Under a contract made in 1991, Claimant, a German company, undertook to sell to Respondent, an Egyptian company, 50,000 tons of coke in two shipments of 25,000 tons. The deliveries were to be made FOB in accordance with the 1990 version of the Incoterms rules. Alleging that the first shipment failed to comply with the contractual specifications, Respondent refused to take delivery of the second shipment, the condition of which deteriorated as a consequence. The arbitral tribunal held that the law applicable to the merits was New York law, as stated in the parties' contract.

'There are in the Contract some provisions concerning:

- the specifications of the coke to be delivered (Article 2)

- the sampling and analysis of the coke (Article 3)

. . . . . . . . .

- the terms and conditions of the delivery of the cargoes (Articles 4, 5 and 6):

Article 4. Deliveries: For deliveries of green coke made hereunder shall be made on the basis of FOB trimmed in vessel, [the load port], Texas.

For each of the shipments during term thereof always considering the appropriate shipping schedules set forth in Article 5, Contractor and [the Buyer] shall consult and establish a 7 day layday period during which vessel loading shall take place, with such layday period being firmly established between Contractor and [the Buyer] at least 20 days prior to the first day of the layday period, provided that the Letter of Credit has been opened by [the Buyer] accepted [sic] by the Contractor agrees to load the vessel at the rate of 12.000 metric tons per weather working day, Saturdays , Sundays, and public holidays include. Notice of Readiness to load shall be tendered in office hours by the vessel to Contractor's agent at the load port. For the purpose of calculating demurrage/dispatch, laytime at Load Port shall count as Exhibit C (shipping conditions - FOB).

Contractor shall be liable for any demurrage incurred as per chartered party as a result of a failure to load within the laytime, and shall receive dispatch at one half the demurrage rate for any laytime saved.

Demurrage/dispatch shall be settled directly between Contractor and vessel owner. [The Buyer] guarantees prompt payment of such liability by vessel owner, after Contractor provides owner with statement of facts, calculation and claim with copy to [the Buyer].

Article 5: The quantity of coke sold and purchased hereunder shall be 50,000 metric tons +/- 5% as determined by Article 7 to be shipped to the following schedule:

Shipping schedule: the first cargo of 25,000 metric tons +/- 5% to be shipped during the second half of October 1991/first half of November 1991.

The second cargo of 25,000 metric tons +/- 5% to be shipped during February/March of 1992 with the layday period to be mutually agreed upon.

Article 6. Terms of Sale: This Contact is made in accordance with the provisions of Incoterms 1990, latest edition.

- the price of coke and the payment (Articles 8 and 9):

Article 8: The price of green coke shipped hereunder shall be U.S. Dollars 95.00 per dry metric ton FOB trimmed in vessel, [the load port], Texas for the 50,000 (fifty thousand) metric tons +/- buyer's option.

Article 9. Payment. Payment of each cargo shall be at sight against an irrevocable Letter of Credit ("L/C") in the same form of Annex A confirmed by a first class German bank . . . Such L/Cs shall be issued and confirmed to Contractor twenty (20) days prior to the beginning of the agreed upon seven day layday period. The issuance and confirmation of the L/Cs shall be the responsibility of and at the cost of [the Buyer].

Letter of guarantee: Contractor shall open immediately in the form of Exhibit B a Letter of Guarantee in the amount of 10% of the total FOB value of the Contract as a guarantee deposit for the fulfilment of the contractual obligations hereunder.

The Letter of Guarantee shall be issued by a first class German bank and shall be confirmed by a first class Egyptian bank.

The issuance and confirmation of the Letter of Guarantee shall be the responsibility of and at the cost of the Contractor.

- the applicable law:

Article 16. This Contract shall be governed by and interpreted according to the laws of the State of New York in the United States of America excluding the United Nations Convention in the International Sales of Goods [sic].

It results from the above-mentioned provisions of the Contract that:

- the specifications of the coke to be delivered including in particular sizing and chemical specifications were carefully set out in the Contract (Article 2).

