Data

Date:: 00-08-1999
Country:: Arbitral Award
Number:: 9083
Court:: ICC Court of Arbitration
Parties:: Unknown

Keywords

APPLICATION OF CISG - CHOICE OF LAW OF CONTRACTING STATE AS GOVERNING LAW OF THE CONTRACT (ART. 1(1)( B) CISG) - CISG APPLICABLE

SCOPE OF CISG - APPLICATION OF CISG TO CONTRACTS FOR SUPPLY OF GOODS TO BE MANUFACTURED OR PRODUCED (ART. 3 (1) CISG)

LACK OF CONFORMITY - TIME OF NOTICE WITHIN A REASONABLE TIME - OVERALL TIME LIMIT FOR EXAMINATION OF GOODS AND NOTICE OF DEFECTS FOURTEEN (14) DAYS UNLESS THERE ARE SPECIAL CIRCUMSTANCES IN SUPPORT OF A REDUCTION OR AN EXTENSION (ART. 39 (1) CISG)

SELLER'S DISCLOSURE OF LACK OF CONFORMITY (ART. 40 CISG)

Abstract

Claimant and Defendant concluded a contract whereby the former undertook to print and supply books for resale in supermarkets. Claimant delivered the books on four installments. Some thirty-three days after receiving the last installment, Defendant informed Claimant that it would not pay the price because the books delivered in the first three installments were fewer than what had been agreed upon. Claimant commenced legal action to obtain payment. Defendant argued that Claimant's claim should be set-off against its claim for damages that it was entitled to make under the penalty clause included in the contract.

The Arbitral Tribunal held CISG applicable as part of the substantive law of a Contracting State (Austrian law) which the parties had chosen as the law governing the contract (Art. 1(1)(b) CISG). The contract at hand was considered to be a sales contract, since Claimant manufactured the books providing itself the necessary means (Art. 3 CISG).

As to the merits, the Arbitral Tribunal held that Defendant could not avail itself of the remedies laid down in Art. 45 CISG nor of the penalty clause provided for in the contract. In fact, Defendant had lost its right to rely on the lack of conformity, because it had failed to give Claimant notice thereof within reasonable time in accordance with Art. 39 CISG. The Arbitral Tribunal admitted that a reasonable time was certainly longer than the time limit under Austrian domestic law (immediately: cf. § 377 of the Austrian Commercial Code). Referring to a decision of the Austrian Supreme Court (Oberster Gerichtshof 15 October 1998, see Abstract and Fulltext in UNILEX) it concluded that the overall time limit for the examination of the goods and notice of the defects is fourteen days, unless special circumstances suggest a reduction or extention of that period.

The Arbitral Tribunal also rejected Defendant's argument that Claimant had not disclosed to it the fact that the books delivered were less than what was agreed upon (Art. 40 CISG). In fact, with respect to the first two installments the invoices clearly indicated the exact number of books delivered, while only with respect to the third installment was the number indicated in the invoice higher than the number of books actually delivered. Yet, according to the Arbitral Tribunal, in the trade sector concerned discrepancies up to 5% (…) are to be tolerated by the contractual partner. Moreover Defendant's silence led Claimant reasonably to believe that the small discrepancies were irrelevant. In any case, the overall number of books to be delivered as agreed upon in the contract had been made up in the last installment within the contractual time for delivery.

Fulltext

Applicable law

'Austrian substantive law is to be applied.
The new 1998 version of the ICC Rules of Arbitration contain a transitory provision in Art. 6(1), according to which, if the parties have not otherwise agreed, the Rules of Arbitration valid at the start of the arbitral proceedings, in this case the 1988 Rules, shall be applied. The decisive issues involved here are, besides, dealt with alike in the 1988 and 1998 versions of the Rules.
The United Nations Convention on Contracts for the International Sale of Goods of 11.4.1980 came into force for Austria on 1.1.1989 (BGBl 1988/96).
The United Nations sales law (CISG) (not excluded in the present case) itself constitutes substantive law, unless excluded by the parties (Art. 6). The CISG provisions concerning the questions presently to be settled are largely similar to those of Austrian law.
The supreme court has finally recognized (2 Ob 328/97t, JBI 1999, 54ff), referring to Posch in Schwimann, ABGB Praxiskommentar, Volume 5, that in choosing Austrian law the parties thereby also choose the CISG, which is part of that legal system.'

