Sale contract of machinery for the production of batteries between an Italian company (seller) and a Czech company (buyer)

United Nations Convention on Contracts for the International Sale of Goods, Vienna (1980) / Applicability, yes: contract governed by Austrian law; Austria is a Member State of the Convention, Art. 1 / Contract within the scope of the Convention, yes, Art. 3 / Applicability of Austrian law as substantive law, yes, Art. 7 / Partial cancellation is the rule in case of partial non-performance amounting to a non-fundamental breach, Arts. 49 and 51 / 18-month contractual warranty period reduces the two-year time limit specified in the Convention, Arts. 6 and 39 / Claim for damages in view of a forthcoming state court ruling in a connected liability case filed by a third party against claimant is rejected, Art.74 / Damages under Art. 74 do not include the restitution of the contract price / Interest on accepted claims, yes, Arts. 78 and 84; starting point, date of maturity of first promissory note, Art. 84; rate calculated by reference to Austrian law, Art. 7 / Conversion rate for payment adopted by reference to rate agreed by the parties in their contract; this rate also applies to interest, Art.84

In 1989, the parties entered into a contract relating to the supply by Defendant (Italian company) to Claimant (Czech company) of a complete automatic assembly line for batteries

.

According to the contract, the machinery was to be delivered not directly to Claimant but to the Czech Company XYZ.

One of the provisions of the contract specified that the Seller granted a guarantee for the mechanical function of the contracted plant during a period of 18 months from the date of the delivery at the latest.

Delivery of the machinery occurred in December 1990.

In December 1991, XYZ commenced proceedings against Claimant before the Commercial Court in Prague for damages resulting from defects in and incompleteness of the machinery purchased by Claimant from Defendant and delivered by Claimant to XYZ.

In August 1992, Claimant filed its request for arbitration.

Claimant basically contends that the machinery never did function properly, that takeover tests under the contract were never performed, and that all of Defendant's many attempts to repair and improve the machinery have been unsuccessful. Claimant therefore requests the Arbitral Tribunal to declare the contract partially cancelled with regard to certain parts of the machinery, and to award damages.

Defendant contends that the request for arbitration was filed 20 months after delivery occurred and, therefore, at a time when the 18-month-latest-period specified in the contract had already expired.

Therefore, all of the Claimant's claims must be rejected on the ground that they are time-barred. Defendant also rejects as unfounded the merits of Claimant's claims.

A. Applicable law

According to the contract, Austrian law governs the merits of this dispute. There is no dispute between the Parties that this choice of law includes application of the UN Convention on Contracts for the International Sale of Goods of April 10, 1980 ("CISG"), of which Austria is a Member State effective January 1, 1989. Art. 1.1 (b) CISG declares the Convention applicable where rules of private international law, including choice of law, refer to the substantive law of a Member State. Austria has not filed a reservation under Art. 95 CISG declaring Art. 1.1 (b) inapplicable (see Wilhelm, UN-Kaufrecht, Vienna 1993, p. 3). The present contract for production, delivery and installation of machinery also falls within the scope of the Convention (see Art. 3.1 CISG). Therefore, substantive domestic Austrian law is only applicable when questions concerning matters governed by the Convention are not expressly settled in it and cannot be settled in conformity with the general principles on which the Convention is based (Art. 7.2 CISG; see Bianca-Bonell, Commentary on the International Sales Law, Milan 1987, pages 65 et seq.; Audit, La vente internationale de marchandises, Paris 1990, pages 46 et seq.). In particular, Austrian law governs the questions of prescription and interest, discussed below (see Wilhelm, op. cit., pages 19 and 25; von Caemmerer/Schlechtriem-Stumpf, Kommentar zum Einheitlichen UN-Kaufrecht-CISG, 1990, Art. 39 note 16 and Art. 84 note 13; Herber/Czerwenka, Internationales Kaufrecht, 1991, Art. 84 note 3).

. . .