- the sampling and analysis were expressly to be conducted at the loading port during the loading of the vessel. An American laboratory . . . was specifically designated by the Parties to this purpose. [The Buyer] had the right to attend the loading of the vessel, the taking of samples and the testing of the samples. It was to receive one sample of the coke, taken at the same time as the sample to be analyzed by [the laboratory]. Article 3, paragraph 5, provides that the determination of chemistry, physical properties and sizing as made by [the laboratory] shall be binding and final for both parties. However, Article 3, last paragraph added that in case of a significant deviation between the analysis between [the Buyer] and the independent laboratory, then the Parties, both [the Buyer] and the Contractor, agree to binding re-analysis of the reference sample by [a third party].

- the cargo was to be delivered in two equal shipments of 25,000 metric tons, the first shipment during the second half of October/first half of November 1991, the second shipment in February/March 1992, the deliveries to be made FOB in accordance with the provisions of Incoterms 1990, latest edition (Articles 4, 5 and 6).

- the price was fixed at U.S.$ 95.00 per metric ton and the payment had to be effected by a confirmed Letter of Credit to be issued under the responsibility of [the Buyer] (Article 9). [Claimant] was to open a letter of guarantee in an amount equal to 10% of the total FOB price of the cargo "as a guarantee deposit for the fulfillment of the contractual obligations hereunder" (Article 9).

. . . . . . . . .

b. The second shipment: the second shipment, also of 25000 MT +1-5% was to be shipped, according to the Contract, during February/March 1992. It was in fact never shipped.

The Claimant maintains that [the Buyer] was obliged to take delivery of the second shipment in accordance with the Contract, at the contractual price of $95 per MT. Claimant repeatedly notified Defendant that the coke was ready for shipment, but Defendant refused to complete the necessary preliminary steps (a conforming letter of credit, etc.) and refused to take delivery. The Claimant asserts that Defendant had no right to refuse to take the second shipment because of a dispute as to the first (particularly since Defendant was not justified in such dispute). To the extent the particle sizes of the waiting coke deteriorated while in storage, this was due to Defendant's delay, and was Defendant's responsibility. The Claimant argues that, while it was able to mitigate damages by reselling the subject coke (in fact, cancelling the sale), the Defendant remains liable for the lost profits-i.e., the difference between the resale price of $83 per MT and the original Contract price of $95. Defendant should also, in Claimant's view, pay the costs of transport and storage for the coke which it refused to purchase, and which were not covered by the resale.

The Defendant denies any responsibility. It argues that it had no obligation to continue with the second shipment until the dispute on the first shipment, triggered by the defective coke (and implicitly [the Seller]'s breach), was settled. Whatever delays then occurred were caused, and implicitly agreed to, by both Parties while engaging in settlement negotiations. More importantly, Defendant asserts that Claimant never had available coke which met the sizing specifications, and was incapable of delivery. This was shown, not only by the defects (alleged) in the first shipment, but by Claimant's own telex of 8 April 1992 . . . which confirmed small particles (fines) of 20 percent, instead of the 5 percent required by the Contract. Defendant was under no obligation to accept such drastically changed specifications, and Claimant was, by its own admission, unable to perform.

The Defendant also contends that the handwritten agreement of 30 April 1992 . . . constituted a new agreement, whereby Claimant agreed to a price of $81 per MT. Having received more than such price in the re-sale, Claimant cannot now claim lost profits. For the same reasons, Claimant should not be able to claim any reimbursement for storage or transport.

The issues raised by the second shipment are both factual and contractual.

i. As soon as the disagreement with respect to the sizing quality of the first shipment became apparent, the parties began a protracted series of meetings and exchanges of correspondence seeking to resolve the issues on the first shipment and to agree on procedures for the second shipment. There was, e.g., a meeting in Egypt on 10 December 1991, another on 14 January 1992, and still another on 26 February 1992. In the course of such meetings, and the surrounding correspondence, the parties made offers and counter-offers for an adjustment in the price of the first shipment, and for an adjustment or different testing procedures on the second. On several occasions the parties appeared to be on the verge of reaching a compromise, and the monetary difference concerning the first shipment was reduced to some $61,000. However, for various reasons, including a failure to agree on the exact wording, no agreement was reached . . .

Throughout such period, [the Seller] steadfastly maintained that its first shipment had met the contractual specification, and that [the Buyer] was contractually obliged to take delivery of the second shipment. [The Buyer], on the other hand, insisted that compensation had to be agreed for the first shipment, and that it would not take the second shipment until the dispute was resolved . . .

