- Arbitral Award
- ICC Court of Arbitration
APPLICATIONOF CISG CONTRACT BETWEEN PARTIES WITH PLACE OF BUSINESS IN THE SAME COUNTRY - CHOICE OF LAW OF CONTRACTING STATE AS GOVERNING LAW OF THE CONTRACT PARTIES' AGREEMENT THAT CISG WAS APPLICABLE
LACK OF CONFORMITY OF GOODS (ART. 35 CISG)
DAMAGES FOR BREACH OF CONTRACT (ART. 74 CISG)
DAMAGES IN CASE OF AVOIDANCE AND SUBSTITUTE TRANSACTION (ART. 75 CISG)
DETERMINATION OF CURRENT MARKET PRICE (ART. 76 CISG)
Aseller and a buyer both from the same Scandinavian country entered into a contract for the sale of coal. A dispute arose between the parties concerning payment for the final shipment. The buyer argued that since the delivered coal had a percentage of volatile matter of only 20,4% rather then the 32% which had been foreseen in the contract, it had the right to reject this delivery. On the other hand, the seller argued that since it was technically possible to use that coal, and the contract did not include any penalty clause for lack of volatile matter, the buyer was not entitled to set off or counterclaim for any amount.
The parties agreed to the application of CISG as a part of the substantive law of a Contracting State, since they had chosen Swiss law as the one governing the contract.
The Court, referring to Art. 35 CISG, stated that since the contract provided for about 32% volatile matter, and the delivered coal only contained 20,4% of such matter, it constituted a difference in quality, so that the buyer was entitled to damages.
The buyer was also awarded damages with interest for late delivery (Art. 74 CISG), since no deliveries were made within the delivery shipment period and this implied a breach of contract by the seller. Moreover, the buyer had to use coal from its security stock.
Furthermore, the buyer claimed damages for non-performance. As a matter of fact the seller, by invoking force majeure, admitted that it had delivered a lesser quantity. The Court held that the contract was avoided as provided by Art. 76 CISG. The parties presented arguments for and against the existence of a market current price for coal. The Court held that there is no relevant current market price.
Therefore Art. 76 CISG cannot be applied and the buyer must measure its damages on the basis of Art. 75 CISG.
[…]Defendants admit that the shipments were made. They deny that they have any liability to pay the sum claimed by Claimant, or any sum, because Defendants have claims under three headings against Claimant which far exceed Claimant's claim against them. Defendants accordingly are seeking an award of damages against Claimant in these arbitration proceedings.
The percentage of volatile matter specified in the contracts was 32%. The coal actually supplied under the shipments made on [date] had an extremely low volatile level of only 20.4%. This is so low that there can be little doubt that Defendants would have had the right to reject this delivery In the event their cement factory... used the coal, but incurred considerable costs in making it usable which they would not have incurred if coal with the specified percentage of volatile matter had been delivered.
Principally, Defendant is not entitled to set off or to counterclaim for any amount. Subsidiarily, all it could set off is USD. . ., leaving Claimant with a claim of still USD.
It is admitted that the contract provides for a quality of about 32% volatiles. It is as well admitted that the coal delivered had 20.4% volatiles. The asserted damage of USD. . . is, however, not justified. There are just technical limits as quality factors. Where it is technically possible to use the coal, no penalty is due. Where there are economical quality influences this is reflected by penalty clause. Some users do not wish to recover too many volatiles. Users blend different coals to suit their specific needs. Lower volatiles may not have any impact, but Claimant has no knowledge of this....
The contract with Claimant does not contain a penalty clause for volatiles. Such a clause would in addition not have been accepted by Claimant.'
In the Terms of Reference the following question was listed as an issue for arbitration: Does Defendant have a claim for low volatile level in the [date] delivery? If so, how should it be measured?"
Article 35 Vienna Convention provides that: The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. Claimant admitted that the contract provides for about 32% volatiles whereas it delivered coal with 20.4% volatiles only. This is a significant difference. Defendant has a claim.
The defense that there is no penalty clause in the contract is not convincing. Defendant is not claiming a penalty but damages.
As a matter of principle, Defendant is entitled to damages.
Claimant does not question the quantum with reasonable particularity and does not say which figure would be correct in its view.
Speculation as to specific needs of users is irrelevant. The Arbitral Tribunal must presume that commercial parties bargain for what they need, not something else. The quantum of USD 12 per ton difference for the specification as claimed by [Defendant's factory]. . . appears reasonable to the Arbitral Tribunal. The value of the coal delivered by Claimant can properly be assessed by reference to the cost of making the coal usable. The difference between the value of sound goods and the value of the defective goods is that cost.
