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| Abstract | ||||||||||||||||||
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| In order to perform a contract with a third party, a Swiss buyer entered into a contract with an Austrian seller for the supply of chemical fertilizer. The seller in turn applied to an Ukrainian supplier to obtain part of the fertilizer. The buyer sent to the Ukrainian supplier the pakaging to be used for delivery (sacks manufactured by the buyer under the seller's instructions). As the sacks sent by the buyer did not conform to the technical rules of the Ukrainian chemical industry, the supplier could not make use of them. Consequently, the goods were not delivered within the period of time fixed in the contract. The buyer asked the seller in writing when the goods would be delivered, expressly adding that, in the absence of a clear committment by the seller, it would avoid the contract with respect to the part of the goods not yet delivered. Since the seller's reply was generic, the buyer had to make a substitute purchase at a higher price in order to be able to perform the contract already concluded with the third party. The buyer commenced arbitral proceedings demanding damages, including the cost of the sacks it had supplied as well as the loss deriving from the substitute purchase. The buyer also asked for interest, at the London International Bank Offered Rate (LIBOR) plus 2%.
The Arbitral Tribunal found that the seller had fundamentally breached the contract (Art. 25 CISG) as it had breached its duty to give the buyer the necessary instructions for the correct manufacture of the packaging. Moreover, the seller was not exempted from performance pursuant to Art. 79 CISG, since the seller is responsible for non delivery caused by its supplier, as part of the seller's risk (Art. 79(2) CISG). The Arbitral Tribunal furthermore held that though late delivery does not usually amount to a fundamental breach and entitles to avoid the contract only after the additional time fixed by the buyer has expired without performance by the seller (Art. 47(1) CISG), a relevant delay may constitute fundamental breach if it appears from the circumstances that the date of delivery is of particular significance to the buyer, and that the seller has knowledge thereof. In the case at hand the seller knew that the goods were to be delivered by the buyer to a third party and that, in case of late delivery, the buyer had to pay a contractual penalty as well as additional costs incurred by a substitute purchase of the goods. The buyer was entitled to partial avoidance of the contract pursuant to Arts. 51(1) and Art. 73 CISG, being a contract for delivery of goods by instalments. As the buyer had sent a letter to the seller expressly saying that, in the absence of a clear committment by the seller, the contract would be partially avoided, the Arbitral Tribunal considered the contract avoided even in the absence of an express subsequent declaration. Indeed, parties' declarations should be interpreted in conformity with what a reasonable person would have understood in the same circumstances: in the case at hand, it was reasonable to consider the contract avoided at the moment in which the conditions mentioned by the buyer came about. According to Arts 49(1)(a), 74 and 75 CISG, the buyer was entitled to recover damages, including both the costs for the sacks it had supplied and the costs of the substitute purchase. As far as the substitute purchase was concerned, the Tribunal held that the transaction concluded by the buyer was reasonable as required by Art. 75 CISG. According to the Tribunal, a transaction should be considered reasonable if the buyer acted as a prudent and careful businessman and the first condition for that is that the goods bought in replacement are of the same kind and quality as the undelivered ones. Small differences in the quality of the goods are of no importance. The price of the purchase should also be considered reasonable, as the short period in which the buyer had to buy the fertilizer in replacement in order to deliver it in time to the third party justified a higher price than the one that could have been obtained if the buyer had more time to negotiate. The buyer was also awarded interest, according to Art. 78 CISG. Interest related to the reimbursement of the cost of the sacks accrued from the time of partial avoidance of the contract, while interest related to the expenses due to the substitute purchase accrued from the time in which the bank of the buyer executed the payment for the replacement goods. Since CISG does not determine the rate of interest, the Arbitral Tribunal applied the average bank short term lending rate to prime borrowers, being the solution adopted either by Art. 7.4.9 of the UNIDROIT Principles of International Commercial Contracts and by Art. 4.507 of the Principles of European Contract Law. The Arbitral Tribunal considered that such rules were applicable as they must be considered general principles on which CISG is based (Art. 7(2) CISG). In the case at hand, the London International Bank Offered Rate (LIBOR) plus 2% required by the buyer corresponded to the bank short term lending rate to enterprises. The buyer was therefore awarded interest at the required rate. |