- Arbitral Award
- ICC Court of Arbitration
APPLICATION OF CISG SIDE BY SIDE WITH THE NEW JERSEY VERSION OF THE UNIFORM COMMERCIAL CODE (UCC)- NO SUBSTANTIAL DIFFERENCE BETWEEN CISG AND NJUCC CONCERNING NON-CONFORMITY TO CONTRACTUAL SPECIFICATIONS
DELIVERY OF NON-CONFORMING GOODS - BURDEN OF PROOF - BUYER HAS TO PROVE BOTH THE EXISTENCE OF EXPRESS SPECIFICATIONS OR IMPLIED WARRANTIES AND THE BREACH OF SUCH SPECIFICATIONS AND WARRANTIES BY SELLER
IMPLIED CONTRACT TERM - PARTIES' AGREEMENT TO BE INFERRED FROM THEIR CONDUCT OR ANY OTHER FACTUAL ELEMENT PROVING SUCH AGREEMENT
Having concluded two contracts for the supply of steel billets, the buyer, objecting that the goods delivered were not respondent to the agreed requirements (and specifically, were unsuited for hot rolling to plain bar), initiated arbitration proceedings in application of the dispute resolution clause of the agreement. The seller argued that the problem was to be attributed to the buyer's customer's installation.
The Tribunal first stated that, although the applicable substantive law chosen by the parties was the New Jersey version of the Uniform Commercial Code (NJUCC) for the first contract and the CISG for the second contract, there appeared to be no substantial differences between the two instruments as far as the solution of the present case was concerned.
According to the terms of the contract, the seller had the obligation to deliver steel billets of a specific steel content and capable of being hot-rolled to plain bar. The Tribunal firstly held that both under NJUCC and CISG the parties were free to set specific warranties in their contracts. However, since the buyer failed to prove that the goods delivered did not meet such specifications, the Tribunal concluded that the seller could not be held liable under either Art. 35(1) CISG or NJUCC sec. 2-313.
The Court then examined whether Respondent was liable for breach of the so-called implied warranties provided for by both applicable laws.
A first implied warranty was that of merchantability, by which the seller had to deliver goods which fit for the purpose for which the goods would normally be used (Art. 35(2)(a) CISG; NJUCC sec. 2-314). Yet according to the Court in the case at hand the express specifications effectively matched with such implied warranty.
The second implied warranty was that of fitness for a particular use expressly or impliedly made known to the seller and where the buyer had relied on the skill or judgment of the seller (Art.35(2)(b) CISG; NJUCC sec. 2-315). In the Tribunal's view not even such implied warranty came into play in the case at hand, since the particular purpose which was not met and on which the buyer based its claim was the hot rolling into plain bar at the buyer's customer's mill, and at the time of the conclusion of the contract the seller did not know nor had any reason to know of such a particular purpose intended by the buyer.
The buyer finally argued that the seller had failed to comply with particular steel industry standards and practices which were relevant under both applicable laws. Yet the Tribunal rejected also this argument. In its view, in order to bind the parties such standards and practices had to be either expressly or impliedly agreed upon between the parties. Since in the case at hand there was no express reference to them in the contract, the buyer had to prove an implied agreement to be inferred from the conduct of the parties or any other factual element, which it failed to do.
a.The governing laws
The parties stipulated in section VII.C. of the Terms of Reference that the law governing this Arbitration Proceeding, with its seat in Zurich, is the law of Switzerland.
The parties also agreed as to the substantive law of their transactions that:
(a) the Purchase Agreement dated...was governed by the law of the State of New
Jersey, including the New Jersey version of the Uniform Commercial Code
(NJUCC), and (b) the Purchase Agreement dated. . . was governed by the United Nations
Convention on Contracts for the International Sale of Goods (Vienna, 1980) (UNISG).
Neither party presented any evidence or argument of any material differences in these two substantive laws, insofar as the potential liability of the Respondent to Claimants in this Arbitration is concerned. The Arbitrator has considered both laws and does not find any material differences in them insofar as they are applied in the present case to resolve the claims brought by Claimants.
The parties did not specify in their ... correspondence what substantive law was intended to govern their agreement relating to reimbursement of Respondent's travel costs to attend [Claimants' customer].
The Arbitrator considers and rules that later agreement is governed by Swiss law, as the obligor was located in Switzerland, from where he made the undertaking and Switzerland has contacts with the transaction at least as significant as any other state. (Swiss Federal Act on Private International Law, section 187(1) and section 117 by analogy).
b. Freedom to establish specifications
c. The burden of proof
The buyer, under each legal system, who claims goods delivered are defective bears the burden of proving both the existence of an express specification or an implied warranty and the breach by the seller of that specification or warranty. Neither of these codified commercial laws contains any provision which affects the general provisions of law placing the burden of proof on the claiming party For the claims based on breach of the Purchase Agreements, the Arbitrator has considered the burden of proof to be on Claimants and for the counterclaim, the burden is on Respondent.
d. Express and implied warranties
Under each of the applicable laws, Respondent had the obligation to deliver billets which conform to the description in the Purchase Agreements, i.e. the expressly warranted quality (See NJUCC s. 2-313; UNISG, Art. 35(1)). In the analysis above, the Arbitrator found that Claimants failed to prove Respondent's billets did not meet the express specifications in the Purchase Agreements, either as to the content of the steel or as to capacity of the billets to be hot-rolled to plain bar.
