1998 ICC Rules of Arbitration

CISG Arts. 1, 2, 3, 7, 25, 33, 35, 38, 45-52, 53, 61, 64, 73, 81

The parties entered into a contract relating to sales of a chemical, to be delivered in stages over a period of several months. Payment was to be made by letter of credit upon presentation of certain documents. Following complaints from Defendant's customer over the poor quality of the product, Defendant (purchaser) rejected the goods delivered. Claimant refused to take them back and Defendant refused to sell them to anyone else. Arbitration proceedings were initiated, in which Claimant sought payment for delivered goods, plus interest. Defendant rejected such claim on grounds of late delivery, non-compliance with contractual requirements and non-delivery of further shipments.

Interim Award relating to the applicable rules of law

'a) Determination of the applicable law

The determination of the rules of law governing the settlement of a dispute involving parties subject to different national legal systems usually results from the application of rules of conflict. It has to be clarified which rules of conflict should apply in the present arbitration and even whether the method of conflict is most appropriate in the present case.

The statement made by the Claimant that the determination of the applicable material law should be made according to the rules of conflict in force at the place of arbitration does not take into account the modification resulting from the latest amendment of the ICC Rules of Arbitration.

According to point H of the Terms of Reference, "The Rules of Arbitration of the International Chamber of Commerce shall apply in their version as of January 1, 1998 as the request for arbitration was registered after the new Rules have entered into force." Pursuant to this version of the ICC Rules of Arbitration, the Arbitral Tribunal is no longer required to choose the applicable law by reference to an appropriate rule of conflict, as used to be the case under article 13.3 of the 1988 version.

The Arbitral Tribunal formerly had to apply the "law designated as the proper law by the rule of conflict which he deems appropriate". This wording has been replaced by a reference to the "rules of law which he deems appropriate" [sic]. The Arbitral Tribunal is therefore free not to make use of any rule of conflict and to determine directly the material law governing the matter.

The notion of "law", that is, according to the usual interpretation, a national legal system, has been replaced by the notion of "rule of law", which is a much broader notion and has been increasingly construed in a widespread acceptance. The Arbitral Tribunal is therefore not bound to make use of any national law and is free to apply instead recognized international legal standards.

The 1980 United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention) enjoys a strong recognition in the arbitration practice as a set of rules reflecting the evolution of international law in the field of international sale of goods.

Reference has even been made to its provisions in ICC arbitration awards prior to its entry into force (n° 6281, 1989, Journal du Droit International (Clunet) 1991-p.1054 and n° 7153, 1992, Journal du Droit International (Clunet) 1992-p.1006) or where the provisions of its article 1(1) do not lead to its applicability (n° 6281, 1989 Collection of ICC Arbitral Awards vol. III; n° 5713, Collection of ICC Arbitral Awards vol. II).

No party has ever contested that the dispute subject to the present arbitration relates to the execution of a contract for the sale of goods. . . .

None of the exceptions provided for by articles 2 and 3 of the Vienna Convention apply in the present case.

The merits of the present arbitration will therefore be governed by provisions of the Vienna Convention

Moreover, according to article 7 (2) of that Convention, "Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law".

Finally, in case of questions concerning matters which are not governed by the Vienna Convention, such as the validity of the contracts (point F(i) of the Terms of Reference) or the effect which the contract may have on the title to the goods sold, reference will also be made to the relevant rules of international commercial law, including the rules generally applied to international contracts and international sales of goods.

b) Alternative reasonings confirming the applicability of the Vienna Convention

Both the rules of conflict of the Vienna Convention and the general principles of international private law lead to the applicability of the Vienna Convention.

In the present arbitration, the Vienna Convention also applies pursuant to its own rules of applicability.

Article 1 (1) (a) of that Convention provides that: "This Convention applies to contracts of sale of goods between parties whose places of business are in different States: when the States are Contracting States."

The Claimant and the Defendant having respectively their place of business in Romania and Germany and both States being contracting States, the Vienna Convention applies according to its article 1 (1) (a). Germany ratified this Convention on December 21, 1989 and Romania adhered to it on May 22, 1991.

The application of the general principles of international private law as stated in international conventions, notably those in the field of the sale of movable goods, such as the 1985 [sic] Hague Convention mentioned by the Claimant, would also have led to the same conclusion. Although this convention has not yet entered into force it best reflects the latest developments in that sphere. Notably, in order to take into account the enactment of the 1980 Vienna Convention, the reference to "domestic law of the country in which…" appearing in the still applicable 1955 version of the Hague Convention has been replaced by a reference to "the law of the State where…" in the 1985 [sic] version.

