Final Award

'C.II.1. Did the Parties agree on a specific date for opening the letter of credit?

C.II.1.1. Position of the Parties:

Claimant:

136. The Parties orally agreed that the letter of credit should have been opened by 30 November 2002 ... This is evidenced by Exhibit C-16 where it is stated: "It was initially agreed that the L/C should have been opened within 30 November 2002 […]." Therefore, there was no need to include a precise date in the Contract itself. In addition, if no specific time is stipulated, the rule quod sine die debetur statim debetur applies. This means that an obligation must be honored in a timely manner ...

Respondent:

137. The Parties did not agree on a specific due date for the opening of the letter of credit. This is evidenced by the fact that no specific date for the opening was included in the Contract itself. Consequently, there was no need to open the letter of credit until the shipping documents could have been presented by Claimant ...

.........

C.II.1.2. Reasoning and findings of the Arbitral Tribunal:

139. A documentary letter of credit is a letter from a bank promising payment in the event that the recipient of the letter, namely the seller, produces the stipulated documents to the bank. This instrument, essentially acting as a guarantee of payment to a beneficiary, is commonly used in international trade. Therefore, a letter of credit reassures the seller that the seller will be paid for the goods. An irrevocable letter of credit from the issuing bank, as it is the case here, is an insurance to the beneficiary that he will be paid, if the required documents are presented and the terms and conditions are met.

140. The Parties agreed that the Contract price shall be paid by an irrevocable letter of credit. However, the Parties did not determine when the letter of credit should be operable. The [applicable] law does not contain any specific provision as to how the Parties shall proceed under such circumstances. Therefore, the Arbitral Tribunal examines in a first step whether M.O.M. [minutes of meeting] No. 31 must be interpreted in a way which would show that the Parties indeed agreed upon on a specific date. In case no such date was agreed, the Arbitral Tribunal itself will establish such date.

141. Pursuant to Article 37 of the Contract, the Contract represents the entire agreement between the Parties. Thus, the Contract supersedes any other agreement or understanding, written or oral, that the Parties may have entered into regarding the purchase of the presses.

142. Exhibit C-16 contains the phrase that "it was initially agreed that the L/C should have been opened within 30 November 2002 […]" [emphasis added]. This exhibit has been signed by ... on behalf of Respondent.

143. The witness [Claimant's commercial manager], who personally participated in the negotiations, stated that, during the negotiations and signing of the Contract, the Parties "considered" that the letter of credit "could be opened not later than two or three months, possibly two months" ... starting from the day of signature. Claimant, therefore, expected that "the maximum limit of this activity [opening the letter of credit] must not be longer than November 30th". When [Claimant's commercial manager] was specifically asked what he meant by referring to "initially", he replied: "During the contract, during the negotiation of the contract". When he was asked a second time whether he referred to the period of "[n]egotiation of the Contract", he stated again: "Yes. And during negotiation [Respondent] promised to try to do the best to reduce this time." ...

144. Consequently, the term "initially" must refer to a time before the Contract was signed. Article 37 of the Contract states that this Contract supersedes any other agreement, written or oral. Consequently, also the initial agreement to open the letter of credit by 30 November 2002 was superseded and replaced by the Contract itself.

145. Claimant must have been aware of Article 37 of the Contract. However, Claimant never provided any arguments as to why the oral agreement concerning the due date should have prevailed or as to why Article 37 did not affect the validity of this oral agreement.

146. As a result, the Arbitral Tribunal unanimously decides that [Respondent] had no obligation to open the letter of credit by 30 November 2002.

147. According to Article 35 of the Contract, the effective date of the Contract would have been (i) when the Contract has been signed by both Parties and (ii) the buyer has paid 5% of the total Contract Price ... (first advance payment). The 5% were due within six weeks from signing the Contract.

148. Taking into account that the Contract was signed on 25 July 2002, the amount should have been received by 4 September 2002 at the latest. The initial provision required payment by a letter of credit. However, [Respondent] proposed that this first advance payment should be made out "of the banking system", meaning payment in cash and not via the letter of credit ... The payment was still due on 4 September 2002. This was accepted by [Claimant]. Both Parties signed M.O.M 2, and M.O.M. 2 also bears [Respondent]'s company seal. On behalf of [Respondent], the amendment was signed by ..., while ... signed on behalf of [Claimant]. The formal requirements as established by Article 30.3 of the Contract were met.2 Therefore, the Contract was modified requiring that the 5% as advance shall be paid in cash ... Consequently, the majority of the Arbitral Tribunal finds that [Respondent] was not obliged to provide [Claimant] with an operable letter of credit on the effective date. One arbitrator considered that [Respondent] still had an obligation to open the letter of credit on the effective date, but reduced to an amount of 95% of the price.

