- Arbitral Award
- ICC Court of Arbitration - Zurich
APPLICATION OF CISG - CHOICE OF LAW OF CONTRACTING STATE AS GOVERNING THE CONTRACT - CISG APPLICABLE
SCOPE OF CISG - FRAMEWORK AGREEMENT FOR SUCCESSIVE SALES AND EXCLUSIVE DISTRIBUTION - CONTRACT FOR SUPPLY OF GOODS TO BE MANUFACTURED OR PRODUCED (ART. 3(1) CISG)- CISG APPLICABLE
PARTIAL DELIVERY (ART. 51 CISG) - IN CASE OF DELIVERY BY INSTALLMENT (ART. 73 CISG) - WITHHOLDING OF PERFORMANCE EXCLUDED
RIGHT TO SUSPEND PERFORMANCE (ART. 71(1) CISG) EXCLUDED IN CASE OF DELIVERIES ALREADY RECEIVED BY THE BUYER
RIGHT TO INTEREST (ART. 78 CISG) - INTEREST RATE- DETERMINED BY DOMESTIC LAW GOVERNING THE CONTRACT
A framework contract for the supply of products within the US market was concluded between Swiss manufacturers of roller bearings (the sellers) and a US exclusive representative (the buyer). When, after about two years, the buyer refused to pay for the received deliveries, the sellers started arbitral proceedings claiming payment and interest. The buyer on its part claimed set-off, alleging its right to obtain damages for breach of contract by the sellers.
As to the applicable law, the Arbitral Tribunal qualified the contract at hand as one for the sale of goods according to Art. 3(1) CISG, since it implied successive sales and deliveries of goods. Moreover, it held CISG applicable as part of the substantive law of a Contracting State, since the contract contained a choice of law in favor of Swiss law (Art. (1)(1)(a) CISG).
With respect to the buyer's defence, the Arbitral Tribunal firstly held that the buyer could not rely on Art. 50 CISG claiming lack of conformity of goods delivered, since the alleged defectiveness referred to deliveries different than those whose payment was claimed by the sellers.
Moreover, the Arbitral Tribunal denied that the buyer was entitled to set-off for either partial or late delivery. In order to reach this conclusion, the Tribunal pointed out that neither Art. 51 CISG nor Art. 73 CISG (as to delivery by installments), both applicable in the case at hand, provide for withholding of payment as a remedy for delivery of a quantity lower than that agreed upon. Nor could the buyer be entitled to withhold performance under Art. 71 CISG, since deliveries had been already received by him.
Finally, the sellers were awarded interest (art. 78 CISG) at the rate determined in accordance with the domestic law governing the contract (i. e. Swiss Law).
'In para 13 of the "Exclusivity Contract", the parties agreed that "the laws of Switzerland shall apply to all matters respecting the making, interpretation and performance of this contract".
The United Nations Convention on Contracts for the International Sale of Goods (hereinafter "CISG") forms part of Swiss substantive law and applies to certain contracts under certain preconditions.
According to art. 1(1)a of the CISG, the CISG is applicable to "contracts of sale 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".
The "Exclusivity Contract" is a contract in which the parties agreed on successive sales and deliveries of bearings to be manufactured by Claimants and delivered to Respondent, while granting Respondent exclusive representation in the USA. According to art. 3 CISG, contracts for the supply of goods to be manufactured or produced are to be considered sales contracts as well. As the parties have chosen Swiss law to be applicable, and Switzerland is a contracting state of the CISG, all preconditions for the application of the CISG to the "Exclusivity Contract" are fulfilled.
The CISG is applicable to the case at bar.'
With respect to the alleged defectiveness of the goods delivered
'According to art. 50 CISG, if goods delivered do not conform with the contract, the buyer may reduce the price in the same proportion as the value of the goods actually delivered. Therefore, Respondent's refusal to pay Claimants' invoices may have been justified if parts of the bearings invoiced by these invoices had been defective.
Claimants' claimed invoices in these proceedings were issued for bearings delivered May 7, 1996 and August 2, 1996. Respondent's claim of defective bearings, on the other hand, was for bearings delivered some time in 1995. Various other shipments and payments bad been effectuated in the meantime. Possible defects of bearings which had been delivered approximately one year before the deliveries of those bearings for which payment is now requested, present no justification to withhold payment of these invoices, but can only be claimed as a separate claim for damages. Para 8 of the "Exclusivity Contract" and the three months period mentioned therein is therefore not relevant in the present context.
