Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
A Sticky Printing Problem
Colin J Wall
General Information
Prinbus Verlag GmbH & Co. (“Prinbus”) is a publishing firm based in Germany, which owns the publishing and copyrights in the books “The World’s Greatest Golf Courses”. This is a ninevolume series covering golf courses in Africa, Asia, Britain and Ireland, the Caribbean, Central and South America, continental Europe, the Middle East, North America and Oceania. There is one volume per geographical location. The books have been published in the German, French and English languages. Recently, Prinbus held discussions with a Japanese book distributor Wakayama Ltd. (“Wakayama”) with the aim of producing a Japanese edition of the books. Negotiations took place and an agreement was reached whereby Prinbus would sell to Wakayama 12,000 copies of each of the nine volumes, with Volume 1 on Africa to be delivered to Yokohama, Japan, by a specified date, and each subsequent volume to be produced and delivered at weekly intervals thereafter. The books were to be sold by retailers in conjunction with a weekly golfing magazine. Prinbus was responsible for the book production and for shipping the books to Yokohama. Wakayama was responsible for organizing the sales of the books and for internal distribution costs in Japan. Each volume was to be a paperback edition inserted into a book slipcase.
Prinbus also contracted with Po Shu Printing Lda. (“Po Shu”), based in Macau, for the printing of the books and book slipcases. Prinbus had used Po Shu as its main printer for books in the Far East for over 12 years, and at the time of placing this order had three other orders being processed. The volume of business between the two companies varies each year but over the last five years the average has run at approximately US$815,000. The order for the nine-volume series was placed on the usual terms and the books and slipcases were made to the specifications provided by Prinbus, and samples of each volume were sent and approved by both Prinbus and Wakayama ahead of the production runs. The cost to Prinbus, including delivery, was US$345,600 (12,000 copies x nine volumes at US$3.20 per book). The contract between Prinbus and Po Shu required that Volume 1 be delivered to Yokohama on or before the date agreed in the contract between Prinbus and Wakayama and that each of the subsequent volumes be produced and delivered at weekly intervals thereafter. Payment was to be made 14 days after the last volume was delivered.
Volume 1, the Africa volume, was produced and shipped to Japan arriving in Yokohama two weeks before the delivery deadline. The 12,000 copies were packed by Po Shu in 50 book cartons, placed on pallets and then shrink wrapped in plastic for protection from the weather and placed in containers. Ten days later the containers were unpacked and Wakayama then distributed the unopened cartons of books across Japan. When the cartons were opened, it was discovered that there was a serious problem, as a number of the paperback books had become stuck in the slipcases and either could not be removed at all or were damaged when they were removed, making them unsuitable for sale. The problem appeared to be that too much glue had been used in the cardboard slipcase and that excess glue had stuck the book to the slipcase. Wakayama immediately contacted Prinbus who in turn contacted Po Shu.
Wakayama decided to postpone the launch of the book series and all of the copies of Volume 1 were returned about a week later to a warehouse in Tokyo, where the remaining unopened individual cartons were opened and each of the books was examined by Wakayama personnel to see if it could be removed from the slipcase without damage. The examinations were witnessed by the sales director of Prinbus and Po Shu’s quality assurance manager, both of whom had flown to Japan especially for this purpose. It was discovered that approximately 25% of the Volume 1 books were defective. While the returned Volume 1 was being checked, the Volume 2 books on Asia were already en route from Macau and Volume 3 was being loaded into the containers for shipment to Japan. When Prinbus was told that 25% of the Volume 1 books were defective, it immediately placed an order with Honest Printing Lda. (“Honest Printing”), also based in Macau, for 3,000 copies of each of the first three volumes of the books and slipcases. Po Shu protested and said that it was willing to reprint the books itself and that liability for the defective books and the cost of the replacement books could be sorted out at a
[Page66:]
later date. Prinbus disagreed and said it had concerns about Po Shu’s quality assurance controls and it did not want to disrupt Po Shu’s production plans and risk delaying the production of Volumes 4 to 9.
A few days later, when Volume 2 was received in Japan, the containers were opened immediately upon arrival, all of the cartons were unpacked and the books examined by Wakayama personnel. Only 240 books were found to contain minor defects and only a few stuck to the slipcase. When Volume 3 was received a week later, less than 1% of the books were found to contain any defects. All concerned were satisfied that whatever it was that had caused the initial problem with the books sticking to the slipcases had now been resolved. The books produced by Honest Printers arrived and Wakayama fixed a new launch date for the book series. Po Shu produced Volumes 4 to 9 on time and without incident.
