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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Date: Final award, 2009
Origin of the parties: Europe and North America
Applicable substantive law: ‘The law of the State of Missouri, USA’
28. [Claimant] says that in [Year Y] [Respondent] unexpectedly chose to replace the existing contractual arrangement by a non-negotiable and imposed new agreement which was considerably longer than the four-page [Agreement A]. The [Agreement] contained many provisions which were considerably more favourable to [Respondent] than the previous contract. [Claimant] signed the new contract which was presented to [Respondent] as a take it or leave it proposition, in view of the trust that [Claimant] had in [Respondent] after 45 years of business together. The [Agreement A], which was in English and subject to US (Missouri) law, was not reviewed by any lawyer on [Claimant]'s behalf. [Claimant] trusted [Respondent] because of the strength of the business relationship which had been built up over generations. The [Agreement A] was for a three year period.
29. In [Year Y+3], [Respondent] decided to replace the [Agreement A] with the [Agreement B]. This had a fixed term of five year. According to [Claimant], the [Agreement B] contained provisions even more favourable to [Respondent]. [Claimant] says that it entered into the [Agreement B] without negotiation, trusting as always in [Respondent's] good faith. The [Agreement B], as with the [Agreement A], provided that US (Missouri) law should govern. According to [Claimant] it was not reviewed by lawyers on its behalf. During this time there was no change in the way in which [Claimant] and [Respondent] did business.
30. The [Agreement B] was automatically renewed without amendment twice for two further five year periods …. Throughout this period [Claimant] contends that it continued to perform the Agreement in utter good faith, developing sales and introducing successfully [in Claimant’s country] a new generation of [Respondent] products.
…..
33. A meeting took place between representatives of the Parties at a trade fair in [Europe] [in Year Y+13]. Recommendations were made by [Respondent] for the development of sales of [Respondent's] products which [Claimant] implemented. After the … meeting [Claimant] says that it received nothing but positive feedback from [Respondent] … However, [Claimant] alleges that [Respondent] was already acting in bad faith, planning to alter its strategy and steal its customer base that [Claimant] alone had built up over [decades] through considerable investment, expertise and commitment. [Claimant] says that it continued to develop the sale of [Respondent's] products and in respect of [Claimant's Year Y+13] forecast that its purchases of [Respondent’s] equipment would increase by over 56% … Several lucrative purchase orders for [Respondent’s] products were obtained by [Claimant] at a trade fair [in Year Y+13].
34. On … [Year Y + 14] [Claimant’s Chair] was informed by [Respondent’s Chief Executive] by that [Respondent] had decided to terminate the Agreement. This came without any prior warning and on the same day [Respondent] sent [Claimant] a letter by fax terminating the Agreement without cause with effect from … [Year + 15]. According to [Claimant], [Respondent's] decision to terminate the Agreement was all the more unexpected and inexplicable having come (i) 13 months after the renewal of the Agreement for an additional five-year term and (ii) 12 months after the discussions in [Europe]. [Claimant] alleges that [Respondent] acted in bad faith and that its actions in terminating the Agreement without prior notice were premeditated and were designed to enable [Respondent] to take over customers which [Claimant] had developed for years and at its expense, which is what happened.
39. [Claimant] therefore claims:
(i) that [Respondent] unlawfully terminated the Agreement which was renewed on … [Year Y+ 13] and remains in force;
(ii) that despite [Claimant’s] attempt to resolve amicably the consequences of the unlawful termination of … [Year Y+14], [Respondent] refused to enter into bona fide negotiations in order to mitigate damages;
(iii) that [Respondent] acted in breach of it obligation of good faith and fair dealing, giving [Claimant] no window of opportunity to cure any alleged default;
(iv) that [Respondent] had no good cause to terminate the agreement;
(v) …
(vi) that as a result of [Respondent's] unlawful termination of the Agreement and its tortious interference, [Claimant] has lost a market and customer base for other products that it has developed and nurtured over [decades], for which [Claimant] is entitled to be compensated. In addition to compensatory damages, [Claimant] contends that it is also entitled to punitive damage for Respondent's] unlawful and bad faith conduct.
40. In its post-hearing brief … [Claimant] asks the Arbitral Tribunal to:
(i) …
(ii) find that the termination or cancellation of the Agreement by the Respondent under the circumstances is unlawful and amounts to a willful and wanton breach of contract;
(iii) find that the notice period given by the Respondent to the Claimant was for its convenience and sole benefit;
(iv) find that the Respondent has durably acted maliciously and in bad faith at least since [Year Y+10];
41. [Claimant] agrees that it entered into a business relationship with [Respondent] to distribute [Respondent's] products in [Claimant’s country] market and that a series of agreements were entered into culminating in the [Agreement B].
42. [Respondent] says that it began to notice deficiencies in [Claimant’s] performance [prior to Year Y], In particular, [Claimant] reduced it staffing levels, received complaints from customers, and recorded decreased sale. [Respondent] repeatedly asked [Claimant] to reform its practices, but to no avail. Ultimately, [Respondent] was compelled to terminate the business relationship. Specifically, in … [Year Y+13], [Respondent] notified [Claimant] that it had to implement certain measures to bolster its declining sales. [Claimant] failed to follow [Respondent's] measures and did not cure the deficiencies. Therefore, in … [Year Y+14], [Respondent terminated the business relationship with [Claimant], but provided an additional six months time to complete the ongoing business affairs between the companies.