Article 8 of the 1985 [sic] Hague Convention reads as follows: "(1) To the extent that the law applicable to a contract of sale has not been chosen by the parties in accordance with Article 7, the contract is governed by the law of the State where the seller has his place of business at the time of conclusion of the contract. (2) However, the contract is governed by the law of the State where the buyer has his place of business at the time of conclusion of the contract, if: (a) negotiations were conducted, and the contract concluded by and in the presence of the parties, in that State; or (b) the contract provides expressly that the seller must perform his obligation to deliver the goods in that State"

Irrespective of whether article 8 (1) or 8 (2) (b) would apply, those provisions making respectively reference to Romanian and to German law, this would also lead to the application of the Vienna Convention.

Article 1 (1) (b) of the Vienna Convention states that: "This Convention applies to contracts of sale of goods between parties whose places of business are in different states (…) when the rules of private international law lead to the application of the law of a Contracting State."

Consequently, where the international standards of rules of conflict designate the law of a country which is a party to the Vienna Convention as applicable, then the provisions of that convention have to apply to international sales of goods contracts.

The Defendant's requests that French law should apply would similarly lead to the application of the Vienna Convention.'

Final Award

With respect to the obligation to pay for the goods

Claimant's position

'The Claimant sustains its claim for the payment of the goods it delivered to the Defendant on Article 53 of the Vienna Convention:

"The buyer must pay the price for the goods and take delivery of them as required by the contract and this Convention."

It is not contested by the parties that . . . tons of . . . were delivered on August 16 . . . to the forwarder agent.

The Claimant issued certificates of analysis and granulation for the goods delivered on August 16 . . . for presentation for the payment of the letter of credit. According to this certificate, the goods delivered complied with the contractual requirements both in terms of chemical analysis and grain size . . .

The Claimant demanded on several occasions from the Defendant the payment of the corresponding price notably in a facsimile dated September 17 . . . This demand was also the subject of further negotiations between the parties.

The Claimant considers "according to the contract, the only document which certified the quality of the consignment delivered was the certificate of quality issued by [. . .] The 'Sample and Assay Report' made by [. . .] was not ordered following a previous agreement, but following the decision of the Defendant, which was a breach in terms and conditions of the contract concluded between the parties."

Consequently, the Claimant considers that no objection of the Defendant might bar its rights to full payment.'

Defendant's position

'Although the Defendant does not make explicit reference to the provisions of the Vienna Convention, it counters the Claimants' demands in making reference to three arguments considered by this Convention.

Late delivery of the shipment

The Defendant insists in its Reply to the Statement of Claim on the fact that the second shipment was delivered later than agreed in the contract.

This can be regarded as an implicit reference to Article 33 of the Vienna Convention according to which:

"The seller must deliver the goods:

(a) if a date is fixed by or determinable from the contract, on that date;

(b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the buyer is to choose a later date (…)."

Non-conformity of the goods delivered with contractual requirements

The Defendant argues that the goods delivered do not conform to the standards agreed in the contract regarding the composition of the [chemical] . . . and the size of the grains . . .

On August 28 . . . the Defendant gave notice to the Claimant of its own client's complaint that the granulometry of the delivered [chemical] did not comply with the contractual standards.

On September 23 . . . the Defendant gave notice to the Claimant of the lack of conformity of the delivered good[s] as regards their composition.

Such argument can be regarded as an implicit reference to Article 35 of the Vienna Convention according to which:

"The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract (…)."

Non fulfilment of further deliveries

The Defendant finally refers to the fact that the Claimant failed to deliver the [chemical] according to the contractual delivery schedule. The Defendant hereby implicitly requires that this default of the Claimant should justify the suspension of its own obligation to pay for the price of the delivered goods as long as further deliveries do not take place.'

The Arbitral Tribunal's decision

'The Defendant's arguments must be analysed as to their validity and their consequences on its obligation to pay for the price of the delivered goods.

The validity of the Defendant's arguments

a) Late delivery

The contract provides for the following schedule for the delivery of the shipments falling under Lot A:

"May, June . . . in partial quantities loaded in two lorries at every decade, First delivery will be during 25-30 May [. . .]"

The first delivery took place on June 17, the second on August 16 . . . Undoubtedly none of them complied with the agreed schedule.

The Claimant therefore violated its obligations under Article 33 of the Vienna Convention. According to Article 45 thereof, the Defendant may exercise the rights provided in Articles 46 to 52. Nevertheless the corresponding provisions do not per se release the Defendant from paying for the price of the delivered goods.

