- Arbitral Award
- ICC Court of Arbitration - Paris
CONCLUSION OF CONTRACT BEFORE ENTRY INTO FORCE OF CISG - CISG NOT APPLICABLE
DAMAGES - RIGHT TO CLAIM DAMAGES (ART. 74 CISG) - CALCULATION OF DAMAGES WHERE SUBSTITUTE TRANSACTION (ART. 75 CISG) - CALCULATION OF DAMAGES WHERE NO SUBSTITUTE TRANSACTION (ART. 76 CISG)
On August 20, 1987, an Egyptian buyer and a Yugoslav seller concluded a contract for the sale of 80,000 metric tons of steel bars at an average effective price of US $190.00 per metric ton. The buyer had the option to increase the quantity to 160,000 metric tons at the same price and conditions provided that he declared his option to purchase the additional 80,000 metric tons at the latest by December 15, 1987. On November 26, the buyer informed the seller that he was exercising his option, requiring the delivery of the additional quantity at the originally agreed price. Since the seller refused to sell the goods at the same price, the buyer bought 80,000 metric tons of steel of the same type and dimension from another firm at US $216.50 per metric ton, and claimed compensation in the amount of the price difference.
The court held that CISG did not apply in the case at hand as the contract had been concluded before the Convention's entry into force on January 1, 1988.
Obiter, the court observed that, had Arts. 74 to 77 CISG been considered, 'if the cover purchase is not made in a reasonable manner or within a reasonable time, damages should [have been] calculated as though no substitute transaction [had] taken place, that is to say in conformity with the other dispositions on damages, especially with Art. 74 CISG (which is the general rule for assessing damages). Under certain circumstances, further damages may be claimed according to Art. 74 CISG also beyond the damages that are due on the basis of a purchase in replacement, in keeping with Art. 75 CISG'.
The following facts emerge from the uncontested submissions of the parties and the produced documents:
On 20 August 1987, the two parties concluded a sales contract concerning 80,000 metric tons of steel bars, whose nature and quality are described in detail in the contract, at an average effective price of US$ 190.00 per metric ton. The goods were to be delivered FOB by the Defendant to Claimant between September 15, 1985 and January 15, 1988 to a suitable Yugoslav port, and were delivered accordingly.
However, Claimant had the option to increase the quantity to 160,000 metric tons at the same price and conditions, provided that he declare his option to purchase the additional 80,000 metric tons at the latest by December 15, 1987, and opened his L/C for the first delivery of the additional quantity at the latest by December 31,1987.
On November 26, 1987, Claimant informed Defendant that he was exercising his option and that he would open the L/C for the first delivery of the additional quantity during the second half of December.
On December 9, 1987, Defendant requested a meeting, to be held during the same month of December, to discuss the prices for the additional quantity.
On December 12, 1987, Claimant insisted on the delivery of the additional quantity at the originally agreed price, yet, said that he was prepared to discuss other future business transactions.
During the meeting, held at [place] on December 28, 1987, Defendant demanded US$ 215.00 - instead of US$ 190.00 - per metric ton for the additional deliveries. Claimant was not prepared to pay that price.
In a letter dated December 31, 1987, Claimant classified Defendant's behaviour as a breach of contract, stated that he had promised the products to his own customers, requested Defendant 'again' (apparently, this had been done orally during the meeting on December 28, 1987) to announce the beneficiaries of the future L/C's, and granted Defendant a respite until January 6, 1988, to state his agreement, otherwise Claimant would hold Defendant liable for any and all damages, caused by breach of contract.
Subsequently, the above deadline was extended to January 25, 1988, without Defendant agreeing that he was ready to deliver at a price below US$ 215.00 per ton.
On January 26, 1988, Claimant bought 80,000 metric tons of steel the same type and dimensions form the Romanian company [company's name] at US$ 216.50 per metric ton.
According to Claimant, whose obligation it was in any event to pay the shipping costs, shipment costs from Rumania to Egypt are lower by US$ 2.00 to US$ 2.50 per metric ton, as compared to transportation costs from Yugoslavia to Egypt.
Claimant is demanding compensation in the amount of the price difference, i.e. 80,000 x US$ 26.50 = US$ 2,120,000, interest on the above sum, as of January 26, 1988.
It should be determined, first and foremost, in connection with the alleged unreasonableness, due to an increase in world-market prices, which legal provisions should be applied to evaluate the sales contract and, thus also, this central issue At any rate, the Vienna United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980, cannot be applied as such. The Convention is in force, both in Egypt and in Yugoslavia, as well as in France; yet, according to Art. 100(2) it applies to such sales contracts only that were concluded after the day the Convention went into force, i.e., 1 January 1988. The present sales contract was concluded on 20 August 1987.
The question, which law applies, must therefore be examined on the basis of the rules on international private law.
According to Egyptian international private law, the law of that country applies, where the contract is signed, unless the parties agree otherwise, and, in addition, if they have their principal of offices in different states (Art. 19 of the 1949 Civil Code).
According to Yugoslav international private law, the law of that country applies, where the seller had his principal of office at the time when he (or the other party) received the offer, if there is no agreement on applicable law between the parties (Bill on International Private Law of 15 February 1982, Sluzbeni list No. 43/ 1982).