149. The next relevant date, which could reasonably be regarded as "due date" for opening the letter of credit, could have been 20 December 2002. Exhibit C-16 does not only refer to the date 30 November 2002, but it also contains the following wording: "[…] but [Respondent] believe[s] that the L/C may not be opened before 20 December 2002." One could argue that by signing Exhibit C-16 [Claimant] consented to the postponement of the opening of the letter of credit, namely to 20 December 2002. In December 2002, [Claimant]'s costs for the production of the various presses had already amounted to USD 3,500,000. In addition, [Respondent] had pressed [Claimant] to accelerate the production. So, the letter of credit should have been opened at the latest by 20 December 2002 to achieve a quid pro quo. This was at least the position of one arbitrator, whose view is explained in more detail in paragraph 159 et seq.

150. One arbitrator considered that a "belief" does not qualify as an obligation to open the letter of credit. [Respondent] somehow promised to use its best effort to have the letter of credit operable at this date. From the documents provided, the majority of the Arbitral Tribunal finds that [Respondent] followed up the issue concerning the opening of the letter of credit ... Consequently, [Respondent] at least tried to have it operable at this date. Therefore, the majority of the Arbitral Tribunal concludes that [Respondent] did not default on the opening the letter of credit on 20 December 2002 because it had not effectively committed itself to have the letter of credit opened on this date.

151. Because the Parties failed to provide the Arbitral Tribunal with relevant [country Y] case law, and also because of a lack of specific literature on the issue at stake, the Tribunal will rely on the most common practice or principles known to it and as reflected in case law, such as English case law or case law from other countries, to decide on the issue.

152. In 1958, the High Court of Justice in England, Queen's Bench Division, had to deal with the following issue at stake: When must a letter of credit be opened when the Parties did not include a specific date in a FOB contract? The case, Ian Stach Ltd v. Baker Bosly Ltd,3 is one of the leading cases and widely referred to in various proceedings.

153. The facts of the case are quite simple: The Parties agreed that the price for 500 metric tons of ship plates had to be paid by a confirmed, irrevocable and transferable letter of credit. The Parties, however, did not agree on a date, when the letter of credit itself should have been opened. After signing the contract, the seller requested on several occasions that the letter of credit be opened by a specific date, otherwise the seller could not comply with its contractual obligations. However, it was not opened on the requested date. Consequently, the seller alleged that he had suffered damages due to the late opening of the letter of credit.

154. The High Court decided that the letter of credit should have been opened at the latest by the earliest shipping date. According to Judge Diplock, "in that way one gets certainty into what is a very common commercial contract, and in any other way one can only get a position in which neither buyer nor seller knows what its rights are until all the facts have been ascertained - and it may become necessary for two or three courts to direct their minds to the question whether in all the circumstances that was a reasonable time".

155. In another case (Plasticmoda Societa per Azioni v. Davidson)4 - also in a FOB context - the judge decided that the letter of credit should have been opened a reasonable time before the earliest shipping day. The judge specifically took into account that the goods had to be transported to the harbour. The decision was not welcomed by all scholars. They argued that such a result would only be acceptable if the contract price also includes transportation costs to the harbour. Any other result would not be consistent with the purpose of the letter of credit, namely to guarantee payment for the goods delivered.5

156. By applying the principles established in both legal instances, the Arbitral Tribunal decides as follows by chairman voting in accordance with Article 25(1) of the ICC Rules. Article 25(1) of the ICC Rules regulates when the arbitral tribunal is composed of more than one arbitrator and if there is no majority, "the Award shall be made by the chairman of the Arbitral Tribunal alone". According to Derains/Schwartz, this "ICC approach permits the chairman to maintain a completely independent position and discourages partisan conduct on the part of co-arbitrators, who know that the chairman is not required to agree with either of them in order to issue an award".6

