- Arbitral Award
- ICC International Court of Arbitration, Zürich 8486
SALES CONTRACT - BETWEEN A TURKISH SELLER AND A DUTCH BUYER - GOVERNED BY DOMESTIC LAW (DUTCH LAW) - ARBITRAL TRIBUNAL REFERENCE TO THE UNIDROIT PRINCIPLES AS THE PREVAILING VIEW IN THE FIELD OF INTERNATIONAL COMMERCIAL CONTRACTS
HARDSHIP - FUNDAMENTAL ALTERATION IN ORIGINAL CONTRACTUAL EQUILIBRIUM (ART. 6.258 DUTCH CIVIL CODE) (ART. 6.2.1 UNIDROIT PRINCIPLES)
A Dutch seller and a Turkish buyer concluded a contract for the sale and installation of a machine for the production of lump sugar. The law applicable to the contract was Dutch law. After the conclusion of the contract the buyer refused to pay the agreed amount of the advance payment, invoking financial difficulties due to a sudden drop in the market demand for lump sugar. After the parties' failure to agree on a revision of the contract, the seller declared the contract terminated and claimed damages from the buyer. In its defense, the latter invoked hardship under Art. 6.258 of the new Dutch Civil Code as grounds for relief.
In rejecting this argument, the Arbitral Tribunal stressed the exceptional character of hardship which required a fundamental alteration in the original contractual equilibrium, not a mere increase in the cost of performance as in the instant case. In confirmation of this conclusion, the Arbitral Tribunal referred not only to Art. 6.258 of the new Dutch Civil Code, which was the applicable law, but also to Art. 6.2.1 of the UNIDROIT Principles. The reference to the latter was justified by the argument that in applying Dutch law in an international context, attention should be given to the prevailing view in the field of international commercial contracts.
'The circumstances put forward by Respondent do not entitle the Arbitral Tribunal to release Respondent from its obligation to pay pursuant to Art. 6:258 of the Dutch Civil Code (Burgertijk Wetboek, BW) on the ground of the occurrence of unforeseen circumstances ("onvoorziene omstandigheden"). It is true that the provisions of the Dutch Civil Code as the law governing the producer are applicable to the contract in accordance with Art. 13, para. 3, sentence 1 of the ICC Rules of Arbitration taken in conjunction with Section 28.2 of the General Terms of Business. This also follows from Art. 13, para. 3, sentence 2 of the ICC Rules of Arbitration taken in conjunction with Article 187, paragraph l, 2nd alternative of the Swiss Private International law Act (PILA). The Swiss PILA, according to Article 176, paragraph 1 thereof, is applicable to the present arbitration, as Zurich (Switzerland) was fixed by ICC as the place of arbitration and both parties have their registered offices outside Switzerland. Claimant, in its capacity as producer of the sugar-cube production plant, has effected the characteristic performance in respect of the contract; as a result, the dispute is most closely connected with its law ...
The provision of Art. 6:258 also applies, even though in Section 25 of the General Terms of Business the parties agreed on special regulations covering "grounds for release". Indeed, according to Art. 6:250 of the parties may not derogate from this provision by mutual agreement, which means that the rule is mandatory ...
The requirements of the provision are not met in the present case, however, the premise being that this provision should only be applied with much prudence. This is firstly because it is a special rule giving general authorization to consider specific contractual provisions as inapplicable in the given circumstances according to standards of fairness and reasonableness ("redelijkheid en billijkheid"), pursuant to Art. 6:248, para. 2 taken in conjunction with Art. 3: 12 of the Dutch Civil Code . . . As it is, this general provision is applied only with much prudence in internal legal practice within the Netherlands . . . The prime decisive factor here, according to Art. 3.12 is the "legal conviction valid in the Netherlands". In the case of application of the provision in an international context; this is replaced by the legal convictions valid in international contract law. The decisive characteristic here, however, is the principle of pacta sunt servanda, as expressed to some (tent in Article 1.3 of the Unidroit Principles of International Commercial Contracts . . .
These legal convictions are also to be taken into consideration when applying national law to international matters . . . The necessity and admissibility of interpreting national law in the light of the Unidroit Principles has also been specifically advocated for Dutch law. It is the intention of the Dutch legislator that such prudence in applying the law should also exist in the application of the special rule in Art. 6:258 . . . Such prudence is again in keeping with international contractual and arbitral practice. It should also be considered in the context of national Dutch law . . . Accordingly, termination of a contract on the grounds of the occurrence of unforeseeable circumstances ("hardship", "clausula rebus sic stantibll") should be admitted only in extreme and rare cases . . . The underlying principle in international trade is rather that the parties themselves assume the corresponding risks of performing and fulfilling the contract unless the risks are expressly otherwise distributed in the contract itself . . . Moreover, Art. 6.2.1 of the Unidroit Principles states specifically that the fact that performance of a contract entails greater economic difficulties for one of the parties is not sufficient justification for accepting a case of hardship. The ICC principles on force majeure and hardship also provide that a party cannot invoke hardship in performance simply because the contract turns out to be unprofitable for it ...