Prinbus has made the following financial claims against Po Shu:
Prinbus has said the initial defects in Volume 1 have caused it much embarrassment and additional cost and it has said that Po Shu is responsible for all of the financial consequences. Po Shu has denied liability and has insisted that the 3,000 defective copies of the Volume 1 books be kept in warehouse storage in Tokyo, pending expert analysis as to the cause of the defects. In the alternative, Po Shu has said that if it is liable for the initial faults with Volume 1, then it is only prepared to pay the reasonable and direct costs arising out of its default.
In preparation for the mediation both Po Shu as the Requesting Party and Prinbus as the Responding Party have prepared position papers, setting out the disputes as they see them.
Prinbus’s position paper states that all of the financial claims listed above are justified. In particular, Prinbus has said the liability for the defective books must lie with Po Shu, as it was clearly a manufacturing defect. It has defended its decision to use Honest Printers as an alternative printer, even though the smaller print run made the printing expensive. While the decision to reprint 3,000 copies of each of Volumes 1 to 3 has unfortunately led to a total of approximately 6,000 excess copies of Volumes 2 and 3, Prinbus says that decision was taken in good faith to mitigate its losses with Wakayama. It also says that due to the urgency of the situation and its important relationship with Wakayama, it was justified in flying its director of sales on a first-class air ticket and that some US$2,500 in entertaining expenses out of the US$15,125 claimed was necessary and expected, so as to appease such an important client as Wakayama. Prinbus has not however provided details of the US$200,000 cancellation charges said to be incurred by Wakayama, but says it has accepted Wakayama’s claim and has accordingly given a US$200,000 discount on its overall sales price to Wakayama.
[Page67:]
Po Shu, in its position paper, has said that it was not its fault that the Volume 1 books were damaged. It says that a preliminary investigation has indicated that the glue in the slipcases melted in the extreme heat, when the books were left for 10 days in the containers at the Yokohama dockside. As Prinbus provided the specification for the glue and delivery was in accordance with its contract, it is Prinbus’s fault and Po Shu should bear no responsibility at all. As a secondary defence, should Po Shu be found to have some liability, it says that it was unnecessary for Wakayama to have inspected all of the Volume 2 books and that only a random inspection should have been carried out, as was done in the case of the Volume 3 books. It says it was wrong for Prinbus to have had the books and slipcases reprinted by Honest Printers and that decision has led to excess copies being made and unnecessary expense. It says it knew nothing at all about the terms of the contract between Prinbus and Wakayama and cannot be liable for Wakayama’s alleged cancellation losses which are in any event too remote and were not foreseeable. It says Prinbus’s sales director had sufficient notice to fly to Tokyo on a business-class air ticket and that the entertainment of Wakayama’s staff has nothing whatsoever to do with Po Shu and so it is not prepared to pay anything at all towards the US$2,500 entertainment expenses. Finally, Po Shu has said that Prinbus has no right whatsoever to deduct monies, by way of set-off, from the other three unrelated contracts, which have been completed without incident.
At the mediation Po Shu will be represented by its Owner (who thus far has not been involved in any of the discussions) and its external lawyer. Prinbus will be represented by its Chief Executive, who has been in office for less than three months, and its external lawyer, neither of whom have been involved in any of the discussions to date.
[Page68:]
Confidential Information for Po Shu
Requesting Party
You are the Owner of Po Shu. You were quite shocked at the aggressive stance taken by Prinbus’s sales director, first for refusing to let your company reprint the replacement copies of Volume 1, and, second, for not waiting to see how many copies of Volumes 2 and 3 might need replacing before placing an order with a rival printer. To your mind, these actions have caused unnecessary expense. To add insult to injury, Prinbus has now not only sought to get you to pay some vague cancellation charge of US$200,000 for matters of which you had no knowledge, but they have also withheld monies owed to you on three other unrelated contracts. The final insult came when Prinbus claimed excessive airfares and entertainment expenses against you. The sales director had enough time to buy a business-class ticket, which you think would have cost about half the price of first class. The entertaining expenses have absolutely nothing to do with Po Shu and it is entirely up to Prinbus if it wants to spend its money on entertaining its own clients. It is as though the 12 years of doing business together mean nothing. You are pleased that the sales director is not attending the mediation and hope that Prinbus’s new Chief Executive will be more reasonable.
