- Arbitral Award
- ICC Court of Arbitration - Milan
INTERNATIONAL DISTRIBUTION CONTRACT - SETTLEMENT AGREEMENT BETWEEN PARTIES GOVERNED BY DOMESTIC LAW (ITALIAN LAW)- APPLICATION BY ARBITRAL TRIBUNAL OF THE CISG AND THE UNIDROIT PRINCIPLES BOTH DEFINED AS NORMATIVE TEXTS THAT CAN BE CONSIDERED HELPFUL IN THE INTERPRETATION OF ALL CONTRACTS OF AN INTERNATIONAL NATURE
DISTRIBUTION CONTRACT - APPLICATION OF CISG TO INDIVIDUAL SALES CONCLUDED UNDER DISTRIBUTION CONTRACT
INTERPRETATION OF SETTLEMENT AGREEMENT - INTERPRETATION IN ACCORDANCE WITH GOOD FAITH
MODIFIED ACCEPTANCE - AMOUNTS TO COUNTER-OFFER - ACCEPTANCE OF COUNTER-OFFER BY ACT OF PERFORMANCE (ART. 19 (1)(2) CISG AND ART. 2.11 UNIDROIT PRINCIPLES)
INTEREST (ART. 78 CISG)- APPLICABLE RATE - RATE GENERALLY APPLIED IN INTERNATIONAL TRADE FOR CONTRACTUAL CURRENCY
CAPITALIZATION OF INTEREST - NOT PROVIDED FOR BY CISG
An Italian manufacturer entered into a number of contracts with a Liechtenstein distributor for the supply of pipes. After the first deliveries a dispute arose between the parties each accusing the other of having breached their obligations under the contract. The parties finally entered into a settlement agreement, but soon thereafter they began arguing about the proper fulfillment of this agreement.
The Arbitral Tribunal held that, while the individual sales contracts concluded under the distribution contract were governed by the CISG, the settlement agreement was governed by Italian law. However, when deciding the merits of the case, the Arbitral Tribunal repeatedly referred, in addition to the relevant provisions of the Italian Civil Code, to provisions contained in CISG and the UNIDROIT Principles, defining both as "normative texts that can be considered helpful in ther interpretation of all contracts of an international nature".
In finding that a modified acceptance amounts to a counter-offer which the original offeror may accept by not objecting to the varying terms contained in the acceptance (in the case at hand, the offeror did not object to the offeree's omission in its reply of the reference to a bank guarantee as contained in the original offer) and by starting performance of its own obligations (in the case at hand, the offeror began production of the pipes), the Arbitral Tribunal referred to Art.19(1) and (2) CISG, confirmed by Art. 2.11. of the UNIDROIT Principles.
Finally, the Arbitral Tribunal addressed the question of the applicable rate of interest. It first pointed out that Art. 78 [CISG] does not lay down the criteria for calculating the interest and that international case law presents a wide range of possibilities in this respect. Then it stated that amongst the criteria adopted in various judgments, the most appropriate appears to be that of the rates generally applied in international trade for the contractual currency … In concrete terms, since the contractual currency is the dollar and the parties are European, the applicable rate is the 3-month LIBOR on the dollar, increased by one percentage point, with effect from the due date not respected up until full payment has been made. The solution substantially corresponded to the one provided for in Art. 7.4.9 (2) of the UNIDROIT Principles, though this provision was not expressly referred to by the Arbitral Tribunal.
The Arbitral Tribunal did not award the capitalization of interest, since this is not provided for by the CISG and does not constitute an international trade usage.
The contract contains a clause, quoted at the beginning, whereby Italian law is applicable. This clause has certainty been extended to the amendment dated […], given the reference to the former in respect of matters otherwise unregulated....
In view of the basic unicity of the relations, mentioned earlier, it is therefore necessary, as a preliminary measure, to establish the law applicable to the contracts in respect of which the parties have not expressed their intent.