The governing laws place additional implied warranty burdens on Respondent, as the seller of goods, insofar as the Purchase Agreements have not expressly excluded such implied warranties. These are statutory as opposed to contractual warranties, which the buyer has the right to rely upon, if not excluded in the contract.
The first of these is the implied warranty of merchantability (usage of trade or fitness for the purpose for which the goods would normally be used) (See, NJUCC 2-3 14; UNISG, Art. 35(2)(a)).
The second is the implied warranty of fitness for a particular purpose expressly made known to the seller and where the buyer has relied on the skill or judgment of the seller (See, NJUCC 2-3 15; UNISG, Art. 35(2)(b)).
The Arbitrator has considered that the phrase in the Purchase Agreements For production of HR plain bar in coil is the expression of an express warranty of fitness for use. The evidence establishes that one of the ordinary uses for the quality of billets purchased by Claimants under the Purchase Agreements was for hot-rolling into plain bar. Hence, no additional implied warranty for such uses exists in the present case. Respondent is fully bound by the express warranty, which effectively matches the statutory implied warranty under each legal system.
A more difficult question arises, however, with respect to the second implied warranty noted above, i.e. that for fitness of purpose for a particular use. As expressed in each of the relevant laws, this implied warranty comes into effect (assuming it is not excluded, which it is not, in the Purchase Agreements) only if two conditions are met; (i) that the seller knows or has reason to know of the particular purpose intended by the buyer (i.e. a particular purpose expressly governing the two Purchase Agreements.
In the context of commercial contracts, one of the fundamental purposes of the NJUCC is stated to be to permit the continued expansion of commercial made known to the seller), and (ii) that the buyer has relied upon the sellers' skill or judgment in providing the goods in question to meet that particular purpose.
The particular purpose which was not met and on which the Claimant's claim in the present case is based, is the hot-rolling into plain bar at [Claimants' customer's] mill. Since the Arbitrator has found, above, that Respondent was not aware at the time of entering into the Purchase Agreements of the identity of the end-user, he must conclude that Respondent, as seller, did not know or have reason to know of such a particular purpose intended by Claimants, as buyers. Hence, this implied warranty cannot come into play.
If Claimants had proposed a further express specification that the steel billets would he capable of being hot-rolled in [Claimants' customer's] mill, and such a term had been accepted by Respondent (the evidence suggests it might not have been), the failure of the billets to pass successfully through that mill could well have constituted a breach of the Purchase Agreements. But no such specification was proposed or accepted.
Or, if Claimants had purchased the billets for rolling in their own mill, which mill was known to Respondent, the case on an implied warranty of fitness for a particular purpose would have been much closer. Here, the billets were purchased for rolling in the mill of an unnamed customer of Claimants, whose identity at the time of contracting was intentionally kept from Respondent for commercial reasons, as noted above.
e. Steel industry standards
A further legal question is presented as to whether Respondent is obligated, under either or both governing laws, to comply with alleged steel industry standards and/or practices, that no billets should be delivered with such a high level of inclusions, even though no such express requirement on this [was] included in the Purchase Agreements.
Claimants argue, in effect, they contracted to purchase billets meeting industry standards on inclusions, which according to them, if met would have made the billets suited for hot-rolling at [Claimants' customer]
Respondent denies it had any separate contract obligation under either governing law relating to the level of inclusions. The evidence supports Respondent's view that the billets, whatever their inclusion content, were suited for the contractually-specified intended purpose of producing hot-rolled plain bar in coil, as that term is used generically.
Since such a requirement is not expressly stated in the Purchase Agreements to be binding on Respondent, the Arbitrator finds it would have to constitute an implied term of the Purchase Agreements, or to be the subject of an implied warranty under the governing laws, noted above.
To find there is an implied term of a contract for sale of goods under either applicable law, Claimants would have had to demonstrate by the preponderance of the evidence that the parties had agreed to such term. That evidence can be derived from the conduct of the parties or any other factual element which proves the parties' mutual agreement on the unwritten term. (NJUCC 2-204 and 2-207(3), UNISG Art. 18(1)).
The evidence in the record does not support a finding that there was any mutual agreement or hence any implied term as to the level of inclusions. Respondent made no promises or representations to Claimants at the time of entering into the Purchase Agreements, or at a later time, related to the inclusion content. Neither is there evidence to support a finding of an implied warranty under the criteria noted above relating to the inclusions in steel billets used for hot-rolling of plain bar.
Moreover, Respondent's evidence is accepted, in this sale to Claimants as a middle-man, Respondent as a matter of company policy sold the steel billets only on the basis of the size, chemistry and the other specifications expressly set forth in the Agreements. The Arbitrator found above that this was accepted by Claimants in their pre-delivery. . correspondence to Respondent, where Claimants confirmed they had not guaranteed to [their customer] the tensile and other mechanical properties of the billets.
In these circumstances, the Arbitrator rules Claimants have not met the burden to prove Respondent failed under the governing substantive laws to comply with applicable steel industry standards or practices as to the level of inclusions in the delivered billets and no responsibility can be placed on Respondent on such a ground.}}
Publishedin English (excerpt):
ICC International Court of Arbitration Bulletin, Vol.11, n.2, Fall 2000, 93-103.}}