In any event, you believe that you are not liable for the problem, or if you are liable then it is a shared liability. You have appointed your own expert and her report concluded that the glue on the slipcases did reach temperatures at which it could melt in the extreme heat, when the books for Volume 1 were waiting to be unpacked from the containers on the dockside in Yokohama. However, the expert’s report also indicates that the problem only arose because there was excess glue in some of the slipcases compared with the quantity specified by Prinbus. It seems therefore that it is thus a combination of the excessive temperatures and excess glue. The expert’s report confirms that the glue had the correct chemical composition required by Prinbus. You have in your office some of the batch of samples of each of Volumes 1 to 9 that were made and approved before the full production runs and some of those, about 15%, contain excess glue in the slipcases. You do not know how many of the samples given to Prinbus and Wakayama also contain excess glue when compared to the specification but logically there must be some. As the samples were approved by both Prinbus and Wakayama, there is an argument to say that you are not in breach of your obligations — you are providing what was approved in the samples.
Your quality assurance manager quickly identified the problem during the inspection of Volume 1 at the Tokyo warehouse because there were four machines used by Po Shu’s subcontractor to produce the slipcases and it became obvious to him, as about 25% were defective, that one of the subcontractor’s machines was delivering excess glue. As Volumes 2 and 3 were unpacked immediately upon arrival in Japan and did not suffer from excessive temperatures there was little, if any, problem with the books sticking to the slipcases.
Your quality assurance manager has purchased 50 copies each of Volumes 2 and 3 from the retail booksellers in Japan, and an inspection of the slipcases to those books shows that approximately 25% of them contain excess glue but none of them were stuck to the slipcases. You do not know if Prinbus is aware of this fact, as the books have been distributed all over Japan but you assume that they must be. Perhaps you can find out in the mediation? The problem of the excess glue was corrected as soon as the quality assurance manager was able to report back on his findings and that is why the remaining volumes were produced without any incident. As you subcontracted the production of the original slipcases to another firm and you have a very good case for recovering damages against it under the subcontract because the finished product did not comply with the specification in that there was excess glue compared to that specified. You believe that you will be able to obtain approximately US$140,000 in compensation from your subcontractor with respect to any liability you may have towards Prinbus’s direct losses incurred in the return, inspection and reprinting of the books and slipcases. Any settlement agreement must therefore clearly indicate what monies you have paid to Prinbus against which heads of claim.
[Page69:]
Ideally you would like to continue to do business with Prinbus and, irrespective of the rights and wrongs of the situation, you would be prepared to make some financial contribution to resolve this dispute. However, Prinbus must first agree to pay you the US$33,225 undeniably due to you on the three unrelated contracts. If Prinbus agree to do this then you, in turn, are prepared to compromise over your counterclaims and withdraw them. You are also prepared to contribute up to US$55,000 towards what you consider to be reasonable damages on Prinbus’s other heads of claim. That means overall you would be prepared to accept a deduction of about US$195,000 from the amount of US$378,825 due to you in order to settle this matter.
You also want to know if Prinbus are now placing new orders with Honest Printers. If they are, you would be prepared to undercut by a small percentage any printing prices that Prinbus might be obtaining from Honest Printers to retain Prinbus as a client but only if you can satisfactorily resolve this dispute. Honest Printers are your biggest rival in Macau and it would damage your reputation if they were to take a long-term business client away from you.
Confidential Information for Prinbus
Responding Party
You have been in your job as Chief Executive for less than three months and have been brought in to reorganize the company and focus on the European market. You have also inherited this dispute to resolve with the assistance of your external lawyer. You made a thorough investigation of the case and extensively interviewed the sales director before you terminated his employment last month.
There is no doubt that the initial defects with copies of Volume 1 of the book series caused severe embarrassment to your client Wakayama, soured relationships and made it necessary for Wakayama to postpone the launch of the book series. The sales director handled the situation in entirely the wrong way. He overreacted and seems to have incurred costs that you will have difficulty recovering from Po Shu, assuming that Po Shu is liable for the problem in the first place.
