingness to pay for the goods is related to the considerable fall of prices for steel, which occurre& in the second half of 1996. Representatives of Claimant travelled to Germany in an attempt to solve the disagreements between the parties, and in the cour-se of these negotiations, Claimant offered to deliver similar goods at lower prices in order to compensate Respondent for the losses caused by the fall of prices. However, these negotiations did not lead to a solution of the dispute; the only result was that Respondent paid 50 % of the outstanding amount on 21 October 1997.

Since Claimant has delivered goods, which correspond to the specifications of the Contract, Respondent must pay the agreed price.

Respondent's position

Respondent denied the presented claim and argued as follows.

In the period before the Contract was concluded, Claimant had delivered steel to Respondent, which did not correspond to the specification h 11. This was agreed between the parties, and Respondent sold this delivery to a customer in Germany, for whom tolerances were not of over-riding importance, since the steel was to be used in production in which the requirements were not very strict. After this first agreement, Respondent mentioned to Claimant that deliveries of steel with the specification h 11 would be paid at a higher price. After some time, Claimant apparently after negotiations with the factory returned with an offer for steel with h 11specifications. Respondent then managed to locate a customer willing to buy such steel and the Contract was concluded. In the Contract and all documents issued under the Contract, the quality of the steel was specified as h 11. This had nothing to do with German customs requirements. It is not disputed that the Technical Agreements apply with regard to the quality of the goods. However, the Technical Agreements contain a lot of different technical specifications, not only dealing with tolerances for different diameters,; but also with other factors such as the specified amounts of various chemical substances which the steel was allowed to contain, etc. Therefore, and since the 'Contract in itself clearly stipulates that the quality of the goods should correspond to the European standard h 11 the specifications in the Technical Agreements regarding diameters and tolerances cannot apply.

The steel was sold to a German customer as corresponding to the standard h 11. However, it soon became evident that the goods were not in conformity with that standard. The customer refused to pay for the goods, and these were finally returned to Respondent after several practical and legal complications, which entailed a substantial cost to Respondent. Respondent has subsequently managed to sell the goods to another customer, at a considerable loss. In all, the loss incurred by Respondent as a result of the faulty delivery from Claimant amounts to DEM 162 000.

On 30 October 1996, an independent expert measured the delivered goods in order to ascertain whether or not they complied with the technical specifications h 11. The examination showed that the goods were not in compliance with the specifications. In November 1996, the deputy managing director of Claimant, L, inspected the goods in Germany. In his presence, further examinations were performed by the independent expert. In view of the results, both parties agreed to see if they could find a possibility to sell the goods to a third party in order to keep the costs as low as possible.

After additional meetings in Germany, the deputy managing director of Claimant made a proposal according to which he was prepared to grant discounts on future deliveries. However, after Respondent had notified Claimant about the necessary specifications of the goods Respondent intended to order, no further reply was received from Claimant. Finally, on 31 October 1997 Respondent balanced the open invoice after deducting costs in the amount of DEM 117 000.
Findings of the Arbitral Tribunal

The first issue to present itself when the dispute between the parties in this arbitration is considered is obviously whether the goods delivered by Claimant were of the quality required by the Contract. If this is found to be the case, clearly Claimant is entitled to payment as claimed, since it is an undisputed fact that the goods were delivered. If, on the other hand, the goods are found to have been defective, further considerations must be made.

The decisive question here is, of course, how the Contract should be construed. What tolerances with regard to the diameters of the steel bars were agreed between the parties?

Article 3 of the Contract states that the quality of the goods shall be in full conformity with Addendum and Technical Agreement. By Addendum is meant, apparently, the Appendix No. 1, which has been attached to the Contract. The Russian text of Article 3 speaks of Prilozheniye, and Appendix No. 1 is headed Prilozheniye No. 1

The description of the goods in the English as well as the Russian versions of Appendix No. 1 contains the designation h 11. There is no dispute that this means a specific European standard setting out certain tolerances accepted with regard to certain defined diameters of steel bars. The same term is used to describe the goods in the bill of lading and in the invoice.

