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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Date: Partial award, 2008
Origin of the parties: Asia and North America
Applicable substantive law: ‘Laws of the State of Washington, USA’
…..
Section 22.0 of the Agreement reads as follows:
Dispute Resolution.
The Parties shall attempt to resolve through good faith discussions any dispute, which arises under this Agreement. Any dispute may, at the election of either Party, be referred to the [Claimant]'s Chief Executive Officer and [Respondent]'s General Manager. Any such disputes not resolved by such discussions shall be finally settled by binding arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one arbitrator appointed in accordance with the such Rules.
2. Factual Issues
The Sole Arbitrator, having carefully examined and evaluated all the briefs, statements, documents and written submissions placed before him, as well as the oral testimonies (including cross-examinations) given and arguments made on behalf of the Parties by their counsel, hereby makes this Partial Award, which shall be final in respect of the issue(s) of this dispute decided upon in this arbitration.
a) The Agreement dated … states in its Section [X] (among others) the methods of calculating royalties of [Respondent]’s Licensed Products … Such [Respondent]’s Net Sales shall be estimated in good faith by the Parties. (Emphasis by the Sole Arbitrator.)
b) The second paragraph of Section [X] states the following: "In the event the foregoing method of determination can be demonstrated to be materially inaccurate, the Parties will cooperate with each other to establish a method that more accurately measures [Respondent]’s Net Sales … Statistical data used by the Parties in accordance with this Section [X] shall be obtained from reliable sources, such as government developed import and export data, reports from reputable independent parties, or similar sources, and FEC shall exercise reasonable diligence in obtaining such data, and shall provide English translations of such reports to [Claimant]." (Emphasis by the Sole Arbitrator)
These passages in the Agreement are the source of the dispute in this arbitration, but at the same time also constitute the source for the solution of this dispute.
It is the imminent nature of any license agreement that license fees or royalties have to be paid. The existing Agreement in these arbitration proceedings is no exception. This has become even clearer during the deliberations at the Oral Hearing, where it was found that both Parties had always agreed (and still agree) to pay royalties. This point is even included in Respondent's Brief dated … on Washington law … There is no dispute between the Parties in this respect, and therefore royalties have to be paid.
Some royalties have been paid, but the dispute was formed around the three questions of whether (1) the paid royalties as such were correctly calculated, (2) the payments were sufficient or not, or (3) – as Respondent even argued – some royalties were overpaid. The third question is the basis for Respondent's counterclaim that the alleged overpaid royalties should be returned.
Respondent relied only on "government developed import and export data" in its calculation of royalties, while Claimant argued that such data were "materially inaccurate" and should be adjusted by contemplating other, more accurate measures, e.g. by using other reliable sources, such as reports from reputable independent parties as stipulated in Section [X] of the Agreement …
Respondent argues that this arbitration is an attempt by Claimant to rewrite the contractual clauses of Section [X] of the Agreement. Respondent thus denies that the calculation method it used is materially inaccurate, and argues that Claimant has the burden of proof of such material inaccurateness, if any. In addition, Respondent argues that its calculation of the royalties was made continuously and stably in accordance with the Agreement and with what the parties had mutually confirmed. This only changed through the demand of Claimant in its letter … namely that royalties were below projection, and again through Claimant's letter … in which Claimant's grievances were described in great detail.
Respondent argues further that Claimant's position is totally different from the method specified in Section [X] of the Agreement and that it is not possible to demand retroactive application of a new calculation method.
Respondent basically argues that the government developed data it used was materially accurate and should be the only basis for the calculation of royalties, e.g. using data published by the … government. Respondent stressed constantly that government data were generally more reliable than those from the private sector. This argument is the core argument Respondent relies upon.
Respondent concedes, however, that it "has highly appreciated and valued a good and sustainable relationship with the Claimant, and therefore … believed that it could settle the dispute through amicable negotiations with the Claimant." One way to achieve this was a "more intensive face-to-face talk at the Claimant's office …" in order "to reach an agreement on a new calculation method to amend the 1st paragraph of Section [X], and the period of which the new method should be applied" …
However, according to Respondent, these negotiations failed and "resulted in nothing after all" …
Claimant, on the other hand, argues that it has suggested alternative calculation methods which it believes will result in reasonably accurate estimates of royalties due.
However – in Claimant's view – Respondent insisted in bad faith to continue its calculation method as described above for its transactions with Claimant. As a result of the faulty data used in calculating royalties, Respondent has underpaid royalties due to Claimant from the inception of the Agreement, and the pattern of underpayments continues (until today).
Furthermore, Respondent has also failed its contractual duty to "cooperate with Claimant to establish a more accurate method" and to "resolve through good faith discussions" the differences regarding the payment of royalties.
