Data

Date:: 15-06-1994
Country:: Arbitral Award
Number:: SCH-4318
Court:: Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft - Wien (Vienna), Austria
Parties:: Unknown

Keywords

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

NON CONFORMITY - NOTICE - WAIVER OF THE RIGHT TO SET UP THE DEFENSE THAT NOTICE IS NOT TIMELY - INTENTION OF PARTIES MUST BE CLEARLY ESTABLISHED

PARTY ESTOPPED FROM SETTING UP THE DEFENSE THAT NOTICE IS NOT TIMELY - ESTOPPEL ('VENIRE CONTRA FACTUM PROPRIUM') AS A GENERAL PRINCIPLE UNDERLYING CISG (ART. 7(2) CISG)

INTEREST RATE - MATTER NOT EXPRESSLY SETTLED BY CISG (ART. 7(2) CISG) - TO BE SETTLED IN CONFORMITY WITH THE GENERAL PRINCIPLES UNDERLYING CISG - FULL COMPENSATION (ARTS. 74 AND 78 CISG) AS A GENERAL PRINCIPLE OF CISG - AVERAGE PRIME RATE FOR CURRENCY OF PAYMENT IN THE CREDITOR'S COUNTRY (ART. 7.4.9 UNIDROIT PRINCIPLES)

Abstract

In 1990 an Austrian seller and a German buyer concluded a contract for the sale of rolled metal sheets. The goods were to be delivered in installments 'FOB Rostock', specially packaged for export. Immediately after receiving the first two deliveries, the buyer sold the goods on to a Belgian company which shipped them to a Portuguese manufacturer. The manufacturer found that the goods were defective and refused to accept the rest of them. After receiving notice of the non conformity by the German buyer, the Austrian seller refused to pay damages, alleging that the notice was not timely. The buyer commenced arbitral proceedings pursuant to an arbitration clause in the contract.

The sole arbitrator held that since the parties had chosen Austrian law, the contract was governed by CISG as the international sales law of Austria, a contracting State (Art. 1(1)(b) CISG).

The sole arbitrator found that the buyer had not complied with the particular requirements as to the examination of the goods and notice of non conformity as contractually stipulated in derogation from Arts. 38 and 39 CISG. The buyer had sent to the seller written notice of the defects, together with an expert statement by an internationally recognized company, only six months after delivery, while, according to the contract, it should have done so immediately after delivery of the goods (or at the latest within two months from delivery).

According to the buyer, the seller had waived its right to set up the defense that notice of non conformity was not timely given. The sole arbitrator held that the intention of a party to waive this right must be clearly established and that in the case at hand, there was insufficient evidence of such an actual intention.

The sole arbitrator held, however, that the seller was estopped from setting up the defense that the notice given by the buyer was not timely. This question is not expressly settled by CISG. The arbitrator applied Art. 7(2) CISG, and - referring to Arts. 16(2)(b) and 29(2) CISG - held that estoppel ('venire contra factum proprium') is a general principle underlying CISG. In the case at hand, the seller had behaved in such a way that the other party was led to believe the seller would not raise the defense (e.g., after receiving the notice the seller had continued to ask the buyer information on the status of the complaints and had pursued negotiations with a view to reach a settlement agreement).

The buyer was awarded damages for non conformity. As far as interest is concerned, the sole arbitrator held that the interest rate is a matter governed but not expressly settled by CISG. Therefore, it must be determined according to the general principles on which CISG is based (Art. 7(2) CISG). Referring to Arts. 78 and 74 CISG, the arbitrator found that full compensation is one of the general principles underlying CISG. In relations between merchants, it is expected that the creditor, due to the delayed payment, resorts to bank credit at the interest commonly practiced in its country with respect to the currency of payment (the currency of the creditor's country or any other foreign currency agreed upon by the parties). The arbitrator observed that this solution is stated also in Art. 7.4.9 of the UNIDROIT Principles of International Commercial Contracts. The interest rate awarded in the case at hand, therefore, was the average prime rate in the buyer's country (Germany) with respect to the currency of payment (US Dollars).