On the face of it, therefore, there can be no doubt that the goods are described in the Contract and by Claimant itself in the other documents mentioned above as steel bars corresponding to the European standard h 11.

However, Article 3 also refers to the Technical agreement. There are, as the parties seem to agree, in fact two Technical Agreements, one for each of the two qualities of steel sold under the Contract, and each of those Technical Agreements contains definitions of tolerances which diverge from the tolerances defined by the European standard h 11. It appears, therefore, that the Contract contains two conflicting definitions of the standard, which is to be applied in respect of tolerances.

Fortunately, this apparent discrepancy in the structure of the Contract can be resolved. A direct reference to the Technical Agreement is found in Appendix 1, where it is stated:

'Technical requirements: According to Technical Agreement No. 150-94 and its add.'

Thus, the reference to the Technical Agreement concerns only what is defined as technical requirements (in Russian: tekhnicheskiye trebovaniya. In the Technical Agreement there is, indeed, a section captioned Tekhnicheskiye trebovaniya (Technical Requirements), but this section has nothing to do with tolerances. It con-cerns only the chemical composition of the steel, the strength of the material etc. The tolerances are described under the heading Assortment and this contains a description of the various qualities rather similar to the description of the goods found in Appendix No. 1.

I find, therefore, that the reference to the Technical Agreements does not include a reference to the tolerances described in those Agreements. The tolerances are defined in Appendix No. 1 by way of the indication of the standard h 11. My conclusion, therefore, is that the parties have agreed that the goods were to correspond to that standard.

The explanation offered by Claimant as to why the Contract and the other documents contain the term h 11 does not change this conclusion. That explanation has been denied by Respondent and in these circumstances it is for Claimant to prove that it is correct. To prove a statement of this nature would always require quite conclusive evidence in the light of the clear language of the Contract, and I cannot find that Claimant has adduced any convincing evidence at all in this respect.

There is no dispute that the goods did not in fact conform with the standard h 11. It is clear, therefore, that the goods did not conform with the Contract and that, consequently, there was a breach of contract on the part of Claimant on this point.

(3) Contractual provision depriving the buyer of its remedies against seller's breach of contract
Claimant's position

Even in the event that the goods shall be found to have been faulty, Respondent is under a duty to pay the price. This follows from Article 9, which states:

'No claims put forward in respect of any consignment of the goods can be used by the Buyer as a reason for his refusal to accept the goods and to pay for them'.

The reason for this provision is the fact that the Russian currency legislation stipulates that payment for exported goods must be received within 180 days. If this is not the case, the authorities will impose penalties of 100-200 % of the price of the supplied goods. It was therefore of utmost importance to Claimant to receive payment of the full price within the time stipulated in the Contract.

Respondent's position
In Respondent's view, Article 9 of the Contract may not be relied upon by Claimant for the following reasons.

Article 9 of the Contract must be considered to be invalid, since a purchaser can never be compelled to accept and pay for goods which are found to be defective or not in compliance with the terms of the agreement.

Even if Article 9 should be held to be valid, Respondent has a counter-claim for damages, which is relied upon for the purpose of set-off. In this case, a legal principle applies to the effect that a claimant is not entitled to payment if, due to the other party's counterclaim, he would have to return the money immediately.

Finally, Article 9 is not applicable because, during the meetings which took place between the parties in the winter of 1996 and the spring of 1997, it was the understanding of both parties that while the negotiations were being conducted, Respondent was under no obligation to settle Claimant's invoice.

Findings of the Arbitral Tribunal
As pointed out by Respondent, under the Vienna Convention, the buyer is entitled to price reduction and/or damages if the quality of the goods does not conform with the agreement. However, Claimant denies Respondent's right to resort to such remedies. In support of this position, Claimant refers to Article 9 of the Contract, pursuant to which no claims (and this expression refers to claims with regard to the quantity or the quality of the goods, made by the Buyer against the Seller) put forward in respect of any consignment of the goods can be used by the Buyer as a reason for his refusal to accept the goods and to pay for them.

