- Arbitral Award
- 370 (429-370-1)
- Iran-United States Claims Tribunal
- Watkins-Johnson Co. & Watkins-Johnson Ltd. v. The Islamic Republic of Iran & Bank Saderat Iran
APPLICATION OF CISG - CISG APPLICABLE AS 'RECOGNIZED INTERNATIONAL LAW OF COMMERCIAL CONTRACTS'
DAMAGES - DUTY TO MITIGATE - PRESERVATION OF THE GOODS - UNREASONABLE DELAY IN PAYMENT - RIGHT TO SELL - RIGHT TO RETAIN REASONABLE EXPENSE (ART. 88 CISG)
In 1976 the Islamic Republic of Iran and a US company entered into a contract according to which the latter was to provide electronic communications equipment and related services for a military program. The contract was subject to the laws of Iran and United States. Iran did not pay a substantial part of the price for the work performed by the seller. In order to mitigate its damages, the seller sold to third parties the equipment not yet delivered after notifying Iran of its intention to do so.
The Tribunal, after establishing that the seller had the right to sell the undelivered equipment in mitigation of its damages under the laws governing the contract, stated that such a right was 'consistent with recognized international law of commercial contracts', which the Tribunal (without giving further explanation) considered to be reflected by Art. 88 CISG.
The Tribunal found that in the case at hand the conditions of Art. 88(1) CISG were satisfied: i.e. there was unreasonable delay by the buyer in paying the price, without the buyer giving satisfactory assurances that payment would be forthcoming, and the seller gave reasonable notice of its intention to sell with two letters to which the buyer never responded.
Moreover, the Tribunal stated that the seller was entitled to deduct from the proceeds of the sale of the goods to third parties its reasonable expenses in carrying out the sales, including costs for the completion and modification of the equipment (Art. 88(3) CISG).
C. FACTS AND CONTENTIONS
I. The Contract
12. Iran and Watkins-Johnson Ltd. entered into Contract No. [...] on [...] 1976. Watkins-Johnson Co. was allegedly Watkins- Johnson Ltd.'s sub-contractor in this project. Under Contract No. [...], Watkins-Johnson was to manufacture, assemble, test and deliver electronic communications equipment, and provide related services, for the IBEX program.
D. REASONS FOR AWARD
2. The Claims
cc) Credit for Equipment Sold
91. Watkins-Johnson sold equipment manufactured under Contract No. [...] in order to set-off the proceeds against its outstanding claim for performance costs. Aside from Iran's position that Watkins-Johnson did not manufacture equipment allegedly sold, Iran disputes Watkins-Johnson's right to dispose of the equipment, whereas Watkins-Johnson maintains that it had not only the right but also a duty to do so in mitigation of its damages.
92. [...] Watkins-Johnson had not received a substantial part of the price of the work it had performed. Nor had Iran given satisfactory assurances that payment would be forthcoming. The Tribunal is satisfied that Watkins-Johnson made a reasonable effort to notify Iran of its intention to sell the equipment by its letters dated [...] and [...].
93. The Tribunal notes Iran's position that Iranian law, which it argues is the applicable law pursuant to Article [...] of Contract No. [...], does not recognise a doctrine of mitigation of damages, which provides for the right to dispose of another party's property. As a preliminary matter, the Tribunal observes that Article [...] does not exclusively refer to Iranian law. It states: 'Law Governing Contract. The Governing law of this contract is the Iranian law. This contract is subject to the Laws of the Imperial Government of Iran and United Sates in every respect if any difference between these two laws the Iranian law will govern'.
94. In the circumstance of this case, the Tribunal is unable to discern a conflict between Iranian and United States law on the issue of mitigation. Under United States law, the Claimant was justified in selling the equipment in mitigation of its damages (See Uniform Commercial Code sections 2-703, 2-706). The Tribunal is not convinced that Iranian law is inconsistent with the principle of mitigation or requires a different result in this Case. Iran cites Article 247 of the Civil Code of Iran to argue that Watkins-Johnson had no right to sell Iranian property. But title to the equipment had not passed to Iran. The Statement of Work [...] to Contract No. [...] provides: 'Delivered equipment and spares become IIAF (Imperial Iranian Air Force) property at time of delivery (F.O.B. destination)'. Such delivery did not take place with respect to the equipment at issue here.
95. Moreover, Watkins-Johnson's right to sell undelivered equipment in mitigation of its damages is consistent with recognized international law of commercial contracts. The conditions of Article 88 of the United Nations Convention on Contracts for the International Sale of Goods (1980) are all satisfied in this Case: there was unreasonable delay by the buyer in paying the price and the seller gave reasonable notice of its intention to sell.
96. Based on the evidence before it, the Tribunal is further convinced that Watkins-Johnson made a reasonable effort in selling the equipment. The invoices presented by Watkins- Johnson demonstrate sufficiently the effort to find buyers for the equipment all over the world. A substantial part of the equipment was sold, even though for less that the Contract price agreed with Iran. Watkins-Johnson explained to the Tribunal's satisfaction that much of the equipment was modified or designed according to the specifications of the Iranian Air Force and, therefore, difficult to sell to other customers. [...].
97. Moreover, the Tribunal finds it credible that a part of the equipment could not be sold at all and was used for 'training' purposes or 'scrapped'. [...]. There is also no reason to doubt that it was in Watkins-Johnson's own interest to sell as much equipment as possible at the best price. Under these circumstances, the evidence presented by Watkins-Johnson is sufficient to establish prima facie that it made its best effort to sell all the equipment. Nothing in the record gives rise to serious doubts in that regard.
98. While one could argue that Watkins-Johnson had a duty to give specific notice of its intention to 'scrap' equipment, the Tribunal finds that Iran cannot rely on the absence of such a specific notice in the circumstances of this Case. Iran never responded to Watkins-Johnson's notices of its intention to sell equipment. Neither did it attempt to pursue delivery in accordance with the previous agreements. Moreover, in view of the determination of the IBEX program, Iran's continued interest in such delivery must be doubted. Therefore, Iran cannot now rely on the argument that it should have been formally notified of Watkins-Johnson's intention to scrap equipment which could not be sold.
99. The Tribunal is persuaded, on the basis of the documentation submitted, that Watkins-Johnson sold equipment for a total of $ [...]. Objections by Iran to the documentation of sales and costs were not only received rather late in the proceedings, but also were not substantiated. They raise no serious doubts as to the conclusiveness of the evidence presented. Watkins-Johnson is entitled to deduct from the proceeds reasonable expenses incurred in carrying out the sales (See Uniform Commercial Code section 2-706; Article 88(3) of the UN Convention). It showed that it incurred $ [...] for the completion and modification of equipment, and an additional $ [...] in selling costs. The of equipment, thus, yielded net proceeds in the total amount of $ [...] which are credited to Iran.
Published in English:
- Yearbook of Commercial Arbitration, XV (1990), 220}}