- Arbitral Award
- ICC Court of Arbitration
APPLICATION OF CISG - CHOICE BY PARTIES OF THE LAW OF A CONTRACTING STATE (FRENCH LAW) INTERPRETED BY THE ARBITRAL TRIBUNAL AS IMPLICIT EXCLUSION OF CISG NOTHWITHSTANDING REPEATED REFERENCES TO CISG IN PARTIES' PLEADINGS (ART. 6 CISG) - ARBITRAL TRIBUNAL'S DECISION TO [S]UPPLEMENT ITS REASONING BY REFERENCES TO THE CISG.
AVOIDANCE (TERMINATION) - FUNDAMENTAL BREACH (ART. 1184 FRENCH CIVIL CODE) (ART. 49 CISG)
AVOIDANCE (TERMINATION)- SELLER DENIED A REASONABLE OPPORTUNITY TO REMEDY THE DEFECTS - BUYER NOT ENTITLED TO AVOID (TERMINATE) THE CONTRACT (ART. 1184(3) FRENCH CIVIL CODE) (ART. 48 CISG).
DAMAGES - RIGHT TO RECOVER LOST PROFITS (ART. 74 CISG).
A Singaporean seller and a Polish buyer concluded a contract for the sale of computer hardware. The contract contained a choice of law clause whereby any dispute between the parties should be settled [i]n accordance with French law. The dispute arose when the buyer, in view of technical difficulties undergone by its customers, refused to take delivery of half of the equipment supplied. In spite of an immediate offer by the seller to repair the technical defects, the buyer declared the contract avoided (terminated). The seller brought arbitral proceedings to recover damages.
As to the applicable law, the Arbitral Tribunal held that the parties, by referring to French law, intended their contract to be governed by French domestic law, i.e. by the rules on the contract of sale laid down in the French Civil Code. In fact, even if the CISG was applicable under Article 1(1)(b), Article 6 CISG permitted the parties to exclude its application, and the choice of a domestic law by the parties, though it was the law of a contracting State, in the opinion of the Arbitral Tribunal amounted to such an exclusion. However, the Arbitral Tribunal pointed out that, since the parties had on several occasions in their pleadings referred to CISG, it would [s]upplement its reasoning by references to the CISG. The Arbitral Tribunal added that, in its view, in case of conflict between the French domestic law rules and the provisions of CISG the former should prevail. It further noticed that, with respect to the issues to be examined in the case at hand, the provisions of CISG were more detailed than the ones laid down in the French Civil Code and that in any event they led to substantially the same result.
With respect to the buyer's claim for avoidance (termination) of the contract, the Arbitral Tribunal stated that, under both French domestic law and CISG, avoidance (termination) of the contract is only possible for fundamental breach (Art. 1184 French Civil Code and Art. 49 CISG). It held that the buyer was not entitled to avoid (terminate) the contract, because it had denied the seller the opportunity to cure the defects in the goods (Art. 1184(3) French Civil Code and Art. 48 CISG). Evidence produced by the seller proved that the defects in the goods could have been repaired easily and at a minimal expense.
The seller was awarded damages which included lost profits (Art. 1149 French Civil Code and Art. 74 CISG).
As to the rate of interest, the Arbitral Tribunal rejected the buyer's claim that the rate of interest should be either the one of the contractual currency or the one of the creditor's place of business, and applied the interest rate laid down in French domestic law. In doing so, it recalled an ICC award which had found that CISG does not contain any rule on the rate of interest.
[…]Under clause 9 of the disputed contract, the parties agreed that any dispute between them should be settled in accordance with French law. They reiterated this choice in the Terms of Reference: under point XII, they stated that the substantive law of France, excluding its conflict of laws rules, shall be applied by the Arbitral Tribunal. The Tribunal regards this choice as controlling, in accordance with the prevailing rule in international contracts, which is itself confirmed by Article 13.3 of the I.C.C. Rule [sic] of Arbitration.
However, one may wonder exactly to what set of rules a reference to French law leads today in an international contract. This is because the Vienna Convention on the International Sale of Goods (CISG) has been in force in France since its entry into force on 1 January 1988, that is prior to the signature of the disputed contract. Indeed, on several instances in their written or oral pleadings, the parties referred to the CISG. This prompts the Tribunal to state its position on this matter, although it must be pointed at the outset that no difference appeared between the French domestic law on sale and that laid down in the CISG on the issues under discussion in the present arbitration.
Under Article 1.1 of the CISG, the Convention applies: (...) (b) when the rules of private international law lead to the application of the law of a Contracting State. Under the present circumstances, one can say that French law is designated by a rule of private international law, that of party autonomy - be it taken from the I.C.C. Rules of Arbitration or from the general law of international trade. Therefore one might conclude that the CISG is the sole source of rules to be applied in the present case.
However, under Article 6 of the CISG itself: The parties may exclude the application of this Convention or (...) derogate from or vary the effect of any of its provisions. It is the opinion of the Tribunal that when the parties initially referred to French law in the contract, what they had in mind was the domestic law of France; and such view is confirmed by the wording of the above mentioned Article of the Terms of Reference, designating the substantive law of France.
Therefore, should there be a difference between a relevant provision of French domestic law and the corresponding one in the CISG, the former should prevail. But no such difference surfaced during the discussions between the parties. Rather, the CISG appears more detailed on the disputed issues than the provisions of French domestic law. The Tribunal will therefore feel free to supplement its reasoning by references to the CISG, as the parties themselves did; but in so doing, it does not intend to set aside the applicable provisions of French law, which the parties expressly chose.