This is a truly remarkable provision. Prima facie, it seems to deprive Respondent of virtually all its remedies against breaches of contract which are related to the quantity or the quality of the goods - in fact the very essence of the rights of any buyer in a sale of goods contract.

In my view, however, this is not the meaning of Article 9.

Claimant has explained that the reason for including this provision in the Contract is to be found in the requirements of the Russian currency legislation. In other words, Respondent's obligation under Article 9 was to make payment to Claimant irrespective of any objections to the quantity or the quality of the goods, so that Claimant could fulfil the requirements of the Russian legislation and account for the payments within the time period stipulated by law.

This in itself would not, however, deprive Respondent of the right to react against any breach of contract related to the quality or quantity of the goods or to resort to the remedies provided by law in this respect. Even if payment has been made a buyer is entitled to make claims of this nature on the seller (see e.g. Article 50 of the Convention). If the claims are satisfied, the seller must return part or all of the moneys paid, as the case may be.

In this case, Respondent has withheld part of the payment, and this may well constitute a breach of Article 9. That is a matter which must be dealt with separately, however, and cannot in itself deprive Respondent of the right to resort to the remedies provided by law. This conclusion is further confirmed by the fact that the Contract contains provisions on the quality of the goods (Article 3; see above, and Article 8 which states that the quality of the goods should be in strict accordance with the terms of the Contract) which would be meaningless and redundant if Respondent had no access to remedies in case of inferior quality.

I find, therefore, that Article 9 does not deprive Respondent of the remedies for breach of contract provided by law. Since Respondent has invoked those remedies in this arbitration, I must consider whether Respondent's arguments in this respect are tenable or not.

(4) The Vienna Sales Convention, article 74, and the right to set-off

Findings of the Arbitral Tribunal
The first argument made by Respondent in this context is that under Article 50 of the Convention, the buyer is entitled to reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time.

It is obviously correct that this provision is applicable in this case. Respondent has argued as I understand it that the application of this principle would lead to a reduction of the price payable under the Contract by at least S0%, so that no further money would be payable and therefore Claimant's claim should be rejected.

A certain reduction of the price would undoubtedly follow from this principle, but it is unclear to what extent. Respondent has supplied no information as to the market value of steel of the quality stated in the Contract at the time of delivery. It seems improbable, however, and in any event has not been demonstrated, that the price difference would be as high as 50 %. This argument, therefore, does not in itself provide sufficient grounds to reject Claimant's claim.

However, Respondent has further contended that under Article 74 of the Convention, it is entitled to damages in an amount exceeding the amount claimed by Claimant and therefore has a counterclaim which may be set off against Claimant's claim.

Article 74 of the Convention clearly states that the aggrieved party is entitled to damages for breach of contract which consist of a sum equal to the loss, including loss of profit suffered as a consequence of the breach; a far-reaching provision. The plea by way of set-off has been presented by Respondent in a timely fashion and in accordance with Article 18 of the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the Arbitration Institute). For these reasons, it is clear that principally, Respondent is entitled to damages and that its claim in this respect should be tried in this arbitration. The next step in the investigation, then, must be to consider whether Respondent's alleged losses have been substantiated and whether they are such as to be comprised by the right to compensation provided by Article 74.

Respondent has calculated its counterclaim at DEM 162 000. The calculation, which is attached hereto as Appendix 1, is not uncomplicated but has been explained by Respondent in summary as follows.

The counterclaim is for losses incurred as a result of two deliveries under the Contract. The first delivery, invoiçed on 31 August 1 996, has been fully paid for by Respondent but was deficient in the same way as the second delivery, which is the one for which Claimant claims payment in this arbitration. Both deliveries caused losses, which are subject to compensation.

The goods were delivered to a company which had bought them from Respondent. Only after delivery it was discovered that the quality was inferior. The buyer then refused to pay for the goods and the goods had to be stored on the forwarding agent's premises. Only in February 1997 were the goods returned to Respondent, stored again by Respondent and subsequently sold to another buyer. The costs incurred consisted of freight, insurance and duties connected with the delivery to the first customer, storage t with the forwarder, freight back to Respondent and then to the second buyer, and lease. of warehouse before deliveries to the second buyer.