With respect to the alleged discrepancies in the quantities delivered

'4.1. The printing assignment at issue, whereby, upon Defendant's order, Claimant mass produced movable goods in bulk (books) using means which it provided, should be described as a sales contract within the meaning of § 377 Handelsgesetzbuch (HGB), Art. 1 CISG. There is no need to examine whether the material or labour aspect is predominant.
If the purchase is a commercial transaction for both parties, then under § 371(1) HGB the buyer must inspect the goods immediately after delivery by the seller, to the extent that this is feasible in the ordinary course of business, and, if a deficiency is apparent, immediately notify the seller thereof. Failure to do this implies that the goods have been accepted, according to § 377, para. 2 HGB, unless the deficiency is one that could not be recognized when the inspection took place.
Pursuant to § 378 HGB, the provisions of § 377 HGB apply also when a quantity of goods other than that agreed upon is delivered, insofar as the goods delivered do not obviously differ from the order to such an extent that the seller must consider the buyer's consent as ruled out.
The inspection by the buyer must take place immediately, i.e. without blameworthy hesitation. If ordinary inspection reveals a deficiency, immediate notification thereof must be given.
The notification must substantiate and describe the deficiency. If it is a lack in the quantity, the missing amount must be stated.
The legal consequence of infringement of the inspection and / or complaints obligation is that the buyer loses all rights available to him under civil law when the seller delivers deficient goods in performance of the contract. All damages in connection with deficiencies and the consequences thereof are thereby excluded (Krejci, Grundriß des Handelsrechtes, 327).
4.2. The CISG is applicable to contracts of sale of movable goods between parties established in different states when these states are contracting states. The contracting states include [states from which the parties originate] and Austria (see V Caemmerer/ Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, Appendix 1).
Contracts for the delivery of goods to be manufactured or produced are treated like contracts of sale, unless the person who placed the order provided a substantial part of the materials necessary for such manufacture or production (Art. 3 CISG). The CISG is also applicable in mixed contracts for sale and work when the sales contract aspect is foremost, as here.
The CISG provisions regarding the inspection obligation and complaints over deficiencies are laid down in Articles 38 and 39 as follows:
Art. 38:
(1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.
(2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination.
(3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination.
Art. 39:
"The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it."
An absolute time-bar of two years (not pertinent in the present instance), which may not be stayed or interrupted, is laid down in paragraph 2 of this article.
Art 40:
"The seller is not entitled to rely on the provisions of Articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer."
Unlike § 377 HGB, "not have been unaware" does not presuppose fraudulent silence (see Kerschner in Jabornegg, HGB, no, 63ff re § 378 HGB).
Art. 44:
"Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice."
As Art. 44 provides for an exception to the complaints and inspection obligation, its rationale requires it to be applied in accordance with strict criteria (Posch in Schwimann 5, no. 6 re Art. 44). There is nothing to suggest any reasonable grounds for excuse within the meaning of Art. 44, and Defendant has not produced anything to this end.
The legal consequence of failure to make such a complaint is that the buyer loses the various legal remedies available to him under Art. 45.
According to Art. 45, the buyer's legal remedies against infringement of the contract by the seller cover the exercise of the rights mentioned in Arts. 46 to 52 (performance, cancellation of the contract, price reduction) and, in addition, damages pursuant to Arts. 74 to 77. As regards monetary compensation, damages cover all pecuniary losses, including penalties (Honsell no. 75 re Art. 45 op. cit.) According to the CISG, therefore, untimely inspection and/or complaint over defects results in the loss of all claims to compensation for damages due to deficiencies and the consequences thereof.
4.3. In the present instance the compulsory inspection of the deliveries by Defendant had to occur once the goods had been deposited with the firm ...