The testimonies of the witnesses presented by Respondent were inconsistent, unconvincing and often beside the point.
[Respondent’s witness]’s cross-examination in regard to his role in the … negotiations in
[Claimant’s office] revealed that he had no authority at all to decide and resolve any of the outstanding matters. The meeting was a farce and does not put a positive light on Respondent's efforts to negotiate seriously and in good faith to achieve a fair and just result in regard to royalty payments due.
The meeting at Claimant's office … was the last chance for the Parties before the commencement of formal arbitration proceedings to come to a fair and just result reflecting the situation at that time. However, Respondent let this chance pass by without making sufficient sincere and real efforts to come to a proper solution.
Respondent's counsel in its "Final Brief" … completely misunderstood the Sole Arbitrator's remarks during the Hearing, namely "Why are we here?''. What the Sole Arbitrator meant was that the Parties should (and could) have resolved their dispute much earlier, e.g. [during the meeting at Claimant’s office]. There was ample time and ample opportunity to do so. The Parties, however, failed to reach a proper, fair and just solution which would have made sense then (and still makes sense today) commercially and legally in light of the existing relationship between the Parties.
The way Respondent conducted its meetings and negotiations, which led to the result that a proper solution could not be reached, shows a certain lack of willingness to achieve a just result.
What does Washington law say in this respect?
When applying the "context rule", as Claimant argues in its Brief re: Washington Law … (and to which the Arbitrator agrees), it becomes apparent and relevant in the present arbitral proceeding, as has been shown numerous times in the deliberations above, that "the contract has to be viewed as a whole, including its purpose, all the facts and circumstances leading up to and surrounding the making of the contract, the subsequent acts and conduct of the parties to the contract, and the reasonableness of respective interpretations advocated by the parties" (see Claimant's Brief re: Washington Law …).
Under Washington law, each contract bears the obligation of dealing in good faith and in a fair way. This requires the parties of a contract to cooperate with each other in order to fulfill the letter and the spirit of the contract.
As the Sole Arbitrator interprets the Agreement, and he is empowered to do so and apply the law, he concludes that Respondent has through its rigid posture, inflexibility and denial to use other data than the ones advantageous and beneficial to itself, namely those produced by the government – failed to properly cooperate with Claimant and thus act in good faith, as is required by the wording and the spirit of the Agreement.
Respondent's stance amounts to a breach of contract.
Respondent is not allowed to gain and keep "windfall profits" by not adjusting materially inaccurate figures, and, through this method, underpaying royalties for a substantive duration of time. As Claimant has rightly stated (see Brief re: Washington Law…), " [Claimant] had no reason to believe that [Respondent]'s calculations were in error. When that suspicion arose, [Claimant] immediately notified [Respondent], and suggested that the parties locate other reliable data". Further, "[Respondent] gave every indication that it would review the matter in good faith".
That Respondent has not done so is in stark contrast to what it has stated continuously in its briefs. This attitude has to be qualified as a non-compliance, a contravention and an infringement of the rights of the Claimant, and also of the legal principle of "venire contra factum proprium". Respondent has to take responsibility for its words, actions and deeds vis-à-vis Claimant. It cannot say one thing, and do another thing, especially not the opposite of what it has said. Respondent cannot agree to hold negotiations in [Claimant’s office] pretending to resolve the issue, but then send representatives without any authority to really solve the problems, an action that resulted in a farce meeting and left Claimant (and the Arbitrator) wondering why Respondent even bothered travelling to [Claimant’s office].
Claimant therefore, based on a new calculation method, is entitled to receive the full amount of royalties due from the commencement of the License Agreement, and to have the calculations performed accurately from the issuance of this Award onward. Inaccurate calculations should be – and have to be – corrected.
Respondent's arguments do not change the result mentioned in the paragraph above. Respondent consistently argues that if Claimant's reason prevailed, e.g. if the present calculation is "to be replaced by a method of calculation that was not agreed upon when the contract was executed" (see [Respondent]'s Brief on Washington Law … then this would contravene Washington law and modify the Agreement unilaterally, while under Washington law this can be only done bilaterally (and in writing …).
However, Respondent too emphasizes that ''Washington embraces a practical, common-sense approach to contract interpretation" … This is exactly the approach that needs to be taken in this arbitration. However, contrary to Respondent's position, the Arbitrator is of the opinion that Claimant's position is not "highly impractical and contrary to the express terms that appear on the face of the contract" …
The sheer fact that Section [X] of the Agreement exists, points to the rational, logical and – consequently – necessary conclusion that both Parties wanted it to exist, because they saw the necessity of its existence as the basis of their future relationship. They anticipated that the future could bring new developments that would make it necessary one day to define the method of royalty calculations anew. Maybe the extent was different to which each Party felt this situation could arise in the future, as each Party had a different level of understanding of the business in question. However, because the - at the time of the conclusion of the Agreement - (maybe only) theoretical (but later also practical) possibility existed that data could (and would) become inaccurate at any given time (and different data would need to be adapted), Section [X] of the Agreement was cooperatively drafted by counsel of both Parties and inserted into the Agreement.