The Defendant might have fixed an additional period of time for the performance by the Claimant of its obligation to deliver. This would have entitled the Defendant to declare the contract avoided (Article 47 and Article 49.1.b.) assuming that this late delivery amounted to a fundamental breach of the contract. The avoidance of such goods would consequently have released the Defendant from its obligation to pay for the goods but the Defendant would have been bound to make restitution. The Defendant nevertheless never declared the contract avoided.

Consequently this argument may not be used by the Defendant to elude its obligation of payment.

Non-conformity of the goods delivered with contractual requirements

The Defendant claims the goods not to be in conformity with the contractual requirements. The Claimant expressly contends the opposite, relying on its own "certificates of analysis and granulation". The documents submitted by both parties are clearly conflicting with each other. The consequences of such argument and the value of the documents must be assessed.

This raises a question of evidence. Rules governing evidence are procedural rules. According to point H.1 of the Terms of Reference, the Arbitral Tribunal decides on the rules that shall apply. It is a general rule that the party requiring that a fact be considered in a proceeding bears the burden of the corresponding evidence (Actori incumbit probatio). The Defendant therefore has to evidence the lack of conformity it invokes.

The Claimant points out that "the Quality Certificate issued by [. . .] remains the only document agreed by the parties with respect to the quality of the goods." It is the duty of the Arbitral Tribunal to analyse the will and the aim of the parties in order to determine the range of their agreement and notably what would be the effect of such document and whether the parties hereby meant that no other source of evidence might be considered in case of a dispute between them. The Parties agreed that the letter of credit be payable upon presentation of specified documents, including the quality certificates. It was not expressly specified whether such certificates should be issued by the Claimant or by an independent expert, as is usually the case.

In any case failing any specific mention it may be inferred that the parties implicitly agreed that the certificate be issued by the Claimant. This is not contested by the Defendant. The parties did not intend to grant such certificates the value of irrefutable evidence.

Moreover, a broader interpretation of this agreement according to which such certificates would bring irrefutable evidence of the conformity of the goods to the contract would empower Claimant to unilaterally decide whether it fulfilled its obligations in this respect.

It has been decided in a similar case that even a quality certificate issued by an independent third party does not bring irrefutable evidence of the quality of the goods (ICC award, case 6653, 1993).

Evidence submitted in this regard by the Defendant within the proceedings may not therefore be rejected prima facie by the Arbitral Tribunal and must be assessed.

The trustworthiness of the Claimants' certificates might on the one hand be questioned for several reasons. . . .

Several circumstances lead to grant considerable weight to the assayer's report. The assayer, who is a sworn and independent expert, was not commissioned by the Defendant itself but by its client.

Similarly the Claimant was informed by Defendant that after the Defendant's client complained about impurities and slags in the delivered goods, those were to be subject to an inspection by an independent assayer . . . The Claimant refused to take part in this inspection and the drafting of the subsequent report. Claimant, who was offered to appoint another assayer for final checking . . ., failed to do so. This refusal leads the Arbitral Tribunal to infer that the Claimant had reasons to be reluctant to submit the goods it delivered to an independent expert.

The Arbitral Tribunal therefore considers that the Defendant brings sufficient evidence that the goods did not comply with the contract.

Although the Defendant did comply with the requirements of Article 38 of the Vienna Convention in that it timely (within as short a period as practicable in the circumstances) caused the goods to be examined by its client and timely (within a reasonable time) gave notice of their lack of conformity, this does not prevent it from paying for the delivered goods.

The goods were delivered to the forwarder agent on August 16 . . . and were directly forwarded to the Defendant's client, where they arrived on August 23 . . . On August 28 . . . the Defendant's client complained about the apparent poor quality of the goods and informed the Defendant that it would commission an assayer for the analysis thereof . . .

On the same day the Defendant informed the Claimant thereof . . .

A more detailed inspection was carried out between September 3 and 16 . . . by an assayer. The results thereof were forwarded to the Claimant on September 18 . . .

The Defendant might have declared the contract avoided according to Article 49.2.b.i.) of the Vienna Convention. It would consequently have been released from its obligation to pay for the goods and would have been bound to make restitution thereof. The Defendant nevertheless never declared the contract avoided.

Pursuant to article 50 of the Vienna Convention, the Defendant might have reduced the price of the goods because of their lack of conformity. It would nevertheless in no way have been entitled to withhold payment.

Non fulfilment of further deliveries

The Defendant finally refers to the fact that the Claimant failed to deliver the [chemical] according to the contractual delivery schedule in order to justify that it did not pay for the price of the disputed shipment.

The parties agreed in the . . . contract that "partial payment takes place after each delivery". The contract was consequently designed as a severable contract. Conversely, the Defendant's contention requires that the contract be an entire contract.

