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| An Italian manufacturer of fashion products (Respondent) concluded an exclusive distributorship agreement with an U.S. distributor (Claimant). According to the contract, delivery was to be made in one or more instalments and payment by means of a letter of credit (“L/C”) within fifteen days of acceptance of order. A dispute arose when the seller requested higher prices for its products (an increase of 10-15% over those on the previous price list) and the buyer refused to open the L/C. In a letter dated 2 August the seller requested the opening of the L/C within twenty-days of receipt, stating that otherwise the agreement would be terminated. Then there was an exchange of communications between the parties (whereby, inter alia, Claimant tried to obtain the necessary information to open the L/C) and, finally on 12 September Claimant opened the L/C. Nonetheless, on 19 September Respondent terminated the agreement. Therefore Claimant initiated an ICC arbitration proceeding claiming direct losses, lost profits and harm to its reputation. The seller counterclaimed for payment of overdue invoices and other matters.
Notwithstanding the fact that the agreement was a long-term contract for distribution of goods and, as such, was not in principle covered by CISG, the Arbitral Tribunal found that CISG was applicable in the case at hand by virtue of a clause in the agreement which read: “The Arbitrator shall apply the 1980 UN Convention on the International sale of Goods for what is not expressly or implicitly provided for under the contract”. As to the merits, the Arbitral Tribunal found that Claimant was in breach of its obligation to pay the price by failing to open the L/C even within the additional period of time granted by the seller under Art. 63(1) CISG. Consequently, Respondent was entitled to terminate the agreement in accordance with Art. 64(1)(b) CISG. In reaching such a conclusion the Arbitrator found, inter alia, that the twenty-day period granted by Respondent as additional time for performance was of a reasonable length considering that in the normal course of business a L/C may be opened within a few hours of request. With respect to buyer’s argument that, since on a previous occasion the seller had accepted payment by ordinary wire transfer, the parties had agreed to modify the provision of the Agreement imposing payment by L/C, the Arbitral Tribunal recalled that the Agreement expressly provided that any addition to or modification of it must be made in writing. The mere fact that on one occasion the seller had exceptionally accepted payment by wire transfer was not sufficient to induce the buyer reasonably to believe that the L/C requirement would be irrevocably abandoned, all the more so as during negotiations Respondent had heavily insisted on the importance of the opening of a L/C and that, according to Art. 8(3) CISG, due consideration should be given to pre-contractual negotiations when drawing legal consequences from the conduct of a party. As to the other argument put forward by Claimant that its refusal to open the L/C was justified by Respondent’s request for a price increase of 10-15%, the Arbitral Tribunal found that Claimant could have opened a L/C on the basis of the previous price list while the refusal to open any L/C was tantamount to a total refusal to pay the price which was an excessive and disproportionate reaction to a disagreement related to only 10% or 15% of the prices. Further, disagreement as to the price could be not per se legitimate reliance by Claimant on Art. 71 CISG (since disagreement regarded the claimant’s own obligation to pay the price and not one of the Respondent’s obligations) and Claimant failed to notify Respondent forthwith of its intention to suspend performance under Art. 71(3) CISG. Again, Claimant failed to give evidence that no issuance of the L/C was to due to an impediment caused by the Respondent entitling it to rely on Art. 80 CISG. The Arbitral Tribunal also rejected the objection that Respondent’s notice requesting the opening of the L/C within 20 days of receipt was ineffective as it was written in Italian notwithstanding a clause in the Agreement providing that all notices to Claimant had to be made in English. The Arbitror invoked Art. 27 CISG which, in its view, sets a general principle of effectiveness of notification that prevented the buyer from availing itself of a mishap in the communication of the summons such as its drafting in the Italian language. However, notwithstanding the foregoing the Arbitral Tribunal ultimately decided that Respondent had wrongfully terminated the Agreement. Indeed, when Respondent notified Claimant its intention to terminate according to Art. 64(2)(a) it was no longer entitled to do so since at that time it knew that Claimant had within the additional period of time granted performed its obligation to open the L/C; moreover, in reviewing the contacts between the parties during that period the Arbitral Tribunal found that there are a number of indications that Respondent did not act in good faith and that its real intention was to use termination to renegotiate the terms of the Agreement to its advantage, thus violating the general principle of good faith, also recalled in Art. 7 CISG, which prevents a party from taking undue advantage of the remedies provided in case of breach of the other party’s obligation. The Arbitral Tribunal also held that, as a consequence of the wrongful termination by Respondent, Claimant was entitled to damages for lost profits under Art. 74 CISG. As to the interest on amounts due by Respondent, after pointing out that the neither the agreement nor CISG contain any indication for its determination, the Arbitrator decided to apply the London Inter Bank Offered Rate (LIBOR), increased of a spread of two points, being “a generally accepted rate, applied on the international financial markets to the currency in which damages shall be paid”. |