Defendants claim as damages the costs incurred by [Defendant's factory] in making the coal usable. Claimant did not argue that the costs incurred were either unreasonable or unnecessary. Defendant's claim is equal to approximately USD 12 per mt. Defendant produced evidence of the settlement. . . of quality claims based on much smaller deficiencies in the volatile levels. This evidence is consistent with and supports the claim.
The Arbitral Tribunal awards the entire USD ... to be set off from the main claim. No interest is claimed.
In the Terms of Reference the following question was listed as an issue for arbitration: In contracts. . . is Defendant entitled to damages for late delivery? If so, how many metric tons were late in delivery? Is Defendant entitled to moving charges? What were the moving charges per metric ton?.
No deliveries under either contract were made within the delivery/shipment period.... Accordingly, there can be no doubt that under both contracts Claimants were in breach of a term of the contracts. Both were performed late. The only issue is what losses did Defendant suffer on account of the late delivery. . .
Clear and unchallenged oral evidence was given by Defendant that using coal from its security stock was the cheapest option for the factory. Other possibilities, such as switching coal intended for other destinations, would have been more disruptive and almost certainly more expensive for Defendant. The steps the factory took were taken in order to mitigate its losses. The factory acted reasonably If it had failed to react to the situation as it developed, its losses would have been considerably higher.
Claimant cannot be heard with the argument that Defendant should have maintained a higher buffer stock because Russian suppliers are notoriously unreliable. This may or may not he true, hut in any event Claimant's risk. Defendant's supplier was Claimant, a [nationality] supplier.
Claimant claims that there is no proof of loss. The Arbitral Tribunal is however satisfied that the coal was indeed moved from stockpiles at the cost stated in the invoices and that thereupon stock had to be replemented [sic].
The Arbitral Tribunal awards the entire USD ... with interest running as claimed, from 8 August, 1994. This must be set off the main claim.
In the Terms of Reference the following question was listed as an issue for arbitration: In contract does Defendant have a claim for damages for non-performance? What was sellers option and under which circumstances could it be exercised? How should the damages, if any, be measured? On the basis of the offer of..., the contract that Defendant made with or in another way?
Claimants admit that only 13,758 mt were delivered under contract ... and that they defaulted on the balance of the contract quantity Their claim that they could rely on the force majeure clause of the contract to excuse their non-performance was abandoned at the hearing.
The default quantity is 46,242 mt, and not 36,242 mt as Claimants maintain, only if it is correct to say that the right to reduce the contract quantity to 50,000 mt was conditional upon any delivery being made in December 1994. The correspondence, however, shows that Defendant first confirmed 60,000 mt with a particular delivery schedule ..., that then Claimant specified a quantity of 50,000 60,000 mt in Seller's option (with an unchanged delivery schedule) . . . and that finally Defendant made it a condition that any quantity supplied below 60,000 mt would be deducted from the December delivery.. . This suggests that Defendants accepted a minimum quantity of 50,000 mt, and that they only insisted that the deliveries due in July/August, September, October and November of 10,000 mt each would not be shortened. Given that the minimum quantity of 50,000 mt was in fact accepted, the default quantity only amounts to 36.242 mt. The question can, however, be left open, since the claim by Defendant based on the default quantity fails for the absence of a current price as required by Art, 76 Vienna Convention ... and Defendant can only claim actual damages measured by its substitute purchase which was in any event only for 10,000 mt.
Defendant's letter of [date] shows that Defendant on that day declared the avoidance of the Contract in the sense of Art. 73 Vienna Convention.
The Arbitral Tribunal is of the opinion that the Contract was properly avoided.
The first issue on damages is whether Defendants are entitled to the difference between the contract price and estimated market value of the goods on the date of default as provided in Art. 76 Vienna Convention...
In view of Art. 76 Vienna Convention the parties presented arguments for and against the existence of a market price for coal.
Claimant argued that there is no such thing as uniform coal. The content in various elements (such as sulfur) differs from one type of coal to another. Even if one looks at volatiles which determine the caloric yield not all users have the same equipment and will necessarily prefer the coal with the highest percentage of volatiles. Moreover, coal is bulky and therefore the transportation costs for delivery at various places are an important element in the price. Consequently, Claimant argued, it has never been possible to establish a leading exchange as it for instance exists for gold, other metals and a number of commodities. Claimants argued that in sum, there is no market or current price for coal and that therefore Defendants can only recover damages if they can prove that they bought in replacement goods.
Defendants argued against this that those involved in the sale and purchase of coal know about the prices practiced in the industry, and these prices are also published on a regular basis. This, they argued, makes it possible for an experienced trader to establish a price for a particular quality of coal to be delivered at certain times at a certain place.