Without the conviction of both Parties that it could become necessary one day to accommodate new factual situations, the insertion of Section [X] into the Agreement would not have made sense and would have been unnecessary.
Even though on page … of Respondent's opinion on Washington law it is stated that "(T)he parties agreed on a specific method for calculating royalties, and agreed to depart from that method only under circumstances that have not yet occurred in this case", Respondent's counsel has declared numerous times that the spirit of the Agreement was to pay royalties to Claimant that are due.
In this respect, Respondent's Brief on Washington law … is correct in its citation of the Washington Supreme Court decision in Hearst Comm'ns, Inc. v. Seattle Times (2005, page 504), when it says "We do not interpret what was intended to be written but what was written". Exactly this is the case in this arbitration.
The position to be taken is that the solution lies not "in what the parties intended, but what they agreed to be bound to". The sheer existence of Section [X] of the Agreement validates this argument.
Further, why is Respondent so anxious to maintain its initial position and not deviate from it one jota? Instead of trying to come to a fair, just and economically sound and plausible solution of the problems at hand, Respondent tries not to look at the existing Agreement, its wording and its meaning, but to introduce further witnesses, engage further counsel to explain various matters, in short, spend more and more time and money that could have been put to better use, i.e. to reach an amicable settlement between the Parties …
During the course of the Oral Hearing, it has become clear that the data used for the calculation of royalties was flawed from the beginning, and that this has to be taken into account when trying to reach a fair and just solution in this arbitration case. The statements in Respondent's Brief on Washington Law in regard to this point are moot … where it is said that "[Claimant] seeks to impose a new method for calculating royalties three years after the effective date of the contract ...", because this is exactly what the parties agreed to in writing … during the Oral Hearing …
Only the second part of this sentence in the Brief, namely "and to recalculate payments from the beginning of the contract term" was disputed between the Parties.
However, the argument that "Under [Claimant]'s interpretation, even many additional years into the contract term, a party could unilaterally (emphasis by the Arbitrator) declare itself to be unhappy with the formula originally agreed on ...", is moot, as it is not unilaterally that the Parties have agreed on that, but bilaterally, which became clear through the written text on the white board … in the Oral Hearing …
The Parties will not be "shadowed with uncertainty at best, and at worst could be forced into a never-ending series of disputes and arbitration proceedings, all with highly unpredictable results" (see Respondent's Brief on Washington Law …), as this arbitration puts to rest all existing queries and leaves no more room for any discussion in regard to the method of the calculation, but only in regard to the exact figures the Parties have to pay to each other as royalties due.
The terms are not "open-ended" as Respondent alleges, but defined now through this arbitral award. This is not an "agreement to agree", but it is the agreement per se. This Award is derived from and based upon the very existence of Section [X] of the Agreement, its wording and its spirit.
The Parties intended to use other methods, if the necessity arose. And arisen it has, as was clearly shown by the convincing testimony of [Claimant’s expert witness].
The chance for change came in the meeting in [Claimant’s office] and again during the course of this arbitration, especially during the Oral Hearing … However, Respondent let both chances go by, and wasted a lot of time, money and other resources. To use more time and money now and still not come to a final result clearly shows that Respondent has not understood its duties and responsibilities under the Agreement, namely to cooperate to the fullest extent possible, as is clearly shown in the Arbitrator's elaborations above.
Respondent's Brief on Washington Law … stipulates that "the contract gives [Respondent] sole discretion to select the data used in the formula for computing royalty payments". However, the Sole Arbitrator concludes that this is not the case, but that a contractual duty exists to cooperate and adjust the method, if it is shown that the past and presently used data is materially incorrect. Exactly this is the case.
Not to remedy this situation is a breach of contract. Even if one follows Respondent's argument, one has to come to the same result, as Respondent's refusal to cooperate was "unreasonably withheld". More than once Respondent tried to hold its position of non-cooperation "unreasonably", and should instead have cooperated in the spirit of the Agreement and the relationship of the Parties, which was (and still is) supposed to be one of trust and mutual benefit.
The argument of "good faith and fair dealing'' goes in the same direction and does not need to be elaborated on any further, as here too the Sole Arbitrator has come to the conclusion after the exchanges during the Oral Hearing that the Respondent's attitude and actions were far from "fair" and in "good faith". The testimonies of Respondent's witnesses underline the conclusion of the Sole Arbitrator in every thinkable and possible way.