157. The Arbitral Tribunal by chairman voting intends to follow the court's reasoning in case Plasticmoda Societa per Azioni v. Davidson, viz. that the letter of credit must be opened a reasonable time before the earliest shipping day. Firstly, the Parties agreed on a "total" price, including the costs of transportation to the harbour. Secondly, from the moment the first press was accepted and its dismantling was allowed, [Respondent] must have been aware that the letter of credit must have been operable, because it could expect that [Claimant] would request payment - at least for the first press - at any time. In addition, the Parties did not agree on a specific date, when the vessel should be ready for loading. Therefore, the first day, when [Claimant] was ready for transport of the first press to [port of shipment], should be the starting point for a "reasonable time" before the first shipping day. Moreover, this date also reflects that from the moment of pre-acceptance until the actual transport, two to three weeks are needed for dismantling and packaging of the presses. Consequently, this first "transportation" date was predictable for both Parties.

158. The pre-acceptance test for the first job was performed on 21 June 2003. According to [Claimant's commercial manager], the packaging of the various parts of the presses takes approximately two to three weeks and 17 days as an average. Taking into account these 17 days, [Claimant] was ready for transport of the first press on 8 July 2003.

159. The Arbitral Tribunal decides by chairman voting that the letter of credit should have been operable on 8 July 2003.

160. The decision was made by the chairman alone in accordance with Article 25(1) of the ICC Rules. One of the arbitrators has taken the view that the letter of credit should have been opened by 20 December 2002 at the latest for the following reasons:

161. [Claimant] expected to receive certain cash payments in advance, in an amount of USD 1,218,750 (= 15% of the price). At the time, [Claimant] did not run the immediate risk that, if [Respondent] did not comply with the Contract and did not open the letter of credit, [Claimant] would not be paid for the items it started to manufacture in November 2002 until January 2003, because [Claimant] held the advance payment to cover its initial costs.

162. Rather soon, however, [Claimant] could be in a situation where it would have to start manufacturing the remainder of the ordered presses. [Claimant] could not be expected to do that on the basis of the 15% cash advance only (in fact the advance [Claimant] received was much lower, viz. only 5%). [Claimant] must have been entitled to have certainty very early in the form of the letter of credit covering the remainder of the Contract Price. [Claimant] was, therefore, entitled to expect that the letter of credit would be opened more or less without delay after the effective date and before it starts production. This is also common business practice.

163. Case law and doctrine are consistent with this business practice. Most importantly, the letter of credit has to be opened before the performance of the main contract and in particular before the performance of the seller's obligations. Thus, the seller will be certain that it would be paid as consideration for its performance.7 Consequently, the buyer should open the letter of credit without delay and at latest "at the very first date when the goods may be lawfully shipped in compliance with the contract" (Pavia & Co. SPA v. Thurmann-Nielsen8), in order to avoid any delay in the execution of the contract. In Plasticmoda Societa per Azioni v. Davidsons,9 it was decided that the letter of credit should be opened a reasonable time before the earliest shipping day.10 Satisfaction of the "reasonable time" test is a matter of fact and, therefore, depends on the circumstances of the case.11 When examining the facts, it should be considered that the assurance for the seller before fulfilling his obligations is at stake that it will be paid.

164. [Claimant's commercial manager] said that it has been the Parties' understanding during the Contract negotiations that it would be opened 2(3 months after 25 July 2002. At [the visit of Respondent's deputy chairman] to [Claimant], he promised the opening for 2 November 2002 ... The witness [Claimant's production manager] confirmed this, although the same witness admitted that he had not been personally present when this was agreed; he saw it afterwards ... The witness [Respondent's former managing director] denied this ... He said it had not been possible for [Respondent] to make such a promise ..., which was confirmed by the witness [Respondent's head of overseas purchasing]. On the basis of the documents and in the light of business practice the contractually agreed date for the opening of the letter of credit would have been 1 November 2002.

165. Soon after the signing of the contract, the Parties agreed on important changes. [Claimant] agreed to shorten the delivery time for the hydraulic press, a new time schedule was allegedly agreed upon and the payment conditions were modified ... Instead of a 10% advance payment, payment of 10% of the Contract Price should be made in exchange for shipping documents ... As regards the 85% of the Contract Price, not a letter of credit, but an "Individual Letter Agreement" was to be established. Finally, [Claimant]'s bank guarantee should still cover 15% of the Contract Price although [Claimant] only received 5% of the Contract Price as advance payment ...

