Data

Date:: 00-03-1995
Country:: Arbitral Award
Number:: 7645
Court:: ICC Court of Arbitration
Parties:: Unknown

Keywords

APPLICATION OF CISG - CHOICE BY PARTIES OF THE LAW OF A CONTRACTING STATE (AUSTRIAN LAW) AS THE LAW GOVERNING THE CONTRACT (ART. 1(1)(B) CISG).

USAGES - PARTIES' AGREEMENT TO APPLY THE CFR CLAUSE (INCOTERMS 1990)-CFR CLAUSE BINDING UPON THE PARTIES (ART. 9(1) CISG) - CFR CLAUSE TO BE USED FOR THE INTERPRETATION OF THE CONTRACT (ART. 8(3) CISG).

MATTERS GOVERNED BY CISG BUT NOT EXPRESSLY SETTLED IN IT - RECOURSE TO THE GENERAL PRINCIPLES UNDERLYING CISG (ART. 7(2) CISG).

AVOIDANCE (TERMINATION)- BUYER'S FAILURE TO FIX AN ADDITIONAL TIME FOR DELIVERY (ART. 47 CISG)- BUYER NOT ENTITLED TO AVOID (TERMINATE) THE CONTRACT (ART. 49(1)(A) CISG).

AVOIDANCE (TERMINATION) - LACK OF CONFORMITY OF DOCUMENTS (ART. 34 CISG)- BUYER ENTITLED TO AVOID (TERMINATE) THE CONTRACT (ART. 49 CISG).

EXCEPTIO NON ADIMPLETI CONTRACTUS (ART. 58 CISG).

DAMAGES BUYER ENTITLED TO RECOVER DAMAGES ART. (ART. 81 CISG)- DETERMINATION OF TOTAL AMOUNT OF DAMAGES (ART. 74-75 CISG).

Abstract

Two parties concluded a contract for the sale of crude metal. The contract provided for the payment of a penalty in case of a delay of more than fifteen (15) days in shipment. The time of shipment (September 30th) was fixed in a letter of credit issued by the seller's bank. Afterwards, the parties decided to extend the expiration date of the letter of credit, but disagreed on whether such an extension of the letter of credit entailed an extension of the contractual date of shipment. The seller shipped the goods on October 29th and its bank delivered the documents after mid-November. On November 27th, the buyer's bank informed the seller's bank that the documents did not conform to the agreement between the parties. The buyer, in view of the delay in shipment and the wrong indications written on the documents, declared the contract terminated. The seller filed an arbitration suit to recover the contractual price, arguing that the contract had not been rightfully terminated.

The Arbitral Tribunal found that the contract contained a choice of law clause in favor of Austrian law as the law governing the contract. The Arbitral Tribunal therefore decided to apply the CISG, which is embodied in Austrian law because Austria is a Contracting State (Art. l (1)(b) CISG). In reaching this conclusion, the Tribunal noted that Austria had not entered any reservations pursuant to Arts. 92 and 95 of CISG.

Furthermore, the Arbitral Tribunal found that the contract contained a reference to the clause CFR - Cost and Freight (named port of destination) of the INCOTERMS 1990. In holding that such clause was binding upon the parties, the Tribunal recalled that according to Article 9(1) CISG the parties are bound by any usage to which they have agreed. The Tribunal concluded that the CFR clause had become part of the agreement and would be taken into account to interpret the wording of the contract, pursuant to Article 8(3) CISG.

Before examining the merits of the case, the Arbitral Tribunal stressed that according to Article 7(2) CISG, questions concerning matters governed by the CISG which are not expressly settled in it are to be settled in conformity with the general principles underlying it, and that recourse to the applicable domestic law can be made only in the absence of such principles.

With respect to the merits of the case, the Arbitral Tribunal held that the fact that the seller had not abided by the date of shipment did not constitute a fundamental breach of contract entitling the buyer to immediately avoid (terminate) the contract (Art. 49(1)(a) CISG). The Arbitral Tribunal explained that the provision whereby the penalty for late delivery would become due only after the expiration of a period of fiftheen (15) days after the contract

Fulltext

[…]The contract provided ... that it was to be governed by Austrian law.