You have commissioned an expert’s report as to the cause of the defects and it appears that the problem with the Volume 1 books sticking to the slipcases was caused by glue in the slipcases that had melted while the books were left at the dockside. However, your expert has said that the excess heat and the melting glue would probably not have caused a problem on their own and that it was the excess glue in certain of the slipcases that created the problem, combined with the books “sweating” in the plastic sheet wrapping used by Po Shu. Your expert says Po Shu used the correct chemical composition of glue exactly as specified by Prinbus and your lawyer has advised that Po Shu was perfectly within its rights to deliver the books two weeks in advance of the deadline. It seems that, in hindsight, the contract with Po Shu could have been better written to require the delivery to be nearer to the deadline with Wakayama. Prinbus might therefore have some shared liability for the defects in the Volume 1 books.
You are aware that Po Shu produced samples of each of the nine volumes before the full production runs and that those samples were approved. However, all of those samples, except for one copy of each volume, were given to Wakayama in Japan. Of the nine books retained by Prinbus, none has any excess glue in the slipcases. This would seem to strengthen your position that Po Shu were in breach of contract and that the slipcases as mass produced did not comply with the approved sample, but you cannot be certain because the remaining approved samples are held by Wakayama and they have currently refused to cooperate with Prinbus. Requests for assistance have gone unanswered. Perhaps you can obtain this information from Po Shu in the mediation? Wakayama’s attitude is particularly upsetting because your sales director gave a US$200,000 discount in your contract with Wakayama but got nothing back in return — another sign that he was incompetent. This reinforces the view of the Board of Directors that Prinbus should concentrate on the European market in the future. You know that you cannot justify the first-class airfare and the entertainment expenses and this was just another example of the sales director acting in an irresponsible manner. The business-class airfare would have cost about US$5,000.
You are willing to compromise on the element of the claim relating to the US$200,000 discount because you know that the contract with Po Shu ought to have informed them, in advance, of the specific arrangements you had with Wakayama and its planned publicity campaign, to make Po Shu aware of what damages might flow from a breach of contract leading to a postponement of the book launch. However, these are real losses that you would not have incurred if Po Shu had not produced defective slipcases. You are prepared to give up as much as US$150,000 against the US$200,000 claimed, as it is going to be hard to justify this head of damages, especially as this was provided to Wakayama by way of a lump sum discount without proof of any loss. You will do this provided that you get most of your damages for the direct losses incurred in the return, inspection and reprinting of the books and slipcases; these damages amount to US$163,700. You accept, however, that there may be an argument to say that Prinbus contributed to the problem by specifying glue for the slipcases that would melt in extreme heat and that Wakayama might have carried out excessive checking of Volume 2.
[Page71:]
Apparently the sales director decided to use Honest Printing as he wanted to test their performance, to see whether they could replace Po Shu in the future. Honest Printing did produce the replacement books and slipcases quickly and the quality was fine, but when Prinbus subsequently tried to place an unrelated printing order with them they quoted excessively high prices and the work was eventually given to a printer in Taiwan. You have had no further dealings with Honest Printing and have no intentions to do so. Although you are winding down your operations in the Far East there are a couple of small book orders with a combined value of about US$110,000 that you need to get printed for customers in the region and if you can resolve the present disputes with Po Shu you are prepared to place these orders with them.
The bottom line is that you really do not want to have to litigate such a weak case and are therefore willing to abandon a sizable amount of the monies claimed against the other heads of claim. However, you really want to try and achieve a settlement whereby Po Shu agrees to contribute between US$180,000 and US$190,000. You also want to get written acknowledgement from Po Shu that it was responsible for the fault with the Volume 1 slipcases, as this will enable you to restart negotiations with Wakayama. Apparently, the sales of the books were not as high as expected, except for Volume 2 on Asian golf courses, which was a complete sell-out. Before relations with Wakayama became strained they said that, as Volume 2 of the series was a best seller, they would be interested in buying from you the extra 3,000 copies you have of this volume, to sell as a stand-alone book. These books are already in Japan and incurring storage charges to Prinbus, so you are keen to make this deal. Wakayama would pay US$30,000 for them. If you could do this deal with Wakayama that would also reduce the monies you need to obtain from Po Shu to achieve a settlement that you could live with.
[Page72:]
Case Analysis
This is a complex role-play involving two parties, a publisher and printer who are in a chain contract, and other entities who can and will influence the ultimate outcome of this mediation, respectively as client and sub-contractor, by contributing to the monetary settlement. This role-play was used in the preliminary rounds of the ICC International Commercial Mediation Competition in 2013 and won the best preliminary round role-play award.