It should be noted, in this respect, that the Contract called for shipment of the second shipment during February/March 1992 (Contract, Art. 5).

On 23 March 1992, [the Seller] wrote to [the Buyer] again, stating that the shipment was "qualitywise and quantitywise ready for shipment", and holding [the Buyer] responsible for any direct or indirect damages resulting from delay and for any risk to the material . . .

[The Buyer] replied . . . denying responsibility and suggesting a revised schedule . . . [The Seller] appeared to accept this suggestion . . . although repeating its assertion of [the Buyer]'s responsibility. Thus, on 30 March 1992, [the Seller] wrote to [the Buyer], reiterating that the Product had been ready for shipment, quality and quantity-wise, within the February-March contractual period . . . Since [the Buyer] could no longer meet the deadline, [the Seller] agreed to a brief extension (to 5 April).

[The Buyer] responded by taking steps to open a letter of credit, but asking for a further delay . . . At this point it appeared once again that the parties might arrive at a solution. However, the letter of credit, as proposed by [the Buyer], made payment conditional upon a certificate from both parties, which was understandably not acceptable to [the Seller]. Thereafter [the Seller] sent a telex setting out revised specifications for the coke in storage, providing for "fines" of up to 20% . . . This was unacceptable to [the Buyer], which rejected such specification in its telex of 8 April 1992 . . . followed by another letter of 9 April, postponing any delivery to late April (or July) and threatening to cancel the second shipment entirely.

In the meanwhile, in late March, part or all of the coke awaiting loading at [the load port] had been moved from one storage area to another. [The Seller] first warned [the Buyer] that such moving would have to be made in its telex of 30 March . . ., giving as a reason "other terminal operations". However, [the Seller] had apparently been informed by the terminal management already on 18 March that sharply increasing temperatures would require pushing, and at least some of the stored Product was pushed on 20 March 1992 . . . The Claimant attributes the far higher percentage of "fines" subsequently found in the stored Product to such "pushing" (which causes abrasion to the coke pellets), and asserts that [the Buyer] is responsible, because of the delays in taking delivery. The Defendant, while contesting the assertion that such "pushing" alone could cause such a high percentage of "fines", rejects any responsibility in any case, since the Product was still [the Seller]'s responsibility under FOB terms.

Soon afterward, on 22 April 1992, [the Buyer] wrote to [the Seller] giving official notice of termination of the Contract, alleging that [the Seller] had failed to meet its contractual obligations, partially on the first shipment and totally on the second shipment . . .

Another meeting then took place in Cairo, on 30 April 1992, where it seemed the Parties were again about to find a solution, The so-called "Agreement" of 30 April was the result. However, as set out above, no final agreement or solution came about. After one more meeting, and several more exchanges, the discussions between the Parties broke off.

[The Seller] thereafter arranged to "resell" the second lot of green coke-in effect cancelling the original purchase of the coke from its parent company-at a price of $83.82 per metric ton . . .

ii. Having considered the circumstances, and the applicable principles of New York law, the Tribunal concludes that the Defendant . . . was not entitled to refuse the second shipment simply because, in its view, the first shipment had not met specification.

The Contract here can only be analyzed as a single contract, providing for the delivery of two installments of green coke. As such it constituted an "installment" contract, to which Section 2-612 of the Uniform Commercial Code, as adopted by the State of New York, applies.

Section 2-612(2) provides that the Buyer may reject an "installment which is non-conforming if the non-conformity substantially impairs the value of that installment". Section 2-612(3) goes on to say that there is a breach of the Contract as a whole only if the non-conformity of the (allegedly) defective shipment "substantially impairs the value of the whole contract". The Official Uniform Comment goes on to explain that:

Whether the non-conformity in any given installment justifies cancellation as to the future depends, not on whether such non-conformity indicates an intent or likelihood that the future deliveries will also be defective, but whether the non-conformity impairs the value of the whole contract . . . (Official Comment No. 6)

In the present circumstances, [the Buyer] did not reject the first shipment as such, even though it claimed a reduction in price. Nor has there been any showing that, if some non-conformity is to be assumed, the value of the Contract as a whole would have been impaired. To the contrary, the evidence suggests that [the Buyer] frequently purchased green coke with higher percentages of "fine" particles at differing prices . . . Even if the second shipment would have been in non-conformity on the percentage of "fines", [the Buyer] would have had a remedy, either to reject that shipment at such time, or to negotiate a price adjustment. But [the Buyer] had no right to refuse delivery of the second shipment, simply because the first shipment was (allegedly) non-conforming, or because [the Buyer] feared that the second shipment might be non-conforming.