This point is covered in paragraph 11 of the Terms of Reference where it is stated that:
With regard to the substantive and procedural provisions contained in the International Chamber of Commerce Rules, it is clearly specified that: a) the applicable substantive law is Italian law […]. Given that the parties, counsel and the arbitrators had signed such terms, this matter can be considered as settled and beyond dispute. It is true that at that moment Respondent had raised an objection to arbitral jurisdiction over all the contracts referred to in Claimant's claims, and so, it could be objected, its acceptance of Italian law as the applicable law was limited to the definition of this procedural objection. Moreover, the subsequent waiver of this objection. . . and the statement whereby Respondent's legal representative admits that the solution to all these issues raised by one or other of the parties in the dispute pending between Claimant and Respondent before the Arbitral Tribunal. . . is sought from the before mentioned Arbitral Tribunal in accordance with the arbitration clause contained in Article XIII (arbitration) of the Accord dated lst October 1991, inter partes […] do not contain any reserves regarding the point of applicable law, as previously outlined in the Terms of Reference, which therefore has to be considered as granted. There is therefore precise justification for the choice of Italian law and the Arbitral Tribunal considers it appropriate to support this choice with a number of clarifications that make a distinction between supplies […] and settlement:
(a) for the former, it would seem appropriate to apply the Vienna Convention, and, purely for the part not regulated by this or for which the principles deriving from it or from international usages are of no assistance, the general rules of Italian law (see Article 7(2) of the Vienna Convention);
(b) the settlement, on the other hand, is unquestionably regulated by the general rules of Italian law.
The supplies between Respondent/Claimant are considered as international sales of goods to which the Vienna Convention is applicable for the following concisely stated reasons:
(c) the original contract, together with the successive amendments and additions thereto (which, despite not being a deed of sale, is considered by the parties to be the general reference framework for their business relations), provides for the applicability of Italian law. It thus appears that Italian law is the most appropriate law and the one that offers the closest connection;
(d) according to the Rome Convention (to which Article 57 of Italian law 218/1995 on the reform of private international law refers), in the absence of any choice by the parties, the contract is governed by the law of the country in which the person effecting the characteristic performance is based (see Articles 4.1 and 4.2). According to standard indications in legislation and conventions, the characteristic performance, as a rule, is that which is not in cash, and, in a deed of sale, is that effected by the seller: see Article 117.3 of the Swiss federal statute on private international law of 18. 12.1987, on which the Italian statute was modelled; Article 3.1 of the Hague Convention of 1955; Article 8 of the new Hague Convention of 1985 (not ratified). In our case, Respondent, a company with its head office in Italy, effected the characteristic performance;
(e) the applicability of Italian law makes international sales immediately subject to application of the Vienna Convention, Article 1.1(b) of which establishes that: This Convention applies to contracts of sales of goods between parties whose places of business are in different states. . . when the rules of private international law lead to the application of the law of a Contracting State and this is the case of Italy on the basis of law 765/1985 that ratified this Convention. Furthermore, this applicability of the Convention is also valid in relation to the explicit choice of Italian law adopted in the Terms of Reference;
The Arbitral Tribunal is of the opinion that the search for the content of the settlement [...] plays an essential role in finding a solution to the questions and the claims raised by the parties
From the literal meaning of Article 1975 of the Italian Civil Code, it results that the settlement may be of a general nature and cover all the business affairs that may exist between the parties and, implicitly and a contrario, that it may cover only certain controversial business affairs, thus allowing the disputes and controversies on other business affairs to subsist […]. Given the extent of the controversies between the parties, it is a question of defìning what is the specific subject of the settlement, and whether it covers the entire dispute […] or only part of it and which part.
