1988 ICC Rules of Arbitration

CISG Arts. 9, 18, 35

Claimants (purchasers) and Respondent (seller) entered into two purchase agreements for the supply of steel billets. Upon delivery, the goods were then shipped to Claimants' customer, who encountered problems when processing them. Claimants contended that the goods were defective and unsuitable for hot rolling, as required by the agreements. Respondent objected, arguing that the problems were due not to the billets but to the customer's installation, which was not suited for hot rolling such billets. Claimants initiated arbitration proceedings pursuant to the dispute resolution clause in the agreements, which stated: 'Matters that cannot be settled within a period of 60 days after material discharge shall be submitted to arbitration in either USA or Switzerland depending on the party wishing to go to arbitration (under the most recent International Chamber of Commerce rules).'

'4. In Law

a. The governing laws

The parties stipulated in section VII.C. of the Terms of Reference that the law governing this Arbitration Proceeding, with its seat in Zurich, is the law of Switzerland.

The parties also agreed as to the substantive law of their transactions that:

(a) the Purchase Agreement dated . . . was governed by the law of the State of New Jersey, including the New Jersey version of the Uniform Commercial Code ("NJUCC"), and

(b) the Purchase Agreement dated . . . was governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) ("UNISG").

Neither party presented any evidence or argument of any material differences in these two substantive laws, insofar as the potential liability of the Respondent to Claimants in this Arbitration is concerned. The Arbitrator has considered both laws and does not find any material differences in them insofar as they are applied in the present case to resolve the claims brought by Claimants.1

The parties did not specify in their . . . correspondence what substantive law was intended to govern their agreement relating to reimbursement of Respondent's travel costs to attend [Claimants' customer].

The Arbitrator considers and rules that later agreement is governed by Swiss law, as the obligor was located in Switzerland, from where he made the undertaking and Switzerland has contacts with the transaction at least as significant as any other state. (Swiss Federal Act on Private International Law, section 187(1) and section 117 by analogy).

b. Freedom to establish specifications

The Swiss Private International Act Article 187(1) recognizes party autonomy as a fundamental maxim in the law of contracts. This is also accepted by both legal systems governing the two Purchase Agreements.

In the context of commercial contracts, one of the fundamental purposes of the NJUCC is stated to be "to permit the continued expansion of commercial practices through custom, usage and agreement of the parties". (NJUCC 1-102(2)(b)). The UN Convention states, with equal purpose, "the parties are bound by any usage to which they have agreed and by any practice which they have established between themselves". (UNISG, Art. 9(1)).

It is beyond question that parties to a commercial purchase/sale agreement have, under either of these laws, a power, unfettered other than by limits of public policy, to establish what express specifications and/or warranties shall apply for the goods to be delivered under their agreement. (Cf., Corbin, The Law of Contracts, 1952, s. 1375).

c. The burden of proof

The buyer, under each legal system, who claims goods delivered are defective bears the burden of proving both the existence of an express specification or an implied warranty and the breach by the seller of that specification or warranty. Neither of these codified commercial laws contains any provision which affects the general provisions of law placing the burden of proof on the claiming party.

For the claims based on breach of the Purchase Agreements, the Arbitrator has considered the burden of proof to be on Claimants and for the counterclaim, the burden is on Respondent.

d. Express and implied warranties

Under each of the applicable laws, Respondent had the obligation to deliver billets which conform to the description in the Purchase Agreements, i.e. the expressly warranted quality. (See NJUCC s. 2-313; UNISG, Art. 35(1)). In the analysis above, the Arbitrator found that Claimants failed to prove Respondent's billets did not meet the express specifications in the Purchase Agreements, either as to the content of the steel or as to capacity of the billets to be hot-rolled to plain bar.

The governing laws place additional implied warranty burdens on Respondent, as the seller of goods, insofar as the Purchase Agreements have not expressly excluded such implied warranties. These are statutory as opposed to contractual warranties, which the buyer has the right to rely upon, if not excluded in the contract.

The first of these is the implied warranty of merchantability (usage of trade or fitness for the purpose for which the goods would normally be used) (See, NJUCC 2-314; UNISG, Art. 35(2)(a)).

The second is the implied warranty of fitness for a particular purpose expressly or impliedly made known to the seller and where the buyer has relied on the skill or judgment of the seller (See, NJUCC 2-315; UNISG, Art. 35(2)(b)).

