Sale contract between a Yugoslavian seller and an Italian buyer

United Nations Convention on Contracts for the International Sale of Goods, Vienna (1980) / Application of the Convention as it most aptly contains general principles of international commercial law and accepted usages in international commercial practice; and also in consideration of the fact that countries of both parties are signatories to the Convention / Silence of the Vienna Convention on the issue of novation / Contract may be modified or terminated by mere agreement of the parties, yes, Art. 29 / Difference between novation of and amendment to, a contract / Interpretation of contractual provisions: objective interpretation is the rule unless it can be demonstrated that the parties had a contrary subjective understanding, (Art. 8) / Lost of buyer's right to rely on a lack of conformity of the goods in absence of suitable notice (Art. 39) / Absence of a reasonable excuse for buyer's failure to give the required notice, yes (Arts. 44, and 50) / Breach of buyer's obligation to mitigate damages (Art. 77) / Interest: rate in the absence of indication in the Vienna Convention: application of the rate effective in the country of the creditor

In 1989, Claimant (a Company having its seat in Yugoslavia) and Defendant (a Company having its seat in Italy) entered into a contract for the sale and delivery of cow hides. Claimant's motivation for entering into these contracts with Defendant resulted from its contract with RX (a Russian entity) to reconstruct a factory in Russia. Since at the time there was no convertible currency, RX proposed a barter arrangement pursuant to which it would pay Claimant by supplying hides and other products. Since RX already had existing business relationships with Defendant, RX suggested to Claimant (which was not experienced in the hide business) to sell hides to Defendant. Fixed prices were then negotiated between Claimant and Defendant based on market conditions. Claimant also had the same fixed prices (including a small margin to cover costs) for the supply of hides relating to the contracts with its supplier RX.

The hides were transhipped to Defendant in Italy. Upon their arrival, a technician inspected the goods on behalf of Defendant, alleging substantial defects in the hides delivered. Defendant did not send these reports to Claimant. During that time, Defendant repeatedly requested a reduction in price from Claimant based on the depressed market for hides. Claimant's response to Defendant was that it could not lower the price since Claimant sold the hides to Defendant at a price which was virtually the same as the price at which RX sold the hides to Claimant. Defendant withheld payment under the contracts. A meeting then took place in Moscow between Claimant, Defendant, and RX.

At the Moscow meeting, RX did not agree to a price reduction. Defendant specified the amount of its claim-US$ 800,000-based on the Italian surveyor reports, which Defendant did not submit to Claimant. Claimant did not express any intent to release Defendant from its obligations under the contracts. Parties signed a Protocol during that meeting, recognizing that the total amount of Defendant's outstanding debt was US$ 2,200,000. As set forth in the Protocol, Defendant paid to Claimant the amount of US$ 1,400,000 and Claimant accepted a 30-day postponement of the debt payment during which time RX was to inspect the hides in Italy.

After RX failed to inspect the hides, Defendant informed Claimant that because of RX's failure, it no longer owed Claimant the outstanding amount under the contracts of US$ 800,000. Defendant sold the goods. Defendant did not specify the amount received in selling the allegedly defective hides.

Applicable law

The contracts entered into between the parties do not contain a choice of law provision.

Claimant has argued that this Tribunal should apply the law of the lex loci venditoris while incorporating the application of the Vienna Convention. Defendant, on the other hand, has argued that no specific national law should apply to the dispute, but rather that general principles of international commercial law and accepted usages in international commercial practice, including the principle of good faith, should govern.

In determining the law applicable to the arbitration agreements as well as the substantive law to govern the dispute, this Tribunal is not bound to adopt any particular national law. Article 13(3) of the ICC Rules provides in relevant part as follows: ". . . In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate."

The Tribunal also has the authority to base its decision on its understanding of the agreement in dispute, general principles of law, and the concept of good faith dealings and mutual trust in business relationships, as well as trade usages (see, e.g., ICC Case 3267/1979, extracts in 1980 Journal du droit international; ICC Case 3131/1979, IX Yearbook 109 (1984)).