43. [Respondent] contends that [Claimant’s] allegation that [Respondent’s] acts constituted a breach of the [Agreement B], a breach of the implied duty of good faith and fair dealing, and tortious interference resulting in punitive damages, are without merit and should be denied.
44. [Respondent] refers to Section [X] of the [Agreement B] and points out that it provides that the transaction and legal relations between [Claimant] and [Respondent] "shall be governed and construed solely in accordance with the laws of the State of Missouri, USA." (emphasis added). Therefore, only Missouri law applies to this arbitration and that [the law Claimant’s place of incorporation] or international legal principles are not applicable.
54. In relation to [Claimant’s] claims that [Respondent] breached its implied obligations of good faith and fair dealing [Respondent] argues that [Claimant] has put forward insufficient evidence to support a claim for breach of the implied covenant of good faith and fair dealing. Under Missouri law, this obligation prevents one party to a contract from exercising a right conferred under the express terms of the agreement in such a manner that evades the spirit of the transaction or denies the other party the expected benefit of the contract. To prevail, Missouri law requires that [Claimant] demonstrate that [Respondent] acted in bad faith or engaged in unfair dealing. [Respondent] denies that there is any such evidence. [Respondent] says that [Claimant] merely asserts that [Respondent] was "malicious," "antagonistic," or "brutal" and that [Respondent] failed to provide [Claimant] an opportunity to cure its deficiencies or explain the cancellation to its clients. Such allegations are not supported by the evidence. Moreover after year of requesting that [Claimant] remedy it deficient sales performance, [Respondent] says that it gave [Claimant] 12 months to cure and an additional 6 months to complete its affair with existing customers. Termination was neither immediately effective nor announced with a public explanation of [Claimant’s] deficient performance. Such reasonable and professional business acts by [Respondent] are not evidence of bad faith.
55. Furthermore, [Respondent] says that any damage to [Claimant’s] reputation resulted from its own deficient customer service and sales performance. [Claimant] failed to implement [Respondent's] requested measures and lost customers and confidence in the process. If [Claimant] lost reputation in the business community because of the cancellation of the Agreement, [Respondent] contends that it is [Claimant’s] fault.
56. [Respondent] also contends that even if it was in breach of its obligation of good faith and fair dealing to [Claimant], [Claimant’s] damages are limited to the loss of net profits and that [Claimant] cannot recover twice on the same contract. Therefore, [Claimant’s] damages for breach of this claim, if any, are limited to the net profit that it reasonably could expect to realize if the breach bad not occurred.
….
The Tribunal’s analysis of the key issues
Did [Respondent] act in bad faith and in breach of its duty of fair dealing?
101. [Claimant] relies upon two principal matters in support of its allegation that [Respondent] acted in bad faith and in breach of it duty of fair dealing. These two matters are that (i) [Respondent] had it in mind to terminate the Agreement at the same time as it renewed the Agreement in …[Year Y+13], leading [Claimant] to believe that it was "business as usual" and (ii) the setting up of [Respondent's] own distribution company in [Claimant’s country] and its dealings direct with [Claimant’s] customers.
102. [Claimant] accepts that the damages which it claims under this head of liability are the same as the damages which [Claimant] seeks for wrongful termination of the Agreement and that if, therefore, the Tribunal finds in favour of [Claimant] on the issue of wrongful termination (as it has done) the damages in respect of [Respondent]'s claim for breach of good faith and fair dealing are the same. To that extent, therefore, the claims for breach of contract and breach of good faith and fair dealing are alternative claims. It is right nevertheless that the Tribunal should make a finding in respect of this claim. The Tribunal considers that by terminating the Agreement in the way that it did, without giving [Claimant] due notice of its alleged deficiencies and an opportunity to cure them within one year as required by Article [X], [Respondent] did not act fairly. [Respondent] had an opportunity to terminate or amend the Agreement in … [Year Y+13], which it did not take, nor did it indicate to [Claimant] at that time that it was considering terminating the Agreement, even though this was one of the options discussed between [Respondent’s Chief Executive], and [Respondent’s representatives]. [Claimant] would have been justified in considering that its business relationship with [Respondent], which had existed for [decades], would continue at least for another 5 years. To that extent, therefore, the Tribunal finds that [Respondent] acted in breach of its implied duty of fair dealing. The Tribunal does not, however, consider that the subsequent setting up by [Respondent] of its own subsidiary in [Claimant’s country], or its dealings with [Claimant’s] customers amounted to bad faith or unfair dealing on the part of [Respondent].
Summary of Tribunal 's findings
In summary the Tribunal's findings on the principal issues in this arbitration are:
1. It is common ground between the parties that the [Agreement B] was in force when [Respondent] terminated its relationship with [Claimant] and the Tribunal so finds.
2. [Respondent] wrongfully terminated the [Agreement B] by its letter of … [Year Y+14] to [Claimant]. [Respondent's] letter of … [Year Y+13] did not constitute a valid Notice of termination under the Agreement.
3. By terminating the [Agreement B] without cause [Respondent] acted in bad faith and dealt unfairly with [Claimant].