B. Accepted claims

Defendant has accepted Claimant's claims regarding non-delivered spare parts valued at . . .

Even though the Defendant has not expressly included payment of interest in his acceptance of Claimant's claims, the Arbitral Tribunal deems it justified to order Defendant to pay interest in the amount due under applicable law (Arts. 78 and 84 CISG).

As to the starting date, interest for reimbursement of the purchase price runs from the date of payment (see Art. 84.1 CISG). The date of the filing of the arbitral request or of its supplementation is not decisive. Thus, Claimant is entitled to interest running from the maturity of the first promissory notes.

As to the amount of interest, Arts. 78 and 84 CISG are silent on the matter. Therefore, under applicable (see Art. 7.2 CISG) Austrian law, the statutory litigation interest applicable to commercial transactions is 5% (see § 352 Commercial Code-HGB). Such amount corresponds to Claimant's demand.

Claimant demands a conversion of the refund into DM at the exchange rate of 720 ITL/1 DM which the Parties chose for the contract price as a remedy against currency fluctuation. Although this rate did not prevail at the time of the request for arbitration the Arbitral Tribunal deems it appropriate to apply it, because the contract price-though valued in Lira-was due in DM. Thus, any refund, including interest, should also be due in DM at the same rate. This is further corroborated by Art. 84.1 CISG which shows that the Convention takes the perspective of the date of payment rather than repayment.

C. Partial cancellation of the contract and partial reimbursement (Art. 49.1 (a), Art. 54.1,

Art. 81.2 CISG)

1) Responsibility under Art. 49.1 (a) CISG for fundamental breach of contract

It is undisputed between the Parties that no formal takeover of the contracted machinery ever took place.

There is substantial disagreement between the Parties as to the responsibility for the failure to carry out the test and to achieve the required parameters.

The Arbitral Tribunal refrains from detailed observations on the highly disputed question of responsibility for the defects because the dispute can be resolved on other grounds.

2) Partial cancellation

The Tribunal notes that Art. 51.1 CISG provides for a partial withdrawal as declared by Claimant. As Art. 51.2 CISG shows, partial withdrawal is the rule rather than the exception in cases of partial non-performance amounting to a non-fundamental breach of the contract (see Art. 49.1 (a) CISG). Defendant's contention that the contract permits only full withdrawal is unpersuasive since the wording of the contract is open in that regard and does not explicitly exclude partial withdrawal. Therefore, a partial withdrawal under Art. 51.1 of the Convention is permissible where the defective piece of machinery forms an independent part of the contracted goods. Independence of the b-machine is suggested not only by the fact that the contract separately lists and values it, but also because the b-machine was replaceable by a different maker's the b-machine while continuing to use the remainder of the contracted units together with the substitute.

3) Time limits under the contract

The crucial issue in this dispute is whether Claimant's partial withdrawal from the contract with respect to the b-machine is barred by the time limits set out in the contract.

. . . The machinery was never accepted in any other way as conforming to the contract.

However, the decisive question is whether Defendant-under applicable law-can avail itself of the 18-month-latest-period provided for in the contract and thus exclude any possible liability for reimbursement.

The Tribunal notes that the contract contains very clear wording relating to the 18-month-latest-period. It is designed to run from the date of delivery of the machinery . . . The wording "at the latest" shows that the 18 month period was meant to set a clear and final deadline for the prescription.