Fulltext

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1. By the request for arbitration of [...] the claimant [a company with place of business in Germany] applied for an award against the respondent [a company with place of business in Austria] for payment of DM [...]. It submitted that the respondent had not fulfilled the agreed requirements of quality and finish with respect to some consignments out of a total of 6,800 metric tons of cold-rolled sheet in coils to be delivered under a contract concluded on 11 December 1990.

[...]

1.2. The respondent [...] applied for dismissal of the claim. It disputed the alleged lack of conformity, both in substance and extent, and asserted that in any case there was no entitlement to guarantee and damages because of the failure to abide by the contractually agreed conditions.

[...]

3. The competence of the Arbitral Centre is founded on the last paragraph of the contract. According thereto, all disputes that cannot be settled amicably should be finally decided according to the rules of the Arbitral Centre of the Austrian Federal Economic Chamber by one or more arbitrators appointed in accordance with those rules. It is true that the contract - and thus the aforesaid arbitration clause - exists only in the acknowledgement of order sent by the respondent to the claimant, which the latter never countersigned. However, there can be no doubt of the validity of the arbitration clause, not least because the claimant expressly refers to it in its claim.

4. According to the contract, the applicable law was Austrian law. That means that - in so far as the issues involved fall within its scope - the United Nations Sales Convention of 11 April 1980 (CISG) applies. In fact, that Convention entered into force in Austria on 1 January 1989, with the consequence that, from that date onwards, all international contracts of sale of goods within the meaning of Article 1 have been subject to the CISG, provided that the conditions stipulated for that purpose in the Convention itself are met, i.e. that either both parties are established in Contracting States or that the rules of private international law lead to the application of the law of a Contracting State. In the present case, the first condition was not met because Germany [...] was not yet a Contracting State at the time of conclusion of the contract. On the other hand, however, the other prerequisite for the application of the CISG was met, i.e. the rules of private international law led to the application of the law of a Contracting State (Austria). In fact, according to the predominant view in international legal writings, the parties' choice of the law of a Contracting state is understood as a reference to the corresponding national law, including the CISG as the international sales law of that State and not merely to the - non-unified - domestic sales law (see also, for further references, M.J. BONELL in BIANCA- BONELL, Commentary on the International Sales Law, 1987, 56 ff. R. HERBER in v. CAEMMERER-SCHLECHTRIEM, Kommentar zum Einheitlichen UN-Kaufrecht 1990, Anm. 38 on Art. 1 and Anm. 16 on Article 5; with reservations, R. LOEWE, Internationales Kaufrecht, 24 ff.).

5. [...] The claimant's claim for damages for lack of conformity of the goods is justified only in part.

5.1. The respondent was obliged on the basis of the contract to deliver a total of approx. 6,800 metric tons of cold-rolled sheet in coils, packed for export. It is established that the first two partial consignments of approx. 1,800 metric tons and 1,200 metric tons displayed quality defects of the most varied types. The exact extent of the defects actually present is disputed. However, the question can remain open since - as will be pointed out below - the claimant lost its right to full compensation for the losses suffered as a result of the failure to give notice of lack of conformity in time.

5.2. According to the contract - which to that extent derogated from the provisions on the duty of the buyer to examine the goods and to give notice of the defects contained in Articles 38 and 39 of CISG - the seller's warranty for any defect of the goods was subject to the condition that the buyer examine the goods immediately after taking delivery and give without delay written notice of the defects discovered on that occasion and substantiate those findings by means of an expert statement by an internationally recognized testing company, whereas complaints as to defects not recognizable immediately must be made at the latest within two months after hand-over.

5.3 The claimant did not comply with these requirements since it did not give notice of the alleged defects in time. Delivery of the first two lots of approx. 1,800 metric tons and 1,200 metric tons, respectively, was made on 21 February and 17 April 1991, respectively, and the goods were dispatched to Portugal by ship on those dates. Even on the assumption that as a consequence of the special packing of the goods the defects were not recognizable when the goods were delivered in the port of Rostock and could not be discovered until after unpacking and/or the commencement of processing by the ultimate customer, the claimant ought to have given notice of the defects in the two lots by 21 April and 17 June 1991 at the latest, respectively. On the contrary, a notice of the defects of the first lot submitted in conformity with the contract, i.e. in writing and confirmed by an expert statement, was not made until 15 May 1991, while a similar notice concerning the entire quantity of goods delivered by that time was not made until 10 October 1991 - that is to say, six months after delivery of the second lot.