Defendant fully entrusted the firm ...‚ as its auxiliary with the inspection of the delivered books. The latter received the CMR bill of loading, inspected the delivery for quality and quantity on the day of delivery, entered the results in the stock-list usually on the following working day and immediately forwarded this to Defendant. Defendant received along with the delivery from Claimant the partial invoice stating, amongst other things, the weight, delivery date and the number of items delivered according to its check.
4.4. The timeliness of a complaint remains to be considered.
The "reasonable" time for complaints laid down by the CISG is to be considered as a longer period than under § 377 HGB ("immediately").
The objective and subjective circumstances of each individual case will be instrumental in deciding whether the time is reasonable or not. It is specified as eight days to one month in Caemmerer/Schlechtriem (op. cit. no. 17 re Art. 39).
In Schwimann (no. 4 re Art. 39), a complaints period of around one month is mentioned and a complaint after six weeks is quoted as being too late.
In Honsell (Kommentar zum UN-Kaufrecht, no. 21 re Art. 39), a time limit of one week is given for notification and a period of 14 days indicated for the overall time limit for inspection and notification. The supreme court (15.10. 1998, 2 Ob 191/98x, RdW 1999, 139ff) has come to the same conclusion. In its view, "an overall inspection and complaints time limit of 14 days [is] to be considered as reasonable, when there are no special circumstances in support of a reduction or extension". No such special circumstances are apparent or have been alleged in the present proceedings.
4.5. A sufficiently concrete complaint over the shortages in the quantities delivered first occurred in the written document dated 3.7.1995, with which attachments dated 15.6. 1995 were enclosed (Annexes 4, 1, 2), thus more than two to three months after it was possible to make a complaint ...
Defendant did not even complain within reasonable time from the last delivery of 31.5. 1995, by which the missing quantities in the ... delivery were then (more than) made up. Defendant has therefore violated its complaints obligation, as a result of which the legal consequences of Art. 39, para. 1 CISG apply and Defendant loses the right to rely on the non-conformity of delivery of an insufficient quantity.
This means in the present instance that Defendant cannot assert insufficient quantities in respect of the timely deliveries of ... and therefore Claimant may not be accused accordingly of delay.
Consideration needs to be given to whether Defendant benefits from Art. 40 CISG or whether Claimant in this particular case is denied the possibility of invoking a violation of the inspection or complaints obligation under Art. 38/39 CISG.
Art. 40 CISG imposes on the seller a duty to disclose, which "not all legal systems" recognize in this form or as having such far-reaching consequences when disregarded. A greater measure of protection is afforded to the buyer under Art. 40 CISG than according to § 377, para. 5 HGB, which provides for removal of the complaints obligation only if the seller is guilty of fraud (Posch in UNKR, Schwimann 5 re Art. 40).
Removal of the Art. 40 CISG complaints obligation presupposes that the seller did not disclose to the buyer the non-conformity, i.e. the discrepancies in the quantities in the present case. True, there is still non-conformity when the disclosure is timely; it will be up to the buyer to reject or approve the goods. If the seller has disclosed the deficiency on time, the buyer's complaints obligation is at any rate maintained in full.
For the two ... deliveries of 30.3.1995 and 17.4.1995, Claimant unequivocally disclosed the shortages in its accompanying invoices. Hence, with respect to these deliveries, it is not pertinent whether or not these deliveries of insufficient quantities on the dates indicated, which were made up in later deliveries, were not in conformity with the contract.
Failing a timely complaint, Defendant may anyway lay no claim to delay, nor therefore to a contractual penalty, for such disclosed shortages in the quantities delivered.
4.6. It remains to be examined whether Defendant may avail itself of rights under Art. 40 CISG in respect of the second ... delivery of 27.4.1995, for which too high an amount of 25,000 items was stated in the invoice. In this connection, it needs to be considered whether delivery shortages in the small proportions as here, which are made up for in later deliveries within the overall delivery period, may be deemed not to be in conformity with the contract. The Arbitral Tribunal denies the non-conformity of such a temporary shortage ... on the basis of the following considerations:
The contract between the parties in dispute contains no special explicit provisions for quantity discrepancies in partial deliveries in the present small proportions and time lag.
Nor has the Arbitral Tribunal been told that, after finalizing their written contract, the parties agreed upon a corresponding rider orally or in writing. There is likewise no evidence of such an agreement in the procedural documents.
Contracts should certainly be interpreted in accordance with sincere trading practice (§914 ABGB), and both parties may call for consideration to be given to sincere trading practice in the understanding of their contract. It is obvious that in the transport trade, when delivering bulk quantities, transport capacities and the number of pallets cannot always be so arranged, at reasonable expense, that the recipient receives the exact number of items corresponding to the agreed quantity. In the Arbitral Tribunal's opinion, the present case does not lie outside the norm in this respect, since, in the Arbitral Tribunal's experience, in similar circumstances a practice may be noted whereby discrepancies up to 5% either way are to be tolerated by the contractual partners, especially when, as in the present case, the difference is immediately made up within the overall delivery time by subsequent deliveries. There have been quantity discrepancies, both shortages and excesses, in all deliveries dispatched from Claimant to Defendant ... Neither when there was a shortage nor when there was an excess did Defendant react, leading Claimant, in accordance with practice, to assume that relatively small discrepancies in the quantities delivered are accepted by Defendant as being in conformity with the contract, so long as the overall quantity provided in the contract is in the end delivered on time. Yet this is what happened in the case of each title.
If, in this matter, Defendant wishes to insist on the literal application of the contract, i.e. on the respect of all partial delivery dates with the exact number of items, it should not have remained silent, but, with the first excessive or insufficient deliver ought to have informed the Claimant that it objected to this. In these circumstances, Defendant's silence must amount objectively, for a sincere party in Claimant's position, to a declaration that such small inaccuracies are irrelevant to the carrying out of the order true to contract. Failing any such complaints from Defendant, Claimant could therefore assume that its conduct in carrying out the order was in accordance with the contract. As shortages in deliveries did not infringe the contract, Defendant could not lay claim to delay nor, therefore, to penalties in respect of the second ... delivery also of 27.4.1995.
In this matter the question may remain open as to whether the discrepancy in the quantities delivered was not disclosed by Claimant. This depends on the conditions applied to the notion of disclosure within the meaning of Art. 40 CISG. Is it disclosure when the seller hands the goods over directly to the buyer's auxiliary in such a way as to allow the latter immediately to ascertain the exact number of delivered items without further difficulty? It should be borne in mind also that, in respect of this delivery Claimant did not show the correct number of items for accounting purposes, but simply the net weight of the overall delivery and the number of pallets, on the basis of which, using basic rules of calculation, the exact number of the specified books may be easily obtained.
Defendant therefore has no claim to penalties on account of discrepancies in the quantities of partial deliveries.
There was therefore no need to look more closely at the possibility of the agreement on contractual penalties being immoral. It should not be concealed, however, that the Arbitral Tribunal has reservations about its appropriateness and therefore, against the background of § 879 ABGB, its effectiveness as well.
The Arbitral Tribunal consequently concludes that Defendant has no right to claim delay for which contractual penalties may be imposed, nor therefore to demand penalties, for inconsistencies in the quantities delivered.'}}

Source

Original in German:
Unpublished

Published in English (excerpt):
ICC International Court of Arbitration Bulletin, Vol. 11, No.2, Fall 2000, 78-82.}}