Moreover, and most importantly, in the present case there was no finding that the first shipment was in fact non-conforming. . . .

Accordingly, a majority of the Tribunal holds that, under applicable New York law, the Defendant had no right to reject or delay the second shipment, merely because it believed the first shipment to be non-conforming. Defendant's failure to take the delivery of the second shipment when it was ready (at the latest by 23 March 1992 . . .), and its attempt to condition such delivery on a resolution of the dispute about the first shipment, constituted a breach of the Contract.

iii. Under normal circumstances, such a breach by the Defendant would entitle the Claimant . . . to recover damages. Such damages would be measured by the difference between the Contract price (i.e., $95 per metric ton; see Contract, Art, 8) and the price which [the Seller] was able to recover elsewhere (i.e., $83.82 per metric ton . . .).

The provision in the Contract excluding any claim for consequential damages (see Contract, Art 17, p. 26) is not relevant in this respect. Under New York law (U.C.C. Sec. 2-708), the appropriate measure of a seller's damage for non-acceptance by the Buyer is the difference between the market price at the time of tender and the original contract price, together with any incidental costs. Such damage is direct, and not merely consequential. . . .

In the case before us, however, the Seller . . . entered into protracted negotiations with the Buyer, howsoever reluctantly and for whatever motives it might have had, seeking to find a solution for the dispute including possible variations in the price for the second shipment. In the course of such negotiations, the Claimant repeatedly agreed to extensions in time, which eventually extended beyond the contractual period of February-March 1992 (Contract, Art. 5 . . .).

During this period, some or all of the coke destined for the second shipment was apparently in storage at [the load port] . . . The Tribunal is unable to determine, on the evidence before it, what were the specifications of such coke at the time it was first available for shipment, or whether it deteriorated, because of storage conditions, relocation, etc.

What seems clear from the evidence, however, and is apparently admitted by the Claimant, is that by 8 April 1992, the available coke no longer met the contractual specifications, but included fine particles well in excess of 5 percent, possibly as high as 20 percent . . . [The Buyer] promptly refused such changed specifications . . .

The Defendant argues that such offer of revised specifications by [the Seller] demonstrates that [the Seller] was not-and never had been-in a position to offer coke meeting the contractual specifications. The Claimant maintains, instead, that the increase in fine particles, and the revised specifications, resulted from the long delays and need for local handling, which were caused by and the responsibility of Defendant.

On the basis of the evidence before it (and in the absence of any sampling or testing at the time), the Tribunal is unable to determine whether the coke initially did or did not meet the Contract specifications. Nor can the Tribunal determine whether or to what extent the coke might have deteriorated while at the [the load port] terminal. The only fact which seems clear is that, by 8 April 1992, the coke did not conform to the contractual specifications with respect to fine particles.

Under New York law, as under the principles of most commercial laws, the Defendant has the burden of proving that the tendered goods did not meet the specifications. Defendant has offered no proof that the coke did not meet specifications at the outset . . . Accordingly, it must be assumed that the coke destined for the second shipment initially did meet the sizing specifications. By the same token, however, it must be assumed that such coke deteriorated for whatever reasons-overheating, relocation, etc.-during the storage period, so that it became non-conforming by 8 April 1992.

As set out above, the Defendant initially had no legal justification for refusing loading and delivery in accordance with the Contract. However, the Tribunal notes that the Claimant repeatedly concurred in extensions in time, although reserving its rights and warning [the Buyer] of eventual responsibility . . . By so doing, and presumably knowing the possible risks of deterioration, the Claimant must be held to have accepted some of such risk.

Moreover, the sale was to be FOB trimmed in vessel, [the load port]. Until the cargo was loaded, it remained under Claimant's control, and Claimant remained responsible for its condition and preservation. Claimant was more expert in the handling of coke, and presumably could better evaluate the risks. Claimant could have declared a breach at once, and proceeded to resell the coke elsewhere, but elected not to do so. Moreover, from a practical standpoint, Claimant was the only party in a position to supervise the handling; it had selected the storage operator, it was closer geographically, and it was in daily contact. Claimant could not shift such responsibility to Defendant simply by making unilateral statements (which Defendant promptly rejected).

Finally, it appears that much of the deterioration, and at least some of the pushing, had already occurred before the end of the contractual delivery period-i.e., February-March (Contract, Art. 5). The analysis showing substantial non-conformity was reported from Germany by telex on 8 April 1992 . . . No event has been cited which would have caused such deterioration between 30 March and 8 April.

On the basis of the foregoing, the Tribunal concludes that the second shipment of coke deteriorated during the storage period to such a degree that it was not in conformity with specifications, at the latest, by 8 April 1992 (assuming that it was in conformity at the outset), and that Claimant must bear the responsibility for such deterioration and non-conformity. Accordingly, Defendant was not obliged to accept such non-conforming product, and Defendant is not liable to Claimant for damages representing the loss in value, or difference between the contract price and Claimant's resale (cancellation) price . . .

Claimant's demand for . . . representing damages for the refusal to accept the second shipment is therefore rejected.

iv. The Claimant has also demanded that the Defendant pay an amount of . . . representing the costs of local transport and storage for the second shipment of coke during the entire period from January to the date of the eventual resale. Such costs, in Claimant's view, are incidental to Defendant's breach, and are distinct from the loss, if any, resulting from the need to resell at a lower price. The evidence of such incidental costs is purportedly set out in the invoices for transport and storage . . .

The Defendant denies that it has any responsibility for such costs, for the same reasons that it is not responsible for the differential in price which occurred on the resale. Defendant notes that the sale was to be on an FOB [the load port] basis, and if the second shipment had been in conformity, and had been loaded, [the Seller] would have had to bear such costs anyway.

Having considered the positions of the parties, a majority of the Tribunal concludes that a distinction can and must be made, first, between the incidental costs of storage and the price differential resulting from the resale of the product, and, second, between the early costs of storage and those which were incurred after the coke was found to be in non-conformity.

For the reasons outlined in the preceding paragraphs, in the absence of any better evidence, it must be assumed that the coke comprising the second shipment initially met the contractual specifications. Therefore, [the Seller] was entitled, and in fact contractually bound, to transport such coke and arrange storage at [the load port] to await loading.

Also for the reasons outlined above, the Defendant had no legal right at the outset to reject the second cargo, or to condition acceptance on a resolution of the first shipment dispute. Had the sale and delivery gone ahead as foreseen, Claimant would have recuperated the storage charges as part of the Contract price.

A distinction must be made, however, between the apparent deterioration in the sizing quality of the coke, which could not be foreseen and for which the Claimant has been found primarily responsible (see above), and the local transport and storage charges which were clearly foreseeable by both parties, and which did not depend on any further action or omission by Claimant.

When the Defendant refused to take delivery of the second shipment, at all times prior to the date on which it was shown no longer to be in conformity, the Defendant knew, or should have known, that Claimant was incurring continuous storage charges, which Claimant would not be able to recuperate unless the sale went ahead at the Contract price. Although the Claimant concurred in some of such delays, and participated in the drawn-out negotiations, Claimant never waived its right to reclaim such costs, in the event that Defendant did not eventually proceed with the sale.

To the extent that Claimant suffered a loss on the price of the resale, such loss was due to the deterioration which was Claimant's responsibility. Moreover, Claimant mitigated such loss by reselling the coke to another party (cancelling the sale). But, to the extent that Claimant incurred costs for local transport and storage charges, which Claimant could not recuperate because of Defendant's breach, such losses are not part of Claimant's responsibility. Such losses were not covered by the mitigating resale of the product.

Accordingly, a majority of the Tribunal concludes that Defendant, because of its failure to accept the tendered product throughout the contractual delivery period without any legal justification, is liable in principle to reimburse Claimant for the relevant portion of such incidental costs.'