This choice of law made by the parties was not disputed by either of them. In view of the autonomy of the parties in selecting the law governing their relationship the clause is to be regarded as valid and binding upon them.

In the initial phase of the proceedings the parties advanced conflicting opinions though as to whether this reference to Austrian law would lead to the applicability of the United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980, signed in Vienna (hereafter referred to as the Vienna Convention or Convention), or not. In the later phase of the proceedings the parties concurred that the Vienna Convention was indeed applicable to the extent provided in the Convention itself.

Austria is amongst the countries having signed and ratified the Vienna Convention. No restricting declarations were made by Austria when ratifying the Convention, neither according to art. 95 of the Convention, that it will not be bound by art. i subpar. 1) b) of the Convention, nor according to art. 92 that it will not he hound by part II of the Convention or that it will not be bound by part III of the Convention. In and for Austria the Vienna Convention is, therefore, applicable in its integrality.

According to art. I subpar. 1) b) the Convention applies to contracts of sale of goods between parties whose places of business are in different states when the rules of private international law lead to the application of the law of a contracting state. This rule, which seems to have been controversial when the Convention was negotiated, which was the reason the Convention provided for the possibility of the contracting states, in art. 95, to declare the non-applicability of the clause, has been accepted by Austria and has, thereby, become applicable under Austrian law.

As it already has been seen, the choice of Austrian law by the parties as governing law of the contract is to he regarded as being valid and binding on them. By this reference to Austrian law the Vienna Convention became, based on the just discussed clause, applicable to the contractual relationship between the parties.

The Convention is applicable to contracts of sale of goods in general, with certain exceptions according to art. 2 of the Convention. None of these exceptions do apply in the present case, so that the Vienna Convention is applicable also in view of the nature of the goods covered by the contract.

According to art. 4 of the Convention, it governs only the formation of the contract and the rights and obligations of the seller and the buyer arising from such contract. The Convention is not concerned with the validity of the contract or of any of its provisions or of any usage. In the present case, the valid conclusion of the contract was not disputed. The issues relate to the interpretation of the contract, the obligations under the contract and the remedies available to the parties in case of breach of contract, all being topics covered by the Convention, especially in its art III, and also in its part I.

Depending on the doctrine followed in the relevant country relating to the nature and effect of public international law the provisions of an international treaty either are regarded as superior to the national law or are regarded as being integrated into national law. Irrespectively (if the basic approach relating to this question it seems clear that the provisions of the Vienna Convention prevail over the provisions of the otherwise applicable national law. Art. 7 of the Convention expressly provides that questions concerning matters governed by the Convention which are not expressly settled in it are to be settled in conformity with the general principles (in which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. Therefore, the issues in these proceedings have to he answered first based on express provisions of the Convention, second based on the general principles which may be deduced from the Convention, third by the provisions of Austrian law and only last and fourth based on general customs and usages of the trade which they have agreed. In fact, if the parties refer specifically to any usage, the relevant rules become part of their contract by reference (or integration).

In the Contract, the parties have, in clause IV under the heading price referred to CNF FO [port, country] (Incoterms 1990).

The Incoterms 1990 edition published by the International Chamber of Commerce in Paris, which became effective as of 1 July 1990, do not provide for a clause CNF. The parties however concurred that the clause to which they intended to refer was the clause CFR'Cost and Freight (..named port of destination).

It would, indeed, seem that the parties, although referring to the Incoterms 1990, had still in mind the designation used for such clause in the prior Incoterms, namely C+F or C and F, in extended terms cost and freight. The middle letter N used in the clause in the Contract would seem to have stood for the word and. The Arbitral Tribunal, in conformity with the opinions expressed by the parties, holds that the reference in the contract was indeed a reference to the clause cost and freight CFR of the Incoterms 1990.