In addition to this, Respondent had to sell the goods at a price which was lower than the price paid to Claimant. This entailed a loss. Furthermore, Respondent lost profit because it had to take the goods back from the first buyer and therefore did not obtain the price agreed with that buyer.

Moreover, a dispute ensued with the forwarder about his claims for storage, and lawyers were engaged to resolve this matter. . .

Finally, Respondent had to pay for the examination of the goods per-formed by the independent expert, and has also lost interest on all the amounts spent to cover the above costs.

Claimant has declared that it considers these claims to be groundless since there is no connection between them and Claimant's obligations.

Claimant has not denied, however, that the costs have actually been included by Respondent. In my view, the account given by Respondent as to how and why these costs have arisen appears logical and credible and the amounts involved seem to be reasonable (with certain exceptions, to which I will return in the following). I therefore see no reason to doubt that the costs and losses stated . . . re correct in the sense that they have actually occurred. A calculation of the lost profit has been submitted, and I am satisfied that it has been correctly computed on the basis of reasonable assumptions.

The losses incurred as a consequence of the inferior quality of the goods delivered under the invoice of 31 August 1998 are arbitrable in these proceedings since that delivery was made under the Contract and, consequently, is covered by the arbitration clause. It has not been disputed by Claimant that this delivery was similar to the second delivery in terms of tolerances.

When considering whether Respondent is entitled to compensation for all the items listed, one should keep in mind the provision of Article 74 of the Convention that the 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 which he then knew or ought to have known, as a possible consequence of the breach of the contract.

It must be considered, 'therefore, whether all the costs and losses listed by Respondent were foreseeable or not. Most of the items certainly seem to have been such as must be anticipated as a result of a faulty delivery: costs for freight, insurance, duties, storage, expert examination of the goods and interest (interest is recoverable as lost profit under Article 74 of the Convention; see e.g. Bianca - Bonell, Commentary on the International Sales Law, Milan 1987, p. 544).

However, the legal dispute with the forwarder [legal expenses claimed DEM 17 5001 was not, in my view, a normal, foreseeable cost. It is not, therefore, recoverable. The invoice from the forwarder is for an exceptionally large amount, DEM 54 000, when compared with the other costs for freight, handling and storage and could hardly have been foreseen by Claimant. In my view, this amount must be reduced by 50 %. In all, therefore, Respondent's costs and losses should be reduced by DEM 44 500. This leaves an amount of DEM 117 500, which are the damages to which Respondent is entitled as a consequence of Claimant's breach of contract.

Respondent has no claim for payment of the amounts by which its counterclaims exceed the claims made by Claimant, but has simply declared a set-off of its counterclaims against Claimant's claims. There is no reason why such set-off should not be permissible.

Conclusion

To summarise, I find that the goods delivered by Claimant did not con-form with the Contract. As a result of this breach of contract, Respondent has suffered losses and is entitled to damages in an amount, exceeding the amount claimed by Claimant in this arbitration. The damages have been set off against Claimant's claim. For these reasons, Claimant's claim must fail.

Costs
Claimant is the losing party in this arbitration and therefore, pursuant to Article 29 of the Rules of the Arbitration Institute, shall be ordered to pay the legal costs and expenses of Respondent. Claimant has accepted the amount claimed by Respondent in this respect, DEM 15 000.

AWARD

1 . Claimant's claims are rejected.

2. Claimant is ordered to pay to Respondent the amount of DEM 15 000 as compensation for legal costs and disbursements.

3. Compensation due to the Arbitration Institute and the fee, costs and disbursements of the sole arbitrator are determined...

4. The fee, costs and disbursements of the sole arbitrator as well as the compensation of the Arbitration Institute will be covered out of the security amount paid to the Arbitration Institute. As between the parties the fee, costs and disbursements of the sole arbitrator as well as the compensation of the Arbitration Institute shall ultimately be born by Claimant.

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Source

Original in English:
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