The October 17 . . . agreement did bind the payment of the disputed shipment to the delivery of further shipments. The Defendant would be entitled to claim not to be bound to make any payment as long as no further shipment is delivered should this agreement have been validly entered between the parties.

The analysis of the text drafted on October 17 . . . and of the subsequent correspondence between both parties leads to the conclusion that no agreement was finally reached since the schedule of the instalments remained a matter of discussion between them. The Claimant suggested that the payment be made by way of twenty instalments of 5% of the total price each . . . The Defendant insisted that the payment be divided into as many instalments as deliveries would be necessary for the outstanding quantity of [chemical] initially ordered . . .

Consequently, none of the arguments raised by the Defendant entitled it to withhold payment of the delivered shipment and the Defendant was bound under the contract to make such payment.'

With respect to whether Claimant was entitled to claim for payment of the price

'The Claimant justifies in its Statement of Claim its failing to make any further delivery by its decision to declare the contract avoided ("cancel"):

"Upon failure by Buyer-Defendant to comply with his main contractual obligation, the Claimant, in his capacity as Seller, has declared the contract 'cancelled' [. . .] In accordance with the provisions of art. 61 (a) of the Convention whereby:

'Article 61

(1) If the buyer fails to perform any of his obligations under the contract or this convention, the seller may:

(a) exercise the rights provided in articles 62 to 65;'

Buyer failed to perform his main obligations under the contract the Claimant was entitled to 'Cancel' the contact [sic] as per the above mentioned resort to the provisions of art. 64 (a).

Moreover, considering the fact that the contract no. [. . .] provided for successive deliveries, and as per art. 73, para. 1 and 2 of the Convention,

'(2) If one party's failure to perform any of his obligations in respect of any instalment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments, he may declare the contact [sic] avoided for the future, provided that he does so within a reasonable time.'

The claimant was entitled to declare the contract 'cancelled' and, accordingly, to deny any further delivery until full payment of the price for the goods delivered."

In its letter to the Defendant dated February 14 . . . the Claimant declared the contract avoided . . .

It has to be examined whether the Claimant was entitled to resort to such remedy and what would be the consequences thereof.

In its Statement of Claim, the Claimant expressly refers to Articles 64.1.a. and 73.1 and 2. of the Vienna Convention. The declaration of avoidance on the ground of Articles 64.1.a and 73.1 is subject to the condition that the failure of the Defendant to pay for the price of the delivered goods constitutes a fundamental breach of contract. According to both the general framework of the convention and its interpretation by case law, the notion of fundamental breach is usually construed narrowly in order to prevent an excessive use of the avoidance of the contract.

Nevertheless, the failure by the Defendant to pay for the goods delivered amounts in the present case to a fundamental breach of contract according to the definition of Article 25 of the Vienna Convention. The Claimant is deprived of the value of the goods it delivered, that it undoubtedly expected to receive under the contract.

Article 73 of the Vienna Convention should be construed as an exception to Article 64.1. The general rule is that in case of fundamental breach, the party that suffers from such breach may declare the whole contract avoided. In case of an instalment contract the effect of such an avoidance is limited to specific instalments. Consequently, the disputed contract being an instalment contract, the Claimant may not declare the contract avoided according to Article 64 but only in accordance to Article 73.

The declaration of avoidance according to Article 73.2. of the Vienna Convention requires that the Claimant has good grounds to conclude that a fundamental breach of contract will occur with respect to future instalments and that it does so within a reasonable time.

In this respect also, and for the same reason as stated above, the notion of "good grounds to conclude that a fundamental breach of contract will occur" should be construed narrowly. Since the Claimant offered without success to recover the disputed goods at its own costs; it can reasonably be considered that it had good grounds to conclude that the Defendant would, in connection with future instalments, proceed the same way, which would amount to fundamental breaches. The Claimant could consequently declare the contract avoided, as far as the future customers are concerned, according to Article 73.2.

The Claimant rightfully declared the contract avoided as far as the disputed instalment and the future instalments are concerned. Consequently, in accordance with article 81.1. of the Vienna Convention, both parties are released from their obligations under the contract for the corresponding instalments; in particular, the Defendant is released from its obligation to pay for the price of the disputed and avoided instalment.

According to Article 81.2 of the Vienna Convention, the Claimant might have claimed restitution from the Defendant of the goods supplied. The Claimant actually did so in its declaration of avoidance . . . Nevertheless, the Claimant failed to do so in the present proceedings, be it in the Request for arbitration or in the Statement of Claims.

The claim that the Defendant be condemned to pay USD . . ., the price of goods delivered under the avoided part of the contract, is rejected.'