The letters FO which were mentioned beside the letters CNF stood, in the opinion of the arbitral tribunal, for the words free out which are used to qualify the term freight under C.I.F. and C.F.R. contracts, and which mean that the expenses connected with discharging the goods from the vessel are included in the "freight".

Although in the Contract the reference to the Cost and Freight clauses is contained in the clause dealing with the price both parties in their briefs clearly assumed that the reference to the Incoterms clauses was not meant to define the price only but was to be understood as a general reference to the CFR terms applying also to the Contract in general ... In concurrence with the opinion of the parties the Arbitral Tribunal holds that the reference to Incoterm clauses in one clause of the Contract with no specification or restriction as to its bearing could! he understood in good faith by both parties and had in fact to be understood! to be a general reference, thus integrating the CFR clauses as a whole into the Contract. The wording of the Contract has therefore to be seen in conjunction with the provisions of the CFR clauses of the Incoterms 1990, which are held to have been integrated in their entirety into the Contract.

[…]

As already seen. . . above, the parties have entered into a specific sale and purchasing contract by exchange of fax messages establishing the elements of their agreement by detailed wording.

According to art. 8 of the Vienna Convention statements made by a party are to be interpreted according to its intent where the other party knew or could not have been unaware what the intent was. This rule is basically equivalent to the general principle of law on contracts to the effect that manifestations of a party of its contractual intent have to be understood and interpreted as a counter party in good faith had to understand them.

When parties have concluded a contract established by an extended wording, the agreement of the parties has to be analysed in first instance by interpreting the wording of the contract itself. According to art. 8 par. 3 of the Convention usages of the trade constitute guidelines only to establish what a reasonable person had to understand in view of the wording of the contract.

As also seen already. . . above, the contract made specific reference, in its clause IV, to the Incoterms 1990, whereby the reference is to be understood to refer to the clauses CFR (cost and freight named port of destination), and whereby further the reference was to be understood as a general reference to such clauses and not as a reference for defining the price only. . . According to art. 9 par. 1 of the Convention the parties are bound by any usage to which they have agreed. The contractual agreement between the parties has therefore to be understood as it results from their written contract in conjunction with the CFR clauses of the Incoterms 1990.

Where the provisions of the contract and of the Incoterm clauses do not provide specific answers, the rules of the Convention and, in a subordinated way, rules of its underlying principles and, even in a more subordinated way, the rules of Austrian law are determining for defining the mutual obligations of the parties based on their contract.

According to Incoterms clause CFR A 4 the seller must deliver the goods on board the vessel at the port of shipment on the date or within the period stipulated, and according to Incoterms clauses CFR A 8 the seller has, unless otherwise agreed, to provide the buyer without delay with the usual transport document for the agreed port of destination. The Incoterms CFR clauses (as the CIF clauses) do actually provide for a dual obligation of the seller, first, the seller has to actually furnish the goods and arrange for their transport (which is to lead to the actual physical delivery of the goods to the purchaser or his successor), and, second, the seller has to deliver to the purchaser the relevant transport documents which enable the purchaser to actually dispose of the goods even while being transported.

In an English case (Kwei Tek Chao v. British Traders and Shippers Ld., 1954, 2 Q.B. 459 at p. 480, as reported in Sasson's C.I.F. and FOB. Contracts, 3d ed. 1984, p. 28) the nature of the C.I.F. contract was summarized as follows:

'A c.i.f. contract puts a number of obligations upon the seller, some of which are in relation to the goods and some of which are in relation to the documents. So far as the goods are concerned, he must put on board at the port of shipment goods in conformity with the contract description, but he must also send forward documents, and those documents must comply with the contract. If he commits a breach the breaches may in one sense overlap, in that they flow from the same act. If there is a late shipment.... the seller has not put on board goods which conform to the contract description .... He has also made it impossible to send forward a bill of lading which ... conforms .... Thus the same act can cause two breaches of two independent obligations.