France is a member of the Convention on the Law Applicable to the International Sales of Goods, done at The Hague on June 15, 1955. Paragraph 2 of article 3 of the above Convention states that if parties have not chosen another law, the contract is governed by the internal law of the state, where the seller has his habitual residence at the time at which he received the order (whether 'order' refers to the offer as such or to the acceptance of an offer is irrelevant; besides, none of the exceptions of the Convention applies).
Since the principal office and the habitual residence of the seller at the time in question was Yugoslavia, and since the sales contract was concluded in Yugoslavia, all applicable rules on international private law refer to Yugoslav substantive law.
Paragraphs 1 and 2 of article 133 of the Yugoslav Law on Obligations of 1978 read as follows (in an unofficial translation):
(1) In case of circumstances occurring after the conclusion of the contract, which are of the nature to render the contractual performance of one of the parties difficult or to prevent the scope of the contract to be attained, both to such an extent that it becomes obvious that the contract ceases to correspond to the expectations of the parties and that it would be generally considered unjust to maintain it in force in the unchanged form, the party whose performance has been rendered difficult or which is prevented to attain the scope of the contract by the changed circumstances, can request that the contract be rescinded.
(2) The rescission of the contract cannot be claimed if the party, which invokes the changed circumstances, should have taken these circumstances into account at the time of the conclusion of the contract or could have escaped or overcome such circumstances.
The above definition corresponds to that of a 'frustration' according to Anglo-American law or of a 'Wegfall der Geschaftsgrundlage' according to German and Austrian law. Yugoslav commentaries (Blagojevic-Krulj; Vizner) speak of a 'clausula rebus sic stantibus', mainly because of the historical development of Yugoslav law. After all, a 'genuine' clausula rebus sic stantibus would sustain (in a positive sense) legal relationships only for as long as there are no changes at all, giving no consideration to predictability and applicability. Such a concept cannot be found in the law of obligations, nor the commercial law, of any country (except, as the most, for unlimited obligations, such as rent and lease relationships, but mainly for support obligations). Otherwise, any business transaction would be exposed to uncertainty, or even be rendered impossible altogether, whenever the mutual covenants are not performed at the time at which the contract is concluded.
In addition to article 133 of the Law of Obligations, Usage No. 56 continues to be in force under Yugoslav law, which lists 'economic events, such as extremely sudden and high increases or decreases of prices' as one of the reasons resulting in a frustration.
Accordingly, the question must be examined, whether the increase in the steel price, admitted by both parties, from US$ 190.00 to approximately US$ 215.00 per metric ton, is an extremely sudden and an extremely high price increase (paragraph 1 of article 133 and Usage No. 56); and, if this is the case, whether Defendant should have taken such a development into consideration at the time when the contract was concluded (paragraph 2 of article 133; in any event, the development could not be escaped or overcome).
The world market prices of products, such as steel, fluctuate, as is known from experience. At the time, when the contract was concluded, steel prices had begun to go up slightly - a trend that continued between the conclusion of the contract and the exercise of the option, and became even more pronounced towards the end of 1988.
In the opinion of Blagojevic-Krulj, Comments on the Law of Obligations, pp. 351, the court must assess the issue, at which amount of damage contract performance is still, or no longer, reasonable, if one of the parties possibly suffers a damage when performing contractual obligations without change of contract. At any rate, such damage must exceed a reasonable entrepreneurial risk. In the present case, the increase in world market prices, i.e., from US$ 190.00 to US$ 215.00, amounts to slightly less than 13.16%. Having to sell a product at the agreed price, instead of at a price that is higher by 13.16%, is well within the customary margin.
Furthermore, the development was also predictable. A reasonable seller had to expect that steel prices might go up further, perhaps even more dramatically than in actual fact. Whether Defendant was a reasonable seller when granting the option 'at the same price' for a relatively long period, given these circumstances, is a matter beyond Arbitrator's terms of reference. In any event, even Yugoslav law precludes that a seller entices a buyer to sign a first contract, containing the option 'at the same price', while having the mental reservation that he can invoke article 133 of the Law on Obligations if prices should continue to go up.
Blagojevic-Krulj, too, advocate a strict approach in assessing lack of predictability. The above-mentioned authors eve go so far as to compare article 133 to the provisions of paragraph 1 of article 74 of the (Hague) Uniform Law on the International Sale of Goods, which was taken over - almost literally - in paragraph 1 of article 79 of the Vienna sales Convention. The two provisions are exonerations for events which a reasonable person in the same situation was not bound (could not be expected) to take into account or to avoid or to overcome. Accordingly, the facts are situated in the vicinity of an act of force majeure.
Defendant maintains that Claimant's buying 80,000 metric tons of steel from the Romanian firm [firm's name] cannot be interpreted as a purchase in replacement, since defendant was not informed in advance of Claimant's specific purchasing intention, since, moreover, defendant had offered the steel at a lower price, i.e., US$ 215.00 per metric ton, and since, in addition, defendant's steel was of a better quality .