The Tribunal agrees with Defendant that general principles of international commercial practice, including the principle of good faith, should govern the dispute. The Tribunal believes that for the present dispute, such principles and accepted usages are most aptly contained in the United Nations Convention on Contracts for the International Sale of Goods, the incorporation of which, as noted above, Claimant has pleaded for. The dominant theme of the Vienna Convention is the role of the contract construed in the light of commercial practice and usage, which was produced by agreement among States resulting from collaboration sustained for over a decade (see generally Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 1991, pp. 47-48).

Applying the Vienna Convention to the present dispute is all the more appropriate since Yugoslavia and Italy are signatories to such convention. For Yugoslavia and Italy, as well as vine other States, the Vienna Convention entered into force on January 1, 1988 (see Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 1991, p. 47). Thus, to the extent the Vienna Convention contains provisions relevant to the dispute, the Tribunal shall consider the same.

Regarding the issue of novation, which is at the core of the dispute between the parties, the Vienna Convention is silent. Despite the Convention's silence on this issue, the Tribunal does not find it necessary to look solely to one national law. As has been pointed out by Claimant (see Claimant's Brief dated December 18, 1992, pp. 5-6), all three national laws related to the parties and this dispute (Italy, France and former Yugoslavia) contain similar provisions relating to those requirements which must be met to bring about a novation releasing the original debtor. Thus, on the issue of novation, the Tribunal shall apply these common core requirements as a general legal standard derived from the three national laws noted above.

Merits of the dispute

The issue of novation lies at the heart of the dispute:

The only principal issue in dispute is the amount of US$ 830,000.00, which is set forth in the Moscow Protocol. The subject matter of the dispute revolves around whether the Moscow Protocol was a novation between Claimant and Defendant rendering the Contracts no longer valid, and whether pursuant to the Moscow Protocol RK's failure to inspect the hides released Defendant from any and all obligations towards Claimant.

Defendant alleges that the Moscow Protocol constitutes a novation to the Contracts previously entered into between Claimant and Defendant releasing Defendant from all its obligations thereunder. Claimant disputes this position, and alleges that the Moscow Protocol did not release Defendant from its obligations under the Contracts.

Modification of contracts versus novation:

It is acknowledged in international law that a contract may be modified or terminated by the mere agreement of the parties. This principle is reflected in Article 29 of the Vienna Convention, which is intended to override the rule applied in many common law jurisdictions that a modification to an agreement is not binding as a contract unless the promise for whose benefit the agreement is made furnishes new consideration.

To be distinguished from a mere amendment to a prior contract is the doctrine of novation. Under the laws of all three national jurisdictions which the Tribunal deems potentially relevant (France, Italy and Yugoslavia), novation cannot be presumed and requires the proof by the party alleging the existence of a novation that the original parties to the contract shared an animus novandi.

. . .

Thus, the following question arises in the present proceeding: was the reference to the inspection and possible payment from RK merely a collateral promise on the part of RK to pay a debt or an assumption of Defendant's debt by RK releasing Defendant from its obligations? There are two potentially relevant sources to determine whether Claimant could reasonably have been understood to have released Defendant from its obligations in the Moscow Protocol: (1) the language of the Moscow Protocol itself; and (2) surrounding circumstances, including the parties' intent.

[On the first question, the Arbitral Tribunal finds that a close reading of the Moscow Protocol supports Claimant's position.]

The surrounding circumstances, including the parties' intent:

In interpreting statements of parties and provisions in contracts, it is generally accepted in international commercial law that the meaning of such statements and provisions are to be assessed on an objective basis, unless it can be shown that the parties had a contrary subjective understanding. The Vienna Convention reflects these general international commercial principles and sets forth in Article 8 general rules with respect to interpreting statements of parties and provisions of contracts . . .