The Vienna Convention and Austrian law contain no contrary rule. Claimant, in the second hearing, has offered to submit Austrian case law on the question of the effect of seller repair activity on the elapse of limitation periods. Following the protest of Defendant, the Arbitral Tribunal has rejected said submission as belated. However, the issue of the effect of repair activities has been raised by Claimant orally and therefore needs to be dealt with. The Arbitral Tribunal deems this point to be clearly one of law, not of fact. However, Austrian law, where applicable, cannot (...) extend the 18-month period itself. The Convention is silent on the run of prescription periods. Art. 39 CISG deals with the duty to inspect and give seller timely notice, and with the loss of rights for failure to notify on time. It should also be mentioned that the Vienna Convention (according to its Art. 6) allows the parties to derogate or vary the effect of any of its provisions. Thus, in the case at hand, the parties, by agreeing on an 18-month warranty period have also reduced the two-year time limit provided for in Art. 39.2 of the Convention to a one-and-a-half-year time limit. On the other hand, Art. 39 of the Convention does not specify, as Herber/Czerwenka, op. cit., Act. 39 note 2, state, "in which period of time the purchaser who has notified the defect on time, has to claim his rights because of such defects" [translation by the Arbitral Tribunal]. Likewise, Wilhelm, op. cit., pages 19 and 20 states: "The Convention does not specify the prescription periods within which the claim . . . has to be brought before the court. This question is subject to the national law. Consequently, claims for delivery, repair and reimbursement of the purchase price after cancellation of the contract as well as claims for the reduction of the purchase price are subject to the provisions of Art. 1478 et. seq. ABGB and damages claims are subject to the provisions of Art. 1489 ABGB [three years period of prescription] [translation by the Arbitral Tribunal]." Therefore, Austrian law governs the prescription period.

Under the contract, therefore, the 18-month-latest period ran out on June 22, 1992. Undisputedly, the Request for Arbitration was filed thereafter.

D. Damages

Claimant's claim for damages is one for indemnification in view of XYZ's claim now pending in the Prague court. As that court has not yet ruled on Claimant's liability to XYZ it is clear that-as of now-Claimant has not suffered any damage as required by Art. 74 CISG. This is also true with respect to Claimant's further argument that the amount due to Claimant but withheld by XYZ should be treated as damage. Indeed, also the lawsuit between Claimant and XYZ is still pending so that already for that reason there is-as of now-no damage that Claimant has suffered. Accordingly, the claim must be rejected. Some remarks, however, seem appropriate regarding this claim.

Damages under Art. 74 CISG do not include the restitution of the contract price already paid by Claimant to Defendant. This observation seems necessary for two reasons: First, since the price was already paid, the question of whether it constitutes damages is before this Tribunal, and Claimant has indeed argued a damage theory (see Claimant's Submission of February 25, 1994, pages 19 and 20). Second, Austrian case law has recently come to include the contract price into claims for negligent breach of contract, along with losses to other goods of buyer and lost profits (OGH in RdW 1985, p. 72). Therefore, under Austrian law, claims for restitution and for damages are partially equivalent. In the case of the contract price Austrian law offers two legal theories with different requirements. Recovery as damages (§ 921 or § 932 para. 1 cl. 2 ABGB) falls within the statutory limitation period of § 1489 ABGB of three years while prescription is six months (§ 933 ABGB) under a restitution theory (§ 932 para. 1 cl. 1 ABGB).

The Arbitral Tribunal finds that applicable law does not allow (partial) recovery of the contract price under the extensive Austrian damages theory. § 1489 ABGB is applicable only to damage claims as defined by the Convention. Austrian law's extensive scope of damages has no bearing on the interpretation of the Convention because-unlike the question of limitation periods-the Convention has its own damages provision (see Wilhelm, op. cit., p. 5). Recovery of damages under Art. 74 CISG is distinguished from restitution of the contract price in Art. 49, 81 (see von Caemmerer/Schlechtriem-Leser, op. cit., Vor. Art. 81-84, note 7; Audit, op. cit., p. 162; Bianca-Bonell op. cit., p. 545 et. seq.).

Given the fact that the damage claim has to be rejected on the grounds that Claimant has not yet suffered damages, the Arbitral Tribunal does not have to rule upon the question whether the contractual limitation period of 18 months for defects also applies to the damage claims.

It should further be noted that any determination of liability by the Prague court will have no binding effect between the Parties to this arbitration since Defendant is not involved in the Prague proceedings.'