Even though in the present case the contract was not a C.I.F. but rather a C.ER. contract, and although the applicable law is not the English law but rather the Vienna Convention respectively Austrian law, the opinion in the mentioned English case may be taken as an expression of an internationally recognized understanding of the C.I.F. clause. The C.I.F. and the C.F.R. clauses being of the same nature under the aspect here under review, what has been said relating to the C.I.F. clause is valid also with regard to the C.F.R. clause.'

[…]

The contract dealt with the time frame, within which the shipment had to take place. The relevant provisions were set forth in clauses V and VII of the contract. These clauses specified the time requirements with regard to the shipment only and did not specifically with time requirements for delivering the documents. The contractual clauses use the terms loading and shipment. It was explained by the parties and not contested that according to the usage of the trade the expression loading stands for the activity of placing the goods in the harbor on the pier in a way suitable and ready for being carried on the ship by appropriate means, while the term shipping and shipment stands for the actual stowing of the goods in the appropriate manner on and in the vessel. The time limit agreed for the shipment therefore refers to the time when the stowing of the goods on and in the vessel has been completed in an appropriate manner for sailing. The periods defined in clause V of the contract therefore referred to the time when the sold goods had actually to be stowed on respectively in the vessel in the sailing port. This has not been challenged by the Claimant.

Art. 34 of the Vienna Convention provides that in cases in which the seller is hound! to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract. If the seller has handed over the documents before that time, he may, up to that time, cure any lack of conformity in the documents, if the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense.

Incoterms clauses CFR A 8 specify that the transport document has to he provided without delay. Since the contract did not specifically determine a time limit for delivering the documents, the contract has to he understood in the manner that the documents had to he handled over respectively delivered without delay, or within reasonable time after the time limit determined for the shipment. An indication of what might have to be understood as reasonable time in the trade could he seen in art. 47 of the old Uniform Customs and! Practice for Documentary credits (UCP) (1983 revision in force as from 1 October 1984, which were those still applicable at the time of the conclusion of the contract). This article provides that banks should refuse documents presented to them later than 21 days after the date of issuance of the transport document.

It is left open for the time being what legal implications the determining of the expiry date of the L/C in the L/C itself might have had with regard to the contractual time limit available for the seller to deliver the documents. It should be remembered that the expiry date of the original L/C (before its amendment) was the 20 October 1991, which was the twentieth clay after the latest date allowed for shipment.

The contract provided that shipment had to take place ... during September 1991. The latest date allowed for shipment therefore was 30 September 1991. Clause VII of the contract, however, contained provisions relating to a performance bond which was to become payable in the event that the shipment was to be delayed more than 15 days after the latest shipment time allowed in the contract.

Defendant sustains that every sale under the Incoterms clauses CFR is to be regarded as a fixed term contract within the meaning of the term as it is used in the legal terminology in many countries, to the effect that the time limit defined in the contract is of essence and that the non-abidance by this time limit constitutes ipso facto a fundamental breach of contract within the meaning of art. 49 par. 1) a) of the Vienna Convention. Defendant submits some opinions of judiciaries and learned authors in support of this theory. However, the principle can, in this generalized form, not be recognized!. The Incoterms clauses CFR do not provide anything to this effect. It is true that Incoterms clauses CFR A 4 provide that the delivery of the goods on hoard the vessel at the port of shipment has to be made by the seller on the date or within the period stipulated. The Incoterms clauses CFR do not, however, specify that the abidance within the time limit is an obligation of especially essential importance or that the non-abidance by the time limit gives to the purchaser unconditionally the right to avoid or terminate the contract or that the contract automatically becomes void in any case where the time limit for shipment is not respected.

Even though there might exist a usage of the trade to the effect that in the absence of provisions to the contrary in the relevant contract, a CFR contract has to he understood as a fixed term contract, which can he left open , such usage of the trade would certainly not prevent the parties from providing for the contrary in their specific contractual agreement. When the parties have entered into an agreement in writing (within a broad sense of the word!) also the question at stake here has to be determined primarily based on the wording of the agreement and the manner in which such wording had to be understood in good faith by both parties. With a view to this, the hearing of the clauses V and! VII of the contract has to be analyzed, and the time frame determined in clause V can certainly not be looked! at without regard to the provisions of clause VII which are significant for determining the issue.