Prinbus, the publisher, and Po Shu, the printer, have worked together for over 12 years and until the time of this dispute had a good and successful relationship. Thus it makes sense, provided there are no changed circumstances, that if the current dispute can be overcome, they should be able to work together in the future. The fact pattern in this case leads to a conclusion for both parties, based on expert reports, that the problem with the books sticking to the slipcases is one of shared liability. It is not uncommon in real mediations when quality issues arise that some liability attaches to workmanship and some liability to design, although it is rare for parties to concede this unless they are in the safety of mediation, where such admissions would be inadmissible in subsequent proceedings. So if the parties are honest with each other about liability for the defects in this particular dispute that will provide good impetus towards a settlement.
There is a considerable financial difference between the parties in this case, with Prinbus using its dominant position to withhold money not just on the disputed contract but also on three further completed contracts. Prinbus has taken the attitude that possession is nine tenths of the law and withheld sufficient monies to fully satisfy all of its claims. This has caused a “threshold” issue whereby Po Shu wants Prinbus to first pay US$33,225, which is undoubtedly due on the three completed and unrelated printing contracts. A wise mediator would ask Po Shu to assume for the purposes of the mediation that Prinbus would agree to this, on the condition that all other matters are resolved, thus avoiding an early impasse.
Both parties have produced position papers which should enable the mediator to get a good understanding of what these disputes are about, but this does not obviate the need for each party to explain, in some detail, its position in respect of each claim and ultimately what its interests are. As there are several monetary claims the mediator might decide to use a “layering” technique of resolving the smallest and simplest claims first in order to gain momentum in the mediation. This would work best with Prinbus’s claims on airfares and entertainment costs and perhaps the claim for monies paid by Prinbus to Wakayama, based on the remoteness of these damages and non-disclosure by Prinbus of its contractual arrangements with Wakayama. It is important to Po Shu that any settlement agreement must be broken down into specific items, so that Po Shu can claim against its sub-contractor.
If the parties can reach settlement there are opportunities to engage in future business together and for Prinbus to offset some of its losses by selling the excess books in Volume 2 to Wakayama.
[Page73:]
Greg Bond
Commentary for Training
Negotiating the Zone of Possible Agreement
This mediation concerns two companies whose prior business has been good and whose future business is limited, as Prinbus wishes to cease its operations in the Far East. Before it does so, there are a few printing jobs it would like to finish up. Po Shu will lose this customer, and if Prinbus can frankly explain why in the mediation, then Po Shu has no reason to fear a competitor taking over their client. This should create trust. In general, if both parties take a rational view of this mediation, looking how best to get out of the mess they are in, there should be a good resolution. The dispute is not highly emotional and the facts say that both parties see room for compromise on their claims.
There is a very possible zone of possible agreement here — the area in which the parties’ significant claims can overlap and thus resolution is possible. If Prinbus concedes that it must pay the outstanding invoices for unrelated printing work, then the parties can negotiate their way through all the other issues, conceding some (such as exaggerated expenses claims or Po Shu’s counterclaim), compromising on others (such as Prinbus considerably lowering its damages claim and Po Shu agreeing to contribute to it), and adding new value in terms of Po Shu gaining the contracts for Prinbus’s final work to be done in the Far East. The difficulty lies in who makes the first offer. The underlying dilemma is that between creating and claiming value. If one party makes all the concessions, then only the other will claim the value created. Clearly, for this mediation to progress, both parties will have to offer the other something. What one concedes must be conditional on a concession from the other party, while what one wins must be conditional on the other party winning something else. At this point this mediation becomes highly strategic.
What can a mediator do to help the parties find comfortable positions for each within their zone of possible agreement? One way would be to list the claims in joint session, and then take each party into caucus quickly. In caucus, the mediator would ascertain that the parties are both willing to move some way towards the other, and then work out specific ranges of compromise that the mediator would take to and fro. This case would offer students a good opportunity to practice a mediation that takes place primarily in caucus, right up to drafting the terms of a settlement. In this scenario, the mediator takes on the responsibility of guarding the parties’ mutual offers until they are ready to reveal them to the other side, which the mediator would do only after indicating that there is room for agreement and after having received permission to make the offer known. Debriefing and feedback could consider the merits of this method, in which the mediator acts an honest broker.
A mediator could equally rely on joint sessions. If the parties take a rational approach, and are able to bargain over concessions jointly, this should work too. Although the problems are sticky, this mediation role-play is written with a satisfactory solution for all in mind.
[Page74:]