- Arbitral Award
- American Arbitration Association – International Centre for Dispute Resolution
- China Railway No. 10 Engineering Group Co. Ltd. v. Triorient LLC
APPLICATION OF CISG - BASED ON PARTIES' CHOICE MADE AT THE BEGINNING OF ARBITRAL PROCEEDINGS
NOTICE OF LACK OF CONFORMITY - REQUIREMENTS FOR NOTICE (ART. 39 CISG) - TIMELY AND SUFFICIENTLY PRECISE NOTICEù
REDUCTION OF PRICE (ART. 50) - CALCULATION OF REDUCTION - PROPORTIONAL METHOD
RIGHT TO INTEREST IN CASE OF LATE PAYMENT OF PRICE (ART. 78 CISG) - APPLICABLE INTEREST RATE - INTEREST RATE APPLICABLE IN THE PLACE OF SEAT OF ARBITRATION
In September 2017, a Chinese seller (Claimant) and a U.S. buyer (Respondent) entered into a contract for the supply of hot briquetted iron. According to the contract, the goods had to meet specific chemical and physical requirements. Also, the agreement contained an arbitration clause providing that any dispute would be settled through arbitration before the American Arbitration Association, and a choice-of-law clause in favor of the laws of Venezuela. A dispute arose between the parties since the buyer refused to pay the full purchase price, relying on Art. 50 CISG and alleging that part of the delivered goods was of inferior quality than that required by the contract. In September 2019, the seller initiated arbitral proceedings seeking to recover the outstanding balance.
At the commencement of the arbitral proceedings, the parties agreed upon the application of CISG. Drawing from the fact the parties had omitted any reference to Venezuelan law in their submissions, the sole arbitrator asserted that the Convention would prevail over the domestic law and would apply to any matters within its scope, while for any matter outside its scope the laws of Venezuela would apply, as a supplementary source, based on the parties’ choice.
As to the merits, first of all, the sole arbitration dismissed the buyer’s argument that the seller’s claim was time-barred. In doing so, it considered that, since prescription (limitation periods) is a matter falling outside the material scope of the Convention, it had to be resolved under the law of Venezuela, which provides for a ten-year statute of limitation period. Accordingly, the buyer’s defense had to be denied.
The sole arbitrator went on to consider the seller’s submission that the buyer had mistakenly calculated the amount of price reduction. However, it first considered the conditions for the exercise of the remedy of price reduction under the Convention.
While noting that, under Art. 50 CISG, the remedy of price reduction can be unilaterally exercised by the buyer irrespective of the degree of non-conformity, namely irrespective of whether the defectiveness of the goods was of major or minor importance, the sole arbitration pointed out that the exercise of such a remedy presupposes the buyer to have duly notified the lack of conformity under Art. 39 CISG. Even if it is true that a notice of non-conformity should be given, as a rule, not later than one month from the moment the buyer knew or could not have been unaware of the defects per Art. 38 CISG, exceptional circumstances may justify a notice to be held as timely despite being given within a longer period. However, the evidence adduced by the parties demonstrated that the requirement for a timely notice was fulfilled in the case at hand; also, the buyer has sufficiently identified the nature of the defects by specifying that the metallic iron content of part of the delivered goods was lower than the minimum guaranteed under the contract.
While acknowledging that the buyer had not lost its right to rely on Art. 39 and, therefore, had not lost the right to resort to the remedy of price reduction, the sole arbitration agreed with the seller that the buyer had erroneously interpreted Art. 50 CISG, and miscalculated the price reduction. Art. 50 CISG, indeed, does not provide for the price reduction to be calculated, as made by the buyer, by determining the price difference between the conforming goods and non-conforming goods at the date of delivery; rather, by relying on the so-called “proportional method”. Such a method leads to the use of the formula according to which the reduced price is equal to the value of delivered non-conforming goods divided by the value of the conforming goods, both calculated at the time of delivery, multiplied by the contract price. As to the time of delivery, the sole arbitrator found that, under the contract, that time was the date when the goods had been loaded to the vessel chartered by the seller for transporting the goods. Hence, this was the only relevant point in time to identify, according to Art. 50 CISG, the proportion of “the value that the goods actually delivered had at the time of the delivery” and “the value that conforming goods would have had at that time.”
However, the sole arbitrator found that the buyer had not met the burden of proving the value of the conforming goods and the non-conforming goods at the time of delivery, for it did not prove at all that there was a drop in value and, therefore, a right to reduce the price under Art. 50 CISG. Also, the buyer had not followed the proportional method indicated in Art. 50 CISG. For those reasons, the buyer’s claim regarding price reduction was dismissed, while the seller’s claim for payment of the outstanding amount was granted.
The sole arbitrator then turned to address the seller’s claim for pre-award interest on the sum in arrears based on Art. 78 CISG. The arbitrator recalled that the interest rate to be applied is an issue not resolved by the Convention to be settled by recourse to the otherwise applicable law (Art. 7(2)). Even if the parties had chosen the law of Venezuela as governing law together with the CISG, the sole arbitrator did not apply Venezuelan law to the matter, as the seller had failed to provide the applicable market interest rate. Instead, it applied the interest rate applicable in New York as the interest rate of the place of the seat of arbitration.
Original in English:
- available at http://www.cisg-online.org}}