5.4. The argument adduced by the claimant that the parties later implicitly derogated from the contractually established time-limit for notice of lack of conformity by both recognizing the complaints as fully justified and jointly discussing their legal settlement is not convincing. At the very least, a distinction should be made between the first and the second complaint. The conduct of the respondent after receipt of the first (partial) complaint and the legal evaluation of such conduct will be considered below (see 5.6.). As to the second and all-embracing complaint, there is not sufficient evidence for the allegation that the respondent had waived its right to set up the defence of late notice of the defects. The respondent was for a long time left by the claimant in the belief that the defects initially complained of were only minor in nature and served primarily as a pretext for the Belgian intermediary to escape from its contract with the claimant, which was no longer profitable. The claimant itself admits that it did not become aware of the true extent of the defects until later, after a further examination of the goods by the expert. That must a fortiori apply to the respondent, who, furthermore, was not informed until the middle of October of the results of the second examination by the expert, notwithstanding the fact that this examination had already taken place in July. The mere fact that the respondent did not expressly reject the late notice by the claimant is not sufficient to justify the conclusion that the respondent intended to waive its contractual rights. In the interests of legal certainty such an intention of the parties must be established beyond any doubt (see, in this sense, expressly, H. STUMPF in v. CAEMMERER-SCHLECHTRIEM, loc.cit., Anm. 15 on Art. 39). This is clearly not true in the present case. The second complaint was clearly to be taken much more seriously than the first (partial) complaint. Since the situation was now substantially different for the two parties, much clearer evidence of a waiver by the respondent of its right to set up the defence of late notice would have been needed than the respondent's silence or the mere fact that it did not immediately object to the late notice.

5.5. The claimant has nevertheless a right to reduced damages. A given legal position (e.g. a right, a defence, etc.) can not only be intentionally waived but can also be objectively forfeited. This follows from the general principle of good faith and the closely related principle of estoppel (prohibition of venire contra factum proprium). Thus, a legal position of a party must be regarded as having been forfeited whenever that party's conduct could be construed as meaning that it no longer wished to exercise its right or its defence, and the other party acted in reliance on the new situation (on this point, see in general inter alia ESSER-SCHMIDT Schuldrecht, I, Allgemeiner Teil, 6. Aufl., 1984, 150-152). The CISG expressly mentions in Article 7 (1) the requirement of the observance of good faith in international trade. The exact significance to be attached to the general principle of good faith within the scope of the Convention may be disputed (see on this point M.J. BONELL in BIANCA-BONELL, loc. cit, p. 83 ff.). However, at the least the principle of estoppel or, to use another expression, the prohibition of venire contra factum proprium, which represents a special application of the general principle of good faith, may without doubt be seen as one of the 'general principles on which the Convention is based', which according to Article 7 (2) of the CISG may be invoked to solve the question of a possible forfeiture of the defence of late notice, not expressly settled in the Convention (see in this sense, among others, M.J. BONELL in BIANCA-BONELL, loc. cit., p. 81 (with a reference to the provisions contained in Art. 16(2)(b) and 29 (2); HERBER/CZERWENKA, Internationales Kaufrecht, 1991, 48).

5.6. In the case in point, the requirements for forfeiture are met. The respondent may never had the intention of waiving the defence of late notice; however, objectively, its conduct after receiving the first complaint from the claimant was such as to give the latter the justifiable impression that it recognized the lawfulness of the complaint despite the lateness of transmission. In that context, the fact that the respondent did not immediately reject the complaint as having been made after the expiry of the contractually agreed time- limit is not so important. What counts is rather the circumstance that, even after the complaint had been made, the respondent remained in contact with the claimant in order to keep itself informed of the development of the complaints on the part of the Portuguese ultimate customer and/or the Belgian intermediary. What is even more important is the fact that the respondent repeatedly [...] made statements to the claimant from which the latter could reasonably infer that the respondent would not set up the defence of late notice with reference to the complaint. In reliance on that, the claimant refrained from immediately taking legal action not only against its own customer but also against the respondent itself.