The Arbitrator has considered that the phrase in the Purchase Agreements "For production of HR plain bar in coil" is the expression of an express warranty of fitness for use. The evidence establishes that one of the ordinary uses for the quality of billets purchased by Claimants under the Purchase Agreements was for hot-rolling into plain bar. Hence, no additional implied warranty for such uses exists in the present case. Respondent is fully bound by the express warranty, which effectively matches the statutory implied warranty under each legal system.

A more difficult question arises, however, with respect to the second implied warranty noted above, i.e. that for fitness of purpose for a particular use. As expressed in each of the relevant laws, this implied warranty comes into effect (assuming it is not excluded, which it is not, in the Purchase Agreements) only if two conditions are met; (i) that the seller knows or has reason to know of the particular purpose intended by the buyer (i.e. a particular purpose expressly or impliedly made known to the seller), and (ii) that the buyer has relied upon the sellers' skill or judgment in providing the goods in question to meet that particular purpose.

The particular purpose which was not met and on which the Claimant's claim in the present case is based, is the hot-rolling into plain bar at [Claimants' customer's] mill . . . Since the Arbitrator has found, above, that Respondent was not aware at the time of entering into the Purchase Agreements of the identity of the end-user, he must conclude that Respondent, as seller, did not know or have reason to know of such a particular purpose intended by Claimants, as buyers. Hence, this implied warranty cannot come into play.

If Claimants had proposed a further express specification that the steel billets would be capable of being hot-rolled in [Claimants' customer's] mill, and such a term had been accepted by Respondent (the evidence suggests it might not have been), the failure of the billets to pass successfully through that mill could well have constituted a breach of the Purchase Agreements. But no such specification was proposed or accepted.

Or, if Claimants had purchased the billets for rolling in their own mill, which mill was known to Respondent, the case on an implied warranty of fitness for a particular purpose would have been much closer. Here, the billets were purchased for rolling in the mill of an unnamed customer of Claimants, whose identity at the time of contracting was intentionally kept from Respondent for commercial reasons, as noted above.

e. Steel industry standards

A further legal question is presented as to whether Respondent is obligated, under either or both governing laws, to comply with alleged steel industry standards and/or practices, that no billets should be delivered with such a high level of "inclusions", even though no such express requirement on this [was] included in the Purchase Agreements.

Claimants argue, in effect, they contracted to purchase billets meeting industry standards on inclusions, which according to them, if met would have made the billets suited for hot-rolling at [Claimants' customer]

Respondent denies it had any separate contract obligation under either governing law relating to the level of "inclusions". The evidence supports Respondent's view that the billets, whatever their inclusion content, were suited for the contractually-specified intended purpose of "producing hot-rolled plain bar in coil," as that term is used generically.

Since such a requirement is not expressly stated in the Purchase Agreements to be binding on Respondent, the Arbitrator finds it would have to constitute an implied term of the Purchase Agreements, or to be the subject of an implied warranty under the governing laws, noted above.

To find there is an implied term of a contract for sale of goods under either applicable law, Claimants would have had to demonstrate by the preponderance of the evidence that the parties had agreed to such term. That evidence can be derived from the conduct of the parties or any other factual element which proves the parties' mutual agreement on the unwritten term. (NJUCC 2-204 and 2-207(3), UNISG Art. 18(1)).

The evidence in the record does not support a finding that there was any mutual agreement or hence any implied term as to the level of inclusions. Respondent made no promises or representations to Claimants at the time of entering into the Purchase Agreements, or at a later time, related to the inclusion content. Neither is there evidence to support a finding of an implied warranty under the criteria noted above relating to the inclusions in steel billets used for hot-rolling of plain bar.

Moreover, Respondent's evidence is accepted, in this sale to Claimants as a "middle-man", Respondent - as a matter of company policy - sold the steel billets only on the basis of the size, chemistry and the other specifications expressly set forth in the Agreements. The Arbitrator found above that this was accepted by Claimants in their pre-delivery . . . correspondence to Respondent, where Claimants confirmed they had not guaranteed to [their customer] the tensile and other mechanical properties of the billets.

In these circumstances, the Arbitrator rules Claimants have not met the burden to prove Respondent failed under the governing substantive laws to comply with applicable steel industry standards or practices as to the level of inclusions in the delivered billets and no responsibility can be placed on Respondent on such a ground.'

1
The body of jurisprudence and doctrine interpreting the Uniform Commercial Code (UCC) on which the NJUCC is based (and is substantially identical in all relevant respects for the purposes of this Arbitration) is far more voluminous and consequential than that interpreting the corresponding provisions of the UN Convention. The latter has, however, been subject to numerous studies. (For example, see Sarcevic & Voken, International Sale of Goods (Oceana, 1986)).