Therefore, Respondent's assertion that certain bearings delivered in 1995 were defective does not justify the withholding of payment for invoices for bearings delivered in 1996, and presents no grounds for an unfoundedness of Claimants' claim.'
With respect to the alleged late delivery and failure to deliver the required quantities
'Respondent asserts that various bearings had not been delivered on time. Additionally, Respondent claims not to have received the amounts of bearings stipulated by the contract to be delivered. Supposing that this were true for the bearings concerned, the question arises whether or not this circumstance would give Respondent a justification to withhold payment of the concerned invoices.
According to art. 45(1) CISG, if the seller fails to perform any of his obligations under the contract or this Convention, the buyer may either exercise the rights provided in articles 46 to 52 or claim damages as provided in articles 74 to 77 CISG. Any damages for breach of contract according to art. 74 to 77 CISG would however be, as already explained above, inadmissible set-off claims and could not be handled in these arbitration proceedings, but would have to be dealt with in other proceedings.
According to art. 51 CISG, if the seller delivers only a part of the goods, art. 46 to 50 apply. In the case of an installment contract, should certain partial deliveries not be made on time, then art. 73 CISG is exclusively applicable to the question which effect this delay has on the entire contract (v. Caemmerer/Schlechtriem, Kommentar zum Einheitlichen UN Kaufrecht, CISG, 2 edition, München 1994, N 3 at art. 51).
According to art. 73(1) CISG, the following remedy is given: "In the case of a contract for delivery of goods by installments, if the failure of one party to perform any of his obligations in respect of any installment constitutes a fundamental breach of contract with respect to that installment, the other party may declare the contract avoided with respect to that instalment."
However, Respondent did not declare the contract avoided, nor did it resolve to any of the other remedies supplied by law in art. 46 to 52 CISG, but rather resolved to the withholding of payment.
Further, art. 71 CISG may be taken into consideration, according to which a party has the right to suspend its performance of the contract if it becomes apparent that the other will not perform a substantial part of its obligations as a result of a serious deficiency in its ability to perform. This article, however, gives a party the right to withhold its performance corresponding to a future anticipated breach. For example, a buyer may suspend performance of a prepayment, when he anticipates that no delivery can be made (Commentary on the International Sales Law, N 2.6. at art. 71). In the case at bar, the buyer has already received his deliveries and must pay for the amount received. If he had not received these deliveries on time or if these deliveries did not comprise the amount that had been ordered, he could assert separate claims claiming damages or fulfilment. The applicable law, however, does not give him the right to withhold payment for deliveries already occurred.
Regardless of any independent claim Respondent might have out of the non-contractual delivery time or quantity according to the applicable law it did not have the right to withhold payment for that reason.'
With respect to interest on unpaid invoices
'According to art. 78 CISG, if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it. The rate to be applied is, however, a matter, in the first place, for the domestic law (Farnsworth, in Bianca-Bonell, Commentary an the International Sales Law, The 1980 Vienna Sales Convention, page 570). Therefore, the Swiss Code of Obligations (CO) is applicable.
According to art. 104 (1) CO, if an obligor is in default as to the payment of a financial debt, he shall pay penalty interest at five percent per annum. Between merchants, penalty interest may be calculated at a higher rate, when the usual bank discount at the place of payment is higher than five percent (art. 104 (3) CO). As Claimants did not offer any proof for this usual bank discount (which according to the Swiss Federal Supreme Court Decision BGE 116 II 141 is not the same as the interest rate on a bank loan), the penalty interest to be awarded to Respondent is five percent according to art. 104 (1) CO.
Pursuant to Art. 106 (1) CO, "if the obligee has incurred greater damage than that compensated by the penalty interest (arts. 104, 105), the obligor will be obligated to also compensate such damage unless he proves that no fault is attributable to him". An example of such damage is the borrowing of third-party funds an which a higher interest than covered by the penalty interest has to be paid (Zürcher Kommentar zum Schweizerischen Privatrecht, N 2 at art. 106).