In the Arbitral Tribunal's view Defendant was not able to show that there is a market or current price within the meaning of Art. 76 Vienna Convention, although there can be no doubt that in general the price of coal rose substantially between June and December 1994.
It is undisputed that there is no commodity exchange and accordingly no commodity exchange price for coal.
It is striking that Defendants were unable to state a market price for coal in general or for coal of a particular quality Defendants were also unable to spot a contract of reference of contract quality.
Defendants themselves point out that coal can have quite different specifications and that the requirements of the consumers may differ... Similarly, it is obvious that coal from different origins may have different heating values.
It remained undisputed that certain product specifications may be relevant for some purchasers, but not for others or that some purchasers prefer a high volatile content, others a low volatile content, or that some purchasers prefer a low ash fusion temperature, others a high ash fusion temperature... Equally, it remained undisputed that the particular quality elements may be viewed differently by the purchasers and that accordingly each customer values a specific coal differently according to his requirements... This leads to the conclusion that the prices that are paid cannot be ascertained merely on objective grounds. .
As a result, the Arbitral Tribunal comes to the conclusion that the pricing of a particular contract for the delivery of coal is primarily made in view of the particular contractual quality and the requirements of the respective purchaser. This leads to the conclusion that there is no relevant current market price. This view is confirmed by the following consideration:
The creditor is exempted from specifically evidencing the loss or damage suffered, if there is a market or current price. The idea is that a market or current price can be established by everyone, or at least by everyone in that particular trade. This in turn requires that the calculation of damages in the case of a market or current price (so-called abstract calculation of damages) must be possible with some certainty Already in 1936 Ernst Rabel in his comparative study on the sale of goods (Das Recht des Warenkaufs, Berlin 1936, p. 462) stated that the calculation of damages based on current prices instead of a calculation based on the actual cover purchase may in the interest of the debtor only be allowed if the current price can be established with some certainty.
The Arbitral Tribunal is also of the opinion that Art. 76 Vienna Convention cannot be applied as there is in this trade no market institution which could be compared to a stock or commodity exchange and which would guarantee that a market price could be established. It was therefore said for the Uniform Law on the International Sale of Goods, a predecessor of the Vienna Convention, that prices continuously achieved by a producer outside of any organized market or the prices achieved in the individual case do not constitute market or current prices (cf. Junge in Dölle (ed.): Kommentar zum Einheitlichen Kaufrecht, München 1976, Art. 12 N 4).
Finally, the Arbitral Tribunal is of the opinion that generally, only a party that went out into the market to make a cover purchase has a credible case that it suffered damage. There is an exception to this, only where a commodity is in question which is regularly traded on the market, in other words, a commodity that has not just a market price but a regular market with many purchasers and sellers actively engaged in regular trading. Only when there is a market in this sense may one assume that whoever has goods may readily sell them and whoever needs goods may readily purchase them. The reason is that where there is a market of that nature it becomes easily believable that the aggrieved party's damages may he measured with reference to the market price, and it becomes unimportant to be able to pinpoint a particular cover purchase. The Arbitral Tribunal however does not find that there is a market for coal in this sense. Consequently, for legal purposes, the Arbitral Tribunal finds that the aggrieved buyer, Defendant, was required to show a cover purchase under the general rule and was not exempted from doing so under the exception of Art. 76 Vienna Convention.
As a result the Arbitral Tribunal concludes that since there is no market or current price that could be applied Defendant cannot measure its damages on the basis of Art. 76 Vienna Convention. Accordingly, Defendant must measure its damages on the basis of Art. 75 Vienna Convention.
The only cover purchase that the Arbitral Tribunal can identify is in the contract with. dated 30 January, 1995, with a price of USD 41 per metric ton for 10,000 metric tons of... coal.
The Arbitral Tribunal does not find that the quality of that coal was inferior to ... coal. Accordingly, the damage measured by that cover purchase is, as calculated by Defendant, 10,000 metric tons x USD 41 per metric ton minus [contract pried per metric ton].
Defendant made no claim for further damages under Art. 74 Vienna Convention.
This counterclaim must accordingly be accepted for USD. . . and rejected for the balance... Accordingly USD. . . will be set off the main claim.
Interest runs on this sum from January 30. 1995, when the cover purchase was made.
The interest rate of 9 percent simple interest p.a., on claim, setoff, and counterclaim remained undisputed. It is reasonable for the currency in question over the relevant period.}}
ICC International Court of Arbitration Bulletin Vol. 11/n.2, Fall 2000, 63-68.}}