5.7 However, the forfeiture refers only to the first (partial) complaint. By behaving in the manner just described the respondent always assumed that the defects would not prove to be greater than established on the first examination of the goods. This follows inter alia from the fact that the respondent, by it own admission, intentionally did not transmit this first complaint to its own supplier, since its contract with the latter provided that 'to a certain extent, lack of conformity was to be tolerated by the buyer'. The expert's report of 6 May 1991 referred to the partial consignment that had arrived at the factory of the ultimate customer by that date, i.e. approx. 1,800 metric tons of the total 3,000 metric tons of goods shipped, only approx. one- third of which had already been processed. Therefore, it is very difficult, if indeed at all possible, to prove the exact extent of the existing defects. As a consequence, the arbitrator fixes the corresponding amount of damages at his discretion at one-fifth of the total value of the goods in question, i.e. 20 % of US sec. [...] x 1,800, plus interest, to be calculated as from 15 May 1991, the date when the first notice of defects in due form was submitted. In his estimate, the arbitrator takes at his basis the projection made by the expert in his second report, according to which the total loss was estimated as one-fifth of the entire quantity of goods delivered. The legal basis for such a discretionary determination of the amount of damages is sec. 273 of the Austrian Code of Civil Procedure, which is also applicable within the scope of the CISG (see in this sense H. STOLL in v. CAEMMERER-SCHLECHTRIEM, loc. cit., Anm. 41 on Art. 74 with reference to the similar provision to be found in sec. 287 of the German Code of Civil procedure).

5.8. Article 78 of the CISG, while granting the right to interest, is silent on the question of the applicable rate. In international writings and case law to date it is disputed whether the question is outside the scope of the Convention - with the result that the interest rate is to be determined according to the domestic law applicable on the basis of the relevant conflict-of-laws rules (in this sense see, among others, HERBER/CZERWENKA, loc. cit., 1991, 347; Oberlandesgericht Frankfurt, 13 June 1991, Recht für internationale Wirtschaft 1991, 591) - or whether there is a true gap in the Convention within the meaning of Article 7(2) so that the applicable interest rate should possibly be determined autonomously in conformity with the general principles underlying the Convention (see in this sense, for example, J.O. HONNOLD, Uniform Sales Law, 2nd edition, Denver- Boston 1991, 525-526; ICC Arbitral Award No. 6653 (1993), Clunet 1993, 1040). This second view is to be preferred, not least because the immediate recourse to a particular domestic law may lead to results which are incompatible with the principle embodied in Art. 78 of the CISG, at least in the cases where the law in question expressly prohibits the payment of interest. On of the general principles underlying the CSG is that of 'full compensation' of the loss caused (cf. Art. 74 of the CISG). It follows that, in the event of failure by the debtor to pay a monetary debt, the creditor, who as a business person must be expected to resort to bank credit as result of the delay in payment, should therefore be entitled to interest at the rate commonly practised in its country with respect to the currency of payment, i.e. the currency of the creditor's country or any other foreign currency agreed upon by the parties (cf. Art. 7.4.9 of the Principles of International Commercial contracts prepared by the International Institute of the Unification of Private Law (UNIDROIT), on which see M.J. BONELL, An International Restatement of Contract Law. The UNIDROIT Principles of International Commercial Contracts, Transnational Juris Publications, Irvington - N.Y., 1994, 114-115). The information received from the Deutsche Bundesbank is that the average 'prime borrowing rate' for US dollars in Germany in the period in question was 6.25 %. The interest due from the respondent should be calculated at that rate.

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[Original in German]}}

Source

Published in German:
- Recht der Internationalen Wirtschaft (RIW), 1995, 591-592

Published in Italian:
- Rivista dell'Arbitrato, 1995, 537-541

Commented on by:
- P. Schlechtriem, Recht der Internationalen Wirschaft (RIW), 1995, 592-594
- A. Veneziano, La Convenzione sulla vendita internazionale e i Principi UNIDROIT dei contratti commerciali internazionali, in due recenti lodi della Corte arbitrale della Camera di Commercio di Vienna, Rivista del'Arbitrato, 1995, 547-560
- A. Mari, Le prime decisioni arbitrali in applicazione dei principi UNIDROIT, Diritto del Commercio Internazionale, 1995, 495}}