First of all, the legal interaction between articles 262 and 525 of the Yugoslav Law on Obligations must be defined clearly. Article 262 grants every contracting party the right to claim compensation for the damage accruing to him, which is due to non-performance, deficient or delayed performance of the obligations by the other party. Article 525, dealing with purchases in replacement, operates as a relief for the aggrieved party, when bringing evidence for the damage suffered. If one were to assume that damages are not due in case of non-compliance with the obligation to give notice according to article 525, then no sanctions could be imposed on the non-delivery of goods, for which there is no equivalent, nor on the non-delivery of goods, where it is no longer possible, in due time, to procure an equivalent by purchase in replacement.
Neither of the parties contested that the world market price for steel (of the grade of the delivery) had gone up to a minimum of US$ 215.00 per metric ton at the time when the option was exercised. If Defendant states, however, that, given these premises, Claimant would have been best advised at that price to buy Defendant's steel, then the only reaction to that can be that Claimant would have been foolish to do so. By invoking Defendant's obligation to damages, in case of non- delivery at the agreed price, Claimant wanted to balance the difference in price. If Claimant had bought from defendant, Claimant would have been in a much more difficult position, since Defendant would have maintained that the price had changed due to novation.
Claimant maintains that he actually obtained a cheaper deal, in the final analysis. He paid US$ 216.50 per metric ton but saved US$ 2.00 to US$ 2.50 per metric ton in freight costs. Claimant must accept that this argument is also applied against him - with the higher amount of US$ 2.50, in case of doubt. His damage is therefore less than the difference in world market prices. It amounts only to the difference between US$ 190.00 and US$ 214.00, i.e., US$ 24.00 per metric ton. Defendant claims that Claimant had to pay a higher import duty on the Romanian goods than he would have to pay on Yugoslav goods, which is irrelevant since Claimant did not claim any additional damage, arising from the purchase in replacement. It is also of no relevance whether the steel supplied by [the Romanian firm] was of lower quality than the steel which Defendant would have delivered. For the Claimant, the steels were of equivalent quality.
It is also of no significance whether article 525 must be interpreted to mean that the infringing party must be informed in advance of an actual purchase in replacement The claim for damages, however, arising from the purchase in replacement, is slightly less than the difference in world market prices at the time in question, when taking account of the lower freight costs. According to article 262 of the Law on Obligations, Claimant cannot claim more than the amount of his actual damage.
It should be remarked in passing that the outcome would have been the same, if article 74 to 77 of the Vienna Sales Convention had been considered, which has 19 member states so far and which one will soon be able to call universal law, on account of the large number of ratifications and accessions that are intended in the near future.
The above result is by no means surprising. After all, Blagojevic-Krulj state in their Comments on the Law of Obligations, p. 1028, that article 525 of the Law corresponds to article 85 of the (Hague) Uniform Law on International sale (ULIS). In commenting on the latter, Tunc states that the buyer should at the least receive the indemnity which results from the simple comparison between the agreed price and the price paid for the goods bought in replacement. ULIS article 85 has been further elaborated in article 75 of the Vienna Sales Convention, without changing, however, its main substance. Knapp in Bianca-Bonell's Commentary on the International Sales Law, The 1980 Vienna sales Convention, p. 551, confirms that, if the cover purchase is not made in a reasonable manner or within a reasonable time, damages should be calculated as though no substitute transaction has taken place, that is to say in conformity with article 74 (which is the general rule for assessing damages and serves in the same function as article 262 of the Yugoslav Law on Obligations). Under certain circumstances, further damages may be claimed according to the above article 74, also beyond the damages that are due on the basis of a purchase in replacement, in keeping with article 75.
Accordingly, Defendant shall reimburse Claimant for a damage of 80,000 x US$ 24.00 = US$ 1,920,000.
According to paragraph 1 of article 277 of the Yugoslav Law on Obligations, interest is due to the creditor on the amount of damages, as of the date at which the debtor begins to default. Defendant did not default by refusing to deliver at the agreed price, nor by Claimant's conclusion of a purchase-in- replacement contract, nor on the date at which payment was due to the new supplier. Defendant's default begins on every day at which he should have delivered but did not deliver. According to the sales contract, the 80,000 metric tons of steel under the option should have been delivered in five part shipments of more or less equal quantity between January and May 1988. Defendant was therefore in default for one fifth of the amount on February 1, March 1, April 1, May 1 and June 1, 1988. For the sake of mathematics, interest can be calculated as though Defendant defaulted on a total delivery, which would have been due on the date of the third shipment, i.e., on April 1, 1988.
As mentioned before, the interest rate amounted and amounts to 6.25 to 8.25%. No prediction can be made, on how the interest rate will develop. Since there is a time delay between issuing the Arbitral Award and voluntary or enforced performance, the Arbitral Award must also fix an interest rate for the future, i.e., until the voluntary or enforced performance of the award. With a view to the mean value of the development so far, an interest rate of 7.25% is appropriate.
Published in English:
- Yearbook of Commercial Arbitration, XV (1990), 96-101
Published in French (trans.):
- Journal du Droit International, 1991, 1054-1059}}