This method of interpretation is entirely consistent with the specific rules of Italian law (Articles 1362-1371 of the Italian Civil Code), as applied by the courts, according to which:
(w) recourse is made to an extra-textual interpretation when the letter-contract is incomplete and fails to execute the common intent of the parties; (x) among the methods taken into consideration, there is first and foremost the so-called logical interpretation, which includes the identification of the purpose of the contract; (y) although considered as being subsidiary the assessment of past and subsequent behaviour falls within the interpreter's responsibilities when the text is unclear or incomplete; (z) an interpretation on the basis of good faith places importance, among other things, on the reciprocal trust between the parties and so on what one of the parties should have communicated to the other with a view to protecting their respective interests, and also in relation to the obligation of good faith in negotiations pursuant to Article 1337 of the Italian Civil Code. The rules relating to interpretation and good faith contained in the Unidroit Principles (in particular, Articles 1.7 and from 4.1 to 4.8), which are in all events a useful reference framework for applying and judging a contract of an international nature, also confirm what has been said.
In this light, the Arbitral Tribunal feels that the following circumstances are important:
(a) the reciprocal objections raised by the parties prior to the settlement agreement: by Respondent: Claimant's failure to perform payment obligations and violation of commercial obligations; by Claimant: defects in goods sold, overdue deliveries and violations of commercial obligations [...]
(b) the manifest and stated scope of the settlement to define all outstanding issues [. . .] with a view to re-establishing current commercial relations which there was a desire to maintain at that time[…].
(c) the previous behavior of the parties: more specifically, the proposals and counterproposals formulated gradually prior to the meeting of [...]
(d) subsequent (immediately following) behavior, and above all the spontaneous principle of execution [sic] (which can also be described as a declaration of a sign of good faith): on the part of Claimant, through the issue of a bank guarantee and payment of the first instalment; on the part of Respondent, acceptance without reserve of the bank guarantee in which, in the description of the agreed terms of payment, no mention is made of the last instalment of interest...
[…] the payment schedule described in the bank guarantee does not mention the January instalment […] and this omission was explained by Claimant […] as consideration for waiving the claims relating to defects etc. later consideration pursuant to subsection (c), in respect of the waivers already made in this respect. Respondent's acceptance without reserve of the bank guarantee, in which point 6 is omitted, and the alleged start-up of production of the ordered pipes amount to a tacit acceptance by Respondent of the modified/counter-proposed acceptance by Claimant, according to the principle derived a contrario from Article 1326, last paragraph, of the Italian Civil Code. Moreover, reference should be made to Article 19, (1) and (2) of the Vienna Convention with regard to the formation of international sales contracts, and Article 2.11 of the Unidroit Principles, which are both normative texts that can be considered helpful in the interpretation of all contracts of an international nature […].
Given that long-term contracts are involved, the termination of relations on the ground of Claimant's fault, as mentioned above, does not extend to relations that have already ended. With regard to payment obligations remaining unperformed, performance cannot be ordered, but rather compensation for damages [. . .]. This compensation is calculated in proportion to the amount from the settlement remaining unpaid, to which overdue interest has been added, as provided for in Article 1219, no. 3 of the Italian Civil Code, with effect from the due date […] and up until full payment of the balance. The Vienna Convention lays down a general rule, in Article 78, that the liability for payment of a sum is subject to interest for late payment, but it does not lay down the criteria for calculating this interest. International case law presents a wide range of possibilities in this respect, but amongst the criteria adopted in various judgements, the more appropriate appears to be that of the rates generally applied in international trade for the contractual currency [...]. In concrete terms, since the contractual currency is the dollar and the parties are European, the applicable rate is the 3-month LIBOR on the dollar, increased by one percentage point, with effect from the due date not respected up until full payment has been made. However, capitalization of interest is excluded, as from Respondent's arbitration answer, since this is not provided for in the Vienna Convention and does not appear to be in keeping with international trade usages. Revaluation is also included in the above mentioned rate.'
Original in Italian:
Published in English (excerpt):
- ICC International Court of Arbitration Bulletin, Vol. 10, No. 2, Fall 1999, 83-87}}