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| Defendant, a Mexican grower, and Claimant, a U.S distributor, entered into a one year exclusive agreement according to which Defendant undertook to produce specific quantities of squash and cucumbers and to provide them to Claimant on an exclusive basis, while Claimant had to distribute the goods on the Californian market against a commission.
The contract, which was concluded in September 2004, contained an arbitration clause in which the parties expressly referred to the UNIDROIT Principles of International Commercial Contracts as the law governing the substance of any potential disputes. Claimant brought an action before the Centro de Arbitraje de México against Defendant arguing that Defendant had breached the contract by not providing the goods referred to in the contract and by violating the exclusivity clause. Claimant asked for termination of the contract as well as damages for the harm suffered as a result of Defendant’s failure to provide the goods; it also asked for payment of the penalty stipulated in the contract in case of violation of the exclusivity clause. Defendant objected that its failure to deliver the goods was due to the destruction of the crops by a series of extraordinarily heavy rainstorms and flooding caused by the meteorological phenomenon known as “El Niño”. According to Defendant these events amounted to a case of force majeure and/or hardship and therefore any liability on its part was excluded; moreover, Defendant argued that the contract entered into with Claimant was null and void since it had not been formalized or registered before the Mexican authorities. The Arbitral Tribunal first of all confirmed the validity of the parties’ choice of the UNIDROIT Principles as the law applicable to the substance of their dispute in view of the fact that according to Article 1445 of the Mexican Commercial Code the Arbitral Tribunal shall decide the dispute according to the “rules of law” chosen by the parties and the fact that the UNIDROIT Principles have been applied in a great number of international arbitration proceedings. The parties had not specified the edition of the UNIDROIT Principles they were referring to, but the Arbitral Tribunal, after recalling that in 2004 a new edition had been published, applied with no further explanation the 2004 edition of the UNIDROIT Principles. With regard to the issue of the validity of the distributorship contract, the Arbitral Tribunal pointed out that according to Article 3.2 of the UNIDROIT Principles the mere agreement of the parties was enough for the valid conclusion of the contract, without further requirements. The contract was therefore to be considered valid even though it had not been registered or otherwise formalized before the Mexican authorities. With respect to the alleged violation of the exclusivity clause, the Arbitral Tribunal held that, although Claimant could demonstrate only one concrete case of Defendant’s contracting with a third person, this was sufficient proof of breach by Defendant of the exclusivity clause: indeed, as stated in Article 7.1.1 of the UNIDROIT Principles, any failure by a party to perform any of its obligations under the contract is a non-performance. Concerning the request for termination, the Arbitral Tribunal pointed out that according to Article 7.3.1 (1) of the UNIDROIT Principles a party may terminate the contract when the non-performance of the other party amounts to a fundamental non-performance. In the Arbitral Tribunal’s opinion in the case at hand the non-performance by Defendant was fundamental since at least three of the criteria laid down in Article 7.3.1 (2) were met: first, Defendant’s failure to deliver the vegetables deprived Claimant of the goods it was entitled to expect under the contract; second, the Defendant’s violation of the exclusivity clause was intentional; and, third, these two circumstances were enough to give Claimant reason to believe that it could not rely on Defendant’s future performance. After recalling that according to Article 7.3.2 (1) of the UNIDROIT Principles the right to terminate is exercised by notice to the other party, the Arbitral Tribunal found that in the case at hand Claimant had given such notice by sending a notice to Defendant requesting Defendant to cure its breach within 15 days of receipt of the notice. By sending this notice in writing by post with return receipt Claimant had fulfilled the conditions required by Article 1.10 (1) and (3) of the UNIDROIT Principles, i.e. to give notice by means appropriate to the circumstances and that are capable of proving that the notice has actually been delivered at the addressee’s place of business. As to the period of time set by Claimant for curing by Defendant, the Arbitral Tribunal decided that the official holidays occurring during that period were included in calculating it, and in this respect made express reference to Article 1.12(1) of the UNIDROIT Principles. Concerning Defendant’s argument that the rainstorms and flooding which destroyed the crops amounted to a case of force majeure, the Arbitral Tribunal held that the meteorological events in question did not meet all the criteria set out in Article 7.1.7 (1) of the UNIDROIT Principles defining force majeure: indeed, while the rainstorms and flooding were undoubtedly beyond Defendant’s control, their occurrence could not be considered unforeseeable by Defendant who in the course of its long-standing activity in the agricultural sector had already several times experienced similar events. Moreover, according to the Arbitral Tribunal an additional reason for confirming the liability of Defendant for its non-performance was that Defendant failed to give notice to Claimant of the events in question and of their effect on its ability to perform as required by Article 7.1.7 (3) of the UNIDROIT Principles. The Arbitral Tribunal also rejected Defendant’s alternative argument that its liability for non-performance was excluded on the ground of hardship. While agreeing that the meteorological events in question had substantially increased the costs of Defendant’s performance, the Arbitral Tribunal found that another essential requirement for the occurrence of hardship as defined in Article 6.2.2 of the UNIDROIT Principles was missing, i.e. that the risk of the event fundamentally altering the equilibrium of the contract was not assumed by the disadvantaged party: in fact, especially in the context of a distributorship agreement concerning specific quantities of goods to be delivered a vegetable grower typically takes on the risk of crop destruction by rainstorms and flooding. Yet even if the events in question were to be considered a case of hardship, according to Article 6.2.3 of the UNIDROIT Principles the effect would not be the exclusion of Defendant’s liability for its non-performance, but only the right to ask for renegotiation of the distributorship agreement with a view to adapting it to the changed circumstances. With respect to Claimant’s request for damages for the harm sustained as a result of Defendant’s failure to deliver the goods, the Arbitral Tribunal awarded compensation for the pecuniary harm, sufficient proof of which was given by Claimant as to amount, certainty and foreseeability and its direct connection with Defendant’s failure to deliver, as required by Articles 7.4.2 (1), 7.4.3 and 7.4.4 of the UNIDROIT Principles. The Arbitral Tribunal also awarded payment of the contractually stipulated penalty for violation of the exclusivity clause: however, since in the case at hand the precise amount to be paid could not be established with a sufficient degree of certainty the Arbitral Tribunal determined it on a discretionary basis according to Article 7.4.3 (3) of the UNIDROIT Principles. On the other hand, the Arbitral Tribunal rejected Claimant’s request for compensation for loss of reputation on the Californian market as a result of its inability to distribute the vegetables in question: though recognising that according to Article 7.4.2 of the UNIDROIT Principles the aggrieved party was entitled to compensation also for non-pecuniary harm suffered as a result of the other party’s non-performance, the Arbitral Tribunal held that in the case at hand Claimant had failed to prove both the existence and amount of such harm. |