Clause VII of the contract determined an obligation of the seller to provide for a performance bond by its hank. It is easily understandable from the wording of the contract that this performance bond was to give to the purchaser the right to be paid a penalty in case of a delay of shipment by the seller. The amount of the performance bond! was, however, to become payable only in the event that the shipment would he delayed more than 15 days after the latest shipment time allowed in the contract. This is a clear indication, in the opinion of the arbitral tribunal, that the last date of shipment allowed in clause V of the contract was not to he understood as a fixed term, the non-abidance by which would have constituted a fundamental breach of contract within art. 49 par. 1) sub. par. A) of the Vienna Convention. To the contrary, the provision indicates that the purchaser was prepared to tolerate a delay up to 15 delays.

Further, the provision does not say in any way that in the case the delay of shipment would have lasted more than 15 days, the contract was to become void automatically or the purchaser had the right to avoid the contract immediately If something to such effect had been intended by the parties it is probable that they would have specified it in view of the fact that the question of a possible delay of shipment had obviously been the subject of considerations when the contract was negotiated.

This leads to the conclusion that the non-abidance by the last shipment date allowed by the contract was not to he considered as a fundamental breach of contract according to the prior mentioned provision of the Vienna Convention and that, accordingly the purchaser would, as a consequence of a delay of shipment, not have been authorized to declare the contract avoided according to art. 49 par. 1) subpar. a) of the Convention without first fixing an additional period of time for performance. Instead, the rules of art. 47 in conjunction with art. 49 par. 1) subpar. b) of the Vienna Convention were applicable with regard to the question of delay of shipment.'

[…]

In view of the double or twofold obligation of the seller, on the one had to ship the goods timely, on the other had to deliver the documents without delay a delay in performance can occur either with regard to the shipping of the goods or with regard to the delivery of the documents. As to the time of shipment, and elaborating on what has just been said, the wording of the contract and the facts around the issuance and the extension of the b/C suggests the following analysis of the situation as to the time of the shipment:

As seen, the contract provided as the last allowed date of shipment 30 September 1991. However, the purchaser had conceded right from the outset in the contact to tolerate a delay of 15 days, i.e. through 15 October 1991. This extended time limit has to be regarded as pre-agreed tolerance. Consequently the shipment would not have been late if it had occurred latest on 15 October 1991. Based on the contract, and without regard to any extension which might have been agreed, the seller would have been in default as from 16 October 1991 as a consequence of the delay of shipment. Had the purchaser known about the delay he would have had the possibility to proceed in accordance with art. 47 of the Convention fixing an additional period of time of reasonable length to the seller for providing for the shipment.

The L/C opened by the purchaser on 12 September 1991 mentioned the 30 September 1991 as latest date of shipment and 20 October 1991 as expiry date. This was in concurrence with the first stage of timing provided by the contract. Claimant would have had to submit all the documents showing shipment date not later than 30 September 1991.

In other words, Claimant would have had a period of twenty days (one day less than the longest period allowed of twenty-one days according to art. 47 of the old UCP) for presenting the documents to its bank in Czechoslovakia, as the b/C provided the expiry date with reference to Czechoslovakia.

When the agent of Claimant, requested, on 30 September 1991, Defendant to extend the terms of the L/C by providing 15 October as new latest allowed date for shipment and 31 October 1991 as new date for expiry of the L/C, this was in concurrence with the provisions of the contract. In fact, seller benefited of a tolerance period until 15 October 1991 for shipping. By the extension of the L/C as requested by the seller, the purchaser would simply have}}

Source

Publishedin English (excerpt):
ICC International Court of Arbitration Bulletin Vol. 11/No.2 - 2000, 34-46.}}