Under the law of sale, the parties must deliver goods as stipulated in the contract (Fr. Civil code, art. 1603, 1625, 1234; CISG, art. 35). Conformity of the goods is the subject-matter of the dispute between the parties.
It follows that strictly speaking, there was indeed a non-conformity between the goods referred to in the contract and those tendered. There remains to be seen whether the difference was of such a magnitude or irreversibility as to warrant a rescission of the contract, as Defendant later claimed. Under French law as in most national legal systems, only a fundamental breach of the contract warrants its rescission (résolution: see Article 1184 Civ. C.) and the rule is the same under the CISG (Article 49). In the present case, Claimant immediately pointed to Defendant that the difference could be cured by way of a minor mounting adjustment and at a minimal cost(...)
Claimant did what was necessary to allow the contract to be performed and to avoid its rescission, as contemplated by French law (article 1184 par. 3: Rescission must be sought in court and time may be granted to the defendant according to the circumstances). The CISG follows the same principle, while laying down more specific rules. According to Article 46.2, If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract (...); under Article 8:  (1) Subject to article 49, the seller may, even after thedate for delivery, remedy at its own expense any failure to perform his obligation, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer; and under Article 49, the buyer may declare the contract avoided only if the failure by the seller to perform any of its obligations under the contract or this Convention amounts to a fundamental breach of Contract (par. 1a). In the present case, [initial supplier's] representative confirmed in his testimony that the work required on the manufactured bases to allow the motors to be adapted could be made at a trifle cost; indeed, never did Defendant or [end-customer] raise this issue of cost or request reimbursement for the work involved.
It follows that Defendant's persistent refusal to take delivery of the goods and its claim to rescind the contract on the ground of non conformity of the goods cannot be held justified. Indeed, the Tribunal notes that in the first telex whereby Defendant requested Claimant to defer the delivery of part of the ordered goods, it referred to difficult situation [end-customer] ...; no reference was made to a technical issue. (…) Whether [end-customer] knew of the technical change or not, it is a fact that they first prompted Defendant to require postponement of the delivery on grounds other than technical.
However, the Tribunal will take into account the fact that the goods were not exactly as described in the documents on which Defendant relied and that the mechanical parts which were manufactured by [end-customer] had to be adjusted by either enlarging the existing holes or drilling new holes.
It cannot be denied that neither of these solutions is totally adequate since both of them consist in an approximative solution, a patching up and do not meet the quality standards in force in the computer industry.
Yet Defendant does not establish that these defects and inadequacies would make the goods totally improper for their utilisation.
Nevertheless, Defendant has insisted that these inadequacies have caused her severe problems, the existence and importance of which cannot seriously be denied by Claimant.
This damage suffered by Defendant justifies a reduction of the goods' price (réfaction a contrat in commercial matter under French law).
Taking into account the elements of the case, and in particular the non-conformity between the goods described in the contract and those tendered as well as the nature the quality of the goods and their utilisation, the Tribunal considers that Defendant is entitled to a reduction in price corresponding to 25 % of the contract price of the remaining [goods].
The applicable principles, under French law as under most legal systems and the CISC that the plaintiff must be compensated for actual loss as well as lost profit (Fr. Civ. C, au 1149; CISG art. 74). Claimant has raised a number of heads of damages, some of which appear justified, while others do not.
Defendant challenged the interest rate put forward by Claimant, claiming that the applicable rate, if any, should be that of Singapore as the currency of the contract or of the creditor's residence. To that end, it relied on two arbitral awards. In ICC case No 5460, the dispute involved an Austrian resident and a South African firm. The single arbitrator awarded the claimant the Austrian interest as a perfectly proper rate, without any particular justification; however, this was the rate claimed by the creditor and the issue does not appear to have been discussed. In ICC case No 6653-1993, the Arbitral Tribunal also applied the rate of the creditor's residence, which it justified as being in relation to the use which the creditor could have made of the sums and also to the currency of the contract (Journal du droit international, 1993, p. 1046). However, this tribunal was relying primarily on the CISG to adjudicate the dispute and had found that the Convention did not lay down any rule on the matter. In the present case, the parties expressly choose the substantive law of France to rule their relations. This leads the Tribunal to give primary consideration to the French law on the matter.
Under French law, the prevailing rule is that the assessment of contractual damages in an international contract is governed by the law of the contract, because the function of damages is to substitute an equivalent to the obligation which was born under that law (Batiffol-Lagarde, Droit international privé, 70 éd., t. 2, No 607, p. 336: la fixation des dommages intérêts obéit à la loi du contrat parce qu'il s'agit de substituer un équivalent àl'obligation créée scion cette loi; see to this effect, Cass. Civ. 15 mai 1935, Journ. dr. mt. 1936.601, Rev. crit. dr. in pr. 1936.463; Cass. com. 20 oct. 1953, Rev. crit. dr. in privé 1954.386). The principle has also been applied by arbitral tribunals (ICC Case No 5428-1988, ICC Case No 5440-1991, quoted by Claimant). A further consideration is in favour of that solution; the choice of French law in this contract between a Polish firm and a Singapore firm obviously stemmed from the desire of each party to avoid the application of the other's national law and therefore to have a neutral law and one with which to get acquainted easily to govern their relations; the rate of interest is an element of that law (see Fr. Civ. C. art. 1907: Interest is legal or contractual. Legal interest is fixed by law. Contractual interest may exceed that fixed by law, whenever this is not prohibited by the law..). The tribunal therefore concludes that the rate of interest to be applied is the legal rate obtaining in France during the relevant period.}}
ICC International Court of Arbitration Bulletin, Vol.11/n.2, 2000, 46-49.}}