- Arbitral Award
- Foreign Trade Court of Arbitration attached to the Serbian Chamber of Commerce
EFFECTS OF A RETENTION OF PROPERTY CLAUSE - GOVERNED BY DOMESTIC LAW APPLICABLE IN ABSENCE OF CISG (ART. 4 CISG)
BUYER'S RIGHT TO TERMINATE THE CONTRACT (ART. 64 CISG)
[CLOUT Case no. 1021]
The plaintiff, a Swiss company, contracted to lease equipment for packaging of milk to the defendant, a Serbian company. Under the terms of the contract, the buyer had to pay half of the price 15 days before the delivery, the remaining sum being payable in quarterly instalments within five years upon invoices issued by the seller. In addition, the buyer was requested to order prescribed quantities of packaging from the seller for five years. In case the buyer failed to perform this obligation, the contract provided for payment of liquidated damages. The contract did not prescribe the conditions of purchase of the packaging, but only the quantity to be purchased and the amount of liquidated damages to be paid in case smaller quantities were to be ordered. Furthermore, the contract provided that “the equipment is to remain the property of the seller until the expiration of the agreed period, or until the fulfillment of the conditions of purchase of the packaging and its timely payment”.
The buyer failed to perform its contractual duties on several occasions, even though the seller warned him to do so: it did not make the payments it was supposed to and it ordered less packaging than it was obliged to under the contract. The parties attempted to reach a mutually acceptable solution, but the buyer failed to perform timely payment. Therefore the seller commenced arbitration proceedings requesting termination of the contract, return of the leased equipment and payment of costs and liquidated damages. The buyer alleged that the contract had been modified and that a form of settlement had been reached. However, neither in its submissions to the arbitrator nor at the hearings, did the buyer ever put forward any counterclaims against the seller.
Since the parties had not chosen the law applicable to the contract, the arbitrator determined that Serbian law — thus the CISG, pursuant to Article 1(1) — was applicable to the case. Given the language of the contract (Serbian), the place of performance of substantial part of the obligations (Serbia) and the fact that the Serbian subsidiary of the seller had a relevant role in the performance of the contract, the Serbian law was mostly connected to the contract. However, the contract was to be considered an “international transaction” (as per Article 1 CISG). Since the seller had more than one place of business, the one most closely connected to the contract and its performance (Article 10 CISG) was the headquarters in Switzerland (it conducted the negotiations, signed the contract, delivered the machine and received the payment). Incidentally, the arbitrator noted that although the Serbian law on the ratification of the CISG uses the term “seat” instead of “place of business”, for the purpose of the uniform interpretation of the Convention, the Serbian translation should be interpreted in accordance with the terminology used in the official languages of the Convention.
The CISG was applicable even if the parties had named their contract “Leasing Contract” and the seller in its submissions referred to the contract as a lease. The agreement was to be considered a sale of goods, with the price being paid in instalments and a provision of retention of property over the delivered goods by the seller until complete performance of the contractual obligations. Payment in advance of one-half of the price and the fact that the buyer would become the owner of the equipment upon payment of the last instalment (rather than being in the position to purchase the object of the contract after payment of the last instalment) corroborated this interpretation. The interpretation was also consistent with foreign judicial practice, which was to be taken into consideration for the uniform application of the Convention, on the basis of Article 7 (1) CISG. Since the Convention does not deal with the effect of the contract on the property of the goods sold (Article 4 CISG), the question of the retention of property over the delivered goods by the seller was to be decided according to Serbian law.
Based on evidence, the arbitrator noted that the parties had negotiated on the performance of the contract even after their submissions to the arbitrator. Through its “Statement of Claim”, the seller had given the buyer an additional period of time for performance of its contractual obligations. As a result, the seller could have avoided the contract only upon the expiration of this additional period of time under Article 64 (1)(b) of the Convention. This additional period of time, of about four months, was reasonable as per the meaning of Article 63 CISG. However, the seller failed to declare avoidance: its behaviour, pursuant to Article 8 CISG, indicated that it wanted the contract to remain in force. The provisional measure obtained by the seller from the Commercial Court in Kraljevo, ordering the restitution of the equipment, was a way to put pressure on the buyer. This equipment was eventually handed over to the seller and the contract was at that point avoided in accordance with Article 64 (1)(b) CISG. Therefore, the arbitrator could not decide on the avoidance of the contract, as requested by the seller, but only acknowledge the moment of avoidance.
Pursuant to Article 81 (1) CISG, restitution in case of avoidance can be ordered only in respect of those performances for which it is claimed. While the seller requested restitution of the machine returned, the buyer failed to request the restitution of what it had paid for the machine until the moment of avoidance. Therefore the buyer was ordered to deliver the machine with all accessories.
The seller’s request for payment of the lease-price for usage of the equipment from the moment of delivery to the moment of commencement of arbitration was unfounded. The arbitrator considered the request as a request for compensation of damages (Article 74 CISG) or as a request for restitution based on unjust enrichment. The seller failed to prove the occurrence of damage due to the buyer’s breach of contract, or the profits acquired by the buyer by usage of the equipment. The seller also failed to submit evidence to determine the amount of the machine’s depreciation, as well as evidence on lost profits, because the machine was in the possession of the buyer, and on the amount of benefit that the buyer had obtained keeping possession of the machine until the moment of avoidance of the contract.
As to the request of liquidated damages for failure of the buyer to purchase packaging, the arbitrator noted that pursuant to the principle of party autonomy (Article 6 CISG) the parties can freely stipulate the amount of compensation to be paid in case of non-performance or untimely performance of the contractual obligation. The arbitrator thus granted the seller’s claim, although not in the amount requested by the seller. Pursuant to Article 78 CISG, the seller’s request of “domiciliary interest” was also granted.
Original in Serbian and English Translation:
- available at the University of Pace law website, http://cisgw3.law.pace.edu}}