- Arbitral Award
- ICC Court of Arbitration
APPLICATIONOF CISG CHOICE BY PARTIES OF THE LAW OF A CONTRACTING STATE (SWEDISH LAW) AS THE LAW GOVERNING THE CONTRACT (ART. 1(1)(B) CISG) - CISG APPLICABLE
AVOIDANCE (TERMINATION) IPSO FACTO AVOIDANCE NOT RECOGNIZED BY CISG (ART. 60 CISG)
AVOIDANCE (TERMINATION) ANTICIPATORY BREACH OF CONTRACT PROBABILITY OF FUTURE BREACH OF CONTRACT (ART. 72(2) CISG)
AVOIDANCE (TERMINATION) DECLARATION OF AVOIDANCE (TERMINATION) NOT MADE WITHIN A REASONABLE TIME (ART. 49(2) CISG) INEFFECTIVE
DAMAGES DIFFERENCE BETWEEN THE AGREED PRICE AND THE PRICE OF THE SUBSTITUTE TRANSACTION (ARTS. 74 AND 77 CISG)
Twoparties concluded a contract for the sale of a certain amount of metal concentrate. After having duly performed its deliveries during the first two years, the seller informed the buyer that, due to a change in the market conditions and for reasons of force majeure, it would not from then on be able to perform, unless the contractual clauses were adapted to the new circumstances. At a meeting held in December 1993 the parties agreed to enter into renegotiations of the contractual price. However, a few months later the buyer, in addition to concluding substitute purchases, demanded that the seller perform the contract. In view of the seller's refusal to do so, the buyer withheld payment of the last delivery and, in January 1995, declared the contract avoided. It then brought arbitral proceedings to claim damages, arguing that the seller's interruption of deliveries amounted to an anticipatory