Though this Article applies literally to a situation where one party is expressing an intent, it can equally be applied to situations where negotiations are followed by the parties nearly simultaneously putting their signatures to a document. (See Farnsworth, Commentary on Article 8 in Commentary on the International Sales Law-The 1980 Vienna Sales Convention by Bianca and Bonell (1987), p. 101.)

Paragraph 1 of Article 8 contains a subjective test. To show that the Claimant understood the Moscow Protocol to result in a release of Defendant under this test, Defendant would have to demonstrate that Claimant knew or could not have been unaware of this interpretation.

Under paragraph 2 of Article 8 of the Vienna Convention, that interpretation which is the more reasonable in light of the kind of parties involved and their circumstances will prevail. The test of paragraph 2 is the same kind as the parties involved with respect, for example, to such matters as linguistic background and technical skill. All relevant circumstances, as noted in paragraph 3 of Article 8 of the Vienna Convention, are to be considered.

Based on the evidence presented, Claimant did not intend to release Defendant from its obligations, and Defendant had no reasonable basic upon which to assume that this was the Claimant's or parties' intent.

. . .

In light of the above, the Arbitral Tribunal holds that both the language of the Moscow Protocol and the surrounding circumstances demonstrate that the parties did not intend to release Defendant from its obligations under the Contracts to Claimant. . . .

Defendant's failure to properly notify Claimant of defects under the contracts:

Defendant never notified Claimant of the damaged goods in the manner required by the Contracts. Under the Contracts, Defendant was obligated to notify Claimant within one month of the arrival of the goods of their defective nature by making a "claim" which was to be substantiated by a surveyor report. Defendant indicates that during the summer of 1990, the Technical Surveyor Bureau . . . ascertained damages to the goods, but admits that it never notified Claimant of such reports. Rather, it is alleged that the report had merely been given to RK's representatives before the Moscow Meeting.

Under Article 39.1 of the Vienna Convention, a 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 the non-conformity is discovered or should have been discovered.

Since the defective nature of the goods can be readily ascertained and, as alleged by Defendant, were ascertained, it is reasonable to uphold the one month notice period set forth in the Contracts, to which Defendant expressly agreed.

Article 44 of the Vienna Convention provides that notwithstanding the provisions of Article 39.1, 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. Defendant was not able to present any such excuse.

Assuming for the sake of argument that Defendant had given proper notice of the defects to Claimant, Defendant still would not have a defense to non-payment. While admitting that it sold the allegedly defective goods, Defendant never presented any evidence of the amount obtained for such goods. The Defendant's failure to do so presents a breach of its obligation to mitigate damages under Article 77 of the Vienna Convention. Moreover, the lack of evidence that the goods were indeed sold at a loss due to their defective nature is an indication that the goods were not defective in the first instance.

Interest:

It is acknowledged in international law that claimants prevailing on the merits are entitled to receive interest on the principal amount awarded. The Tribunal finds the application of this principle particularly appropriate in this case since Claimant has suffered damages due to delayed payment, which must be compensated by the granting of interest. It is also generally acknowledged that interest does not begin to accrue until proper notice of the claim has been given. In this case, there is no indication that proper notice was given before the filing of the Request for Arbitration.

Regarding the precise rate of interest to be applied, there is no single internationally accepted rate of interest. This is reflected in the Vienna Convention, which only generally provides that parties are entitled to interest without specifying any particular rate of interest. It is, however, acknowledged in international law that where the parties are silent as to choice of law with respect to the payment of interest, the law of the State applies in which the damage resulting from the delayed payment is suffered. It is furthermore acknowledged in international law that such damage is suffered at the place of the creditor and in the creditor's market (see ICC Case 2375/1975: JDI, 1976, p. 973, obs. Derains; ICC Case 5460/1987, XIII Yearbook 104 (1988)). Therefore, this Tribunal shall apply the rate of interest effective for commercial matters in the country of the creditor, the Claimant.'