Claimants submitted a table showing payments to ... (an importer of Claimants) for which allegedly a credit loan was engaged ... Furthermore, Claimants submitted bank statements showing that Claimants were charged a certain interest rate an their loan from the bank. This interest rate ranged between 9.0625% and 9.375% in the period of time between September 24, 1996 (the date of the earliest submitted bank statement) and June 12, 1997 (this being the maturity date for the loan as of the bank statement of February 20, 1997).
Claimants' submitted bank statements provide evidence that Claimants had, in fact, taken up credit, even though these did not show the entire claimed amount for the entire time ...
As Claimants have not provided strict evidence for their claim - they request 9.5%, but prove at the most a rate of 9.375% for a limited period of time and a limited amount - the Arbitral Tribunal will not apply the percentage rate most favorable to Claimants, but rather an average rate of 9%. Within the Arbitral Tribunal's scope of free evaluation of the evidence, and considering that taking up a credit in a situation in which an obligor is in default is common nowadays, it accepts that for the period of time Claimants have submitted evidence, they have shown that they have suffered damages higher than the penalty interest of five percent. The Arbitral Tribunal therefore awards interest at a rate of 9% on the unpaid invoices for the time between September 24, 1996 and June 12, 1997.
For the rest of the time interest is claimed, Claimants have not submitted any evidence in regard to having incurred greater damage than 5%. The burden of proof, however, lies on Claimants for the amount of the interest owed (Swiss Federal Supreme Court Decision BGE 116 II 141). Therefore, for the remainder of the time, an interest rate of 5% is to be applied as penalty interest, as no proof for a greater damage has been submitted for this period of time.'
With respect to interest on invoices alleged to have been paid late
'Although the Arbitral Tribunal had specifically asked Claimants to submit evidence of their allegation, Claimants only submitted "five samples" of invoices, bills of lading and bank statements of account ... They otherwise base their claim solely on their "recapitulatory table" which only lists the invoices allegedly paid in delay, but does not supply any proof for this allegation. The Arbitral Tribunal will therefore only take the "five samples" submitted as proof into consideration, and must neglect the other claimed invoices as no proof whatsoever has been submitted to uphold the allegation that they have been paid in delay, and, furthermore, as Respondent denies having paid any invoices in delay.
Among the five invoices submitted, each invoice claimed is divided ... into two payments to be effected. One of the payments mentioned is the one to be paid at sight according to para 6 lit. a of the "Exclusivity Contract", and the other is to be paid 60 days from the date of shipment (para 6 lit. b "Exclusivity Contract").
For the first of these payments (the one presumably to be paid at sight), Claimants state that a certain date for payment bad been determined; this date cannot be concluded from the invoices. Other proof for the calculation of this date has also not been submitted by Claimants. Hence, no sufficient proof for the question of whether or not payment at sight was made in delay has been supplied; the Arbitral Tribunal will therefore not award any interest on these parts of the invoices allegedly paid in delay.
For the second of these payments, however, the due date is established in the "Exclusivity Contract" para 6 lit. b: 60 days from the date of shipment. As Claimants have submitted five invoices and the corresponding bank statements of account, sufficient evidence for answering the question of a delay on these payments is given.
According to art. 104 (1) CO, penalty interest of five percent may be claimed on payments made in delay. As evidence for a higher interest rate due to further damages (art. 106 (1) CO) has only been submitted for a period of time between September 24, 1996 and June 12, 1997, an interest rate of five percent will be applied.
Respondent's argument that Claimants never claimed penalty interest when the "Exclusivity Contract" was in force and therefore have, on the ground of estoppel (art. 2 of the Swiss Civil Code), lost their right to claim payment of interest on payments allegedly paid belatedly, cannot be followed. An obligee normally has the possibility to claim its right until it is forfeited because of the statute of limitations. According to Swiss law, claims arising from an obligor's default are forfeited after ten years because of the statute of limitations (art. 127 CO). Therefore, Claimants are still entitled to claim interest on the above invoices paid in delay.
The Arbitral Tribunal therefore awards a total amount of ... as interest on the submitted unpaid invoices. No penalty interest on this penalty interest shall be calculated, as this is not allowed by Swiss law according to art. 105 (3) CO.'}}
Published in English:
ICC Court of Arbitration Bulletin 2000, n.2, 103-107.}}