Accordingly; a Dutch arbitral tribunal found that a dramatic fall in prices and currency divergency alone do not constitute unforeseeable circumstances and therefore do not justify termination of the contract. It was the opinion of the arbitral tribunal that these circumstances fell rather within the area of risk of the party concerned . . . In view of these uncertain circumstances on the Turkish market, known to Respondent, it cannot be countenanced that Respondent now wished to shift the associated economic risks to Claimant.
With respect Claimant's ending of the contract:
'Claimant, for its part, however, put effective end to the contract with Respondent. The question remains open as to whether Claimant, through the document from its legal counsel dated . . .effectively cancelled the contract by way of voidance (vernietiging) in accordance with Art. 3:39 of the B~ or by way of termination (ontbinding) in accordance with Art. 6:267, para. 1 of the BW The parties in fact effectively excluded these provisions of the applicable Dutch law in the General Conditions for the Supply and Erection of Plant and Machinery for Import and Export of the United Nations Economic Commission for Europe (No. 188 A) appended to the order confirmation. According to these Supply Conditions, Claimant is entitled to terminate the contract and claim damages.
The General Supply Conditions were validly included in the contract between the parties. To this end, Art. 6:234, para. 1(1) of the BW taken in conjunction with Art. 6:233(b) of the BW requires that the user provide the other party with the conditions "before or at the rime of concluding the contract", so that the other party has "a fair possibility of acquainting itself" with the content of such conditions. The order confirmation, of which was initialed and signed by both parties and hence represents the actual text of the contract, contains both in the preamble and the concluding section an express reference to the General Supply Conditions, which were moreover appended to the contract.
According to Art. 10.2 of the Supply Conditions, Claimant could, in the event of the late taking of delivery, summon Respondent to take delivery within a fitting period of rime; once this period had expired, it could renounce the contract simply by giving written notification. The Claimant has satisfied these requirements. ...'
With respect to the arbitration costs:
According to Art. 20 of the ICC Rules of Arbitration, the Arbitral Tribunal is required, in addition to deciding on the merits of the case, to rule on the costs of the arbitration and decide which of the parties should pay the costs. According to general principles, the costs of the proceedings are home by the unsuccessful party in the arbitration . . . In the present case, Respondent is unsuccessful in its counterclaim, while Claimant is only partially successful in its claim. Moreover, it is liable towards Respondent for costs in connection with the partial al withdrawal of its claim announced during the proceedings However, the arbitration costs are to be home in full by Respondent. Indeed, according to general principles of international arbitration law, the Arbitral Tribunal, in its decision on costs, should take account not only of the outcome of the proceedings but also of the conduct of the parties during the proceedings . . .
Parties to international arbitration have a special duty, in good faith, to help the proceedings to progress and to refrain from any delaying tactics . . . Respondent's conduct during the entire proceedings in no way meets these requirements. Respondent paid none of the advances on costs required for the arbitration. Moreover, it not only delayed in submitting its counterclaim, namely until after the first draft of the Terms of Reference had been drawn up, refused to sign the Terms of Reference amended in accordance with its wishes, despite being fully advised by the Arbitral Tribunal as to the significance and legal consequences, and failed to take part in the hearing despite being given sufficient notice, but also, by instructing legal counsel at the last minute, i.e. after the hearing was aver and shortly before the expiry of the final deadline for reacting to the report of the hearing, followed by the abandonment of the brief just a few days later, contributed considerably to delaying and confusing proceedings. This was moreover exacerbated by the fact that the same legal counsel resumed the brief on the same war, without the arbitrator being informed.
For the above mentioned reasons, Respondent shall reimburse Claimant for the advance on costs amounting to paid by the latter in respect of these proceedings.
According to Article 20, para. 2 of the ICC Rules of Arbitration, the requirement to pay costs incumbent on Respondent also covers the "normal legal costs incurred by the parties.” The "normal" nature of the legal costs is determined according to general principles underlying arbitration cost law. The deciding factor here is whether the asserted legal costs are objectively necessary and fitting, given the factual and legal complexity of the case including the anticipated rime it would take. The Arbitral Tribunal has some leeway in making its decision . . . In view of the legal questions raised by the proceedings and having regard to the course of the proceedings described above, the Arbitral Tribunal finds the legal costs asserted by Claimant necessary and fitting, and therefore also "normal" within the meaning of Art. 20, para. 2 of the ICC Rules of Arbitration. They are consequently to be home in full by Respondent.}}
Original in German:
- Journal du droit international, 1998, 1047-1049, with note by Y. Derains
- ICC International Court of Arbitration Bulletin, Vol. 10, No. 2, Fall 1999, 69-71}}