166. Therefore, it can be concluded that as per 7 August 2002 [Claimant] was to prepare for the issuance of a 15% bank guarantee and was entitled to receive:

(i) 5% in cash as advance within six weeks, i.e. on 28 September 2002, and

(ii) an "Individual Letter Agreement" no later than 1 November 2002 for 85% of the Contract Price.

167. At this point in time, it seems that [Claimant] had renounced from receiving a 10% cash advance. [Claimant] would only be paid the 10% when it delivered and supplied shipping documents ... This understanding was confirmed by [Claimant] in its letter to [Respondent] of 3 September 2002 ...

168. At a meeting on 6 November 2002, [Claimant] made an important concession. According to [Claimant's counsel], [Claimant] accepted, at least indirectly, that the letter of credit would be opened on 20 December 2002 ... and perhaps even later, thus resulting in a further delay in the delivery schedule.

169. On 1 November 2002, [Claimant] was rather lax about the time for the opening of the letter of credit. Then, on 13 December 2002, [Claimant] suddenly changed tone ..., has threatened to stop the manufacturing because the letter of credit had not been opened, and in its letter 18 December 2002 ..., [Claimant] wrote that the situation is now critical.

170. Judging from [Claimant]'s letter ..., it had incurred costs of 3,5 Million USD, i.e. ten times more than the USD 375,000 it had received in cash advance, and it had still not received the letter of credit. Therefore, [Claimant]'s claim that it should have received the letter of credit around this time, by 18 December 2002, was justified. [Respondent] had pressed [Claimant] to accelerate delivery of the first press and had suppressed the 10% cash advance in the payment terms. There must be some quid pro quo in this situation, [Claimant] must have been sure to receive payment as it has continued the production.

171. Because of the conciliatory approach [Claimant] took in its letter 6 November 2002, on the one hand, but also taking into account the alarming news in [Respondent]'s letter of 16 December 2002 ..., that the letter of credit was still not opened, and [Claimant]'s reaction, on the other, one dissenting arbitrator concluded that 20 December 2002 was the date on which the letter of credit should have been opened.

172. Thus, the Parties' agreement should be construed to mean that the L/C should have been opened on 1 November 2002 and that [Claimant] subsequently agreed to an extension until 20 December 2002.

173. The other arbitrator assumed that the letter of credit should have been opened after the date the finance agreement was concluded. The arbitrator's reasoning accompanies this award in the form of a concurring and dissenting opinion.'

Dissenting Opinion of a Co-arbitrator

'1. In section C.II.1. of the award, the arbitral tribunal examined the question whether the parties agreed on specific date for opening the letter of credit. In para. 157 of the award the arbitral tribunal decided by chairman's vote only that the letter of credit should have been opened not later than 8 July 2003, i.e. a reasonable time before the presses were ready for shipping.

2. The contract is clear that the respondent (the purchaser) is obliged to pay the contract price "in due time and in accordance with the terms and conditions of this contract" (Article 3.11 of the contract). It is also clear that the contract price must be paid by means of an irrevocable letter of credit (Article 6.1.2 of the contract). However, the contract is silent about the exact date that such letter of credit must be opened. Still, the provisions of the contract can be used to determine the time that the letter of credit must be opened.

3. Article[s] 5.3 and 6.1.2 of the contract are relevant to deciding on this issue. Article 5.3 of the contract reads:

5.3. The payment of this contract is based on the finance agreement between [bank B] of [country Y] and [bank A] of [country X].

Further, Article 6.1.2 of the contract is more precise in determining that the letter of credit should be opened by the respondent and through a [country Y] bank to which the export credit facility was to be granted:

6.1.2. The contract price will be paid by the purchaser to the supplier by means of an irrevocable letter of credit to be opened by [one of the 8 [country Y] banks] to which has been granted the export credit facility. Such a letter of credit shall be payable as follows: ...

a) ...

b) ...

c) 85% of the contract price shall be financed by means of an individual letter of credit to be signed between [bank A] and [one of the 8 [country Y] banks] payable upon presentation of the following documents ...

4. These contractual provisions justify the conclusion that the provision of the export credit facility was as a conditio sine qua non for the respondent obligation to open the letter of credit.

5. The negotiation of the export credit facility agreement was in the hands of [bank B] of [country Y] and [bank A] of [country X], with no possibility or duty for respondent to influence on that. The claimant entered into the contract with full knowledge ... that the respondent could be able to procure the letter of credit only after the time that the export credit facility agreement was duly concluded and the finance resources were available to one of the 8 [country Y] banks, and finally, when the individual agreement was concluded between the financer and the relevant [country Y] bank ([bank C]) in order to allocate the required amount for the payment of the proposed letter of credit.

6. The claimant foresaw or should have foreseen that the letter of credit could not be opened, unless the export credit facility agreement was concluded between [bank B] and [bank A].

7. According to the documents on file ..., the finance resources became available to the respondent's bank ([bank C]) on 8 August 2003. It is safe to conclude that the respondent contractual obligation under Article[s] 3.11 and 6.1.2 to open the letter of credit materialized as of that specific date of 8 August 2003.

8. The letter of credit could not be opened immediately after the finance agreement was concluded. Rather a reasonable time was necessary for the respondent and its bank ([bank C]) in order to allocate the collateral and to arrange the opening of the letter of credit out of the finance agreement. I am therefore of the opinion that the letter of credit must have been opened by respondent, after such reasonable time, 10 days and by mid-August 2003, i.e. not later than 18 August 2003.

9. To determine the date that the letter of credit should have been opened, the arbitral tribunal examined the factual background, and then referred to English case law produced in Plasticmoda Societa per Azioni v. Davidson, to conclude that "the letter of credit must be opened a reasonable time before the earliest shipping day" (paras. 155(157 of the award).

10. I agree with the reasonable test for determining the due time for performance of obligations. Also, I agree that in an international arbitration regarding commercial disputes arising out of an international transaction, the arbitral tribunal may well refer to the common practice and the principles of law as developed in the case law (para. 149 of the award). However, I believe that the arbitral tribunal must first apply the contractual applicable law, the [country Y] law, in order to decide on the reasonable test. This is the case under ICC Rules of Arbitration.

11. According to the provisions of Article 17(1) of ICC Rules of Arbitration, when the applicable law is chosen by the contracting parties, the arbitral tribunal must first look into the contractual applicable law, and may on second stage refer to common practice or case law in line with the requirements of that applicable law, mainly in order to support its findings under such law.

12. The test of reasonableness for the time of fulfillment of an obligation is available under [country Y] applicable law. Articles ... of the Civil Law of [country Y] recognize the custom and usage as an integral part of the contract.

... Contract[s] not only bind the parties to perform what is expressly laid down in them, but the parties are also bound by all consequences which by custom or practice follow from the contract or follow it by virtue of law.

... When something is recognized by custom and practice as usual in such a way that the contract covers it even if it is not expressly mentioned therein, that thing is considered to be mentioned in the contract.

13. Article ... of the Civil Code is also relevant to this argument, as it provides the application of custom and practice in determining the time of performance of a contractual obligation, if the time is not mentioned in the contract.

14. The criterion of reasonableness in determining the time for performing an obligation is rooted in the principle of respect for custom and usage which principle is well available as part of applicable to the contract (the [country Y] law) ...

15. As a consequence of my opinion that the letter of credit must be opened on 18 August 2003, I would consider this date as starting date for calculating the payable damages related to currency risk, i.e. the difference of the values of the presses in US dollar and euro ...'

1
Exhibit C-16, M.O.M. 3 states: "It was initially agreed that the L/C should have been opened within November 30th, 2002 but [Respondent] believe[s] that the L/C may not be opened before December 20th, 2002."

2
"A written instrument duly signed by both Parties shall make any modification, additions and/or omissions to this contract."

3
(1958) 2 Q. B. 130.

4
(1952) 1 Lloyd's Rep. 527, 538.

5
Meining, Zur Fälligkeit der Akkretivbestellungspflicht des Käufers im Rahmen eines CIF-, FOB- und FCA-Geschäfts, Internationales Handelsrecht 2004, p. 58 et seq.

6
Derains/Schwartz, A Guide to the ICC-Rules of Arbitration, p. 306 (2nd ed., 2005).

7
J. Stoufflet in Crédit Documentaire, Jurisclasseur 5, 1999, para. 18; H. Lesguillons, Lamy Contrats Internationaux, 2004, Tome 7, Article 570.

8
(1952) 1 All E.R. p. 494.

9
(1952) 1 Lloyd's Rep. p. 527, 538.

10
For an application of the "reasonable time" test by an Arbitral Tribunal: Final award in ICC Case N° 6527, 1991, Collection of ICC Arbitral Awards, 1991(1995, Vol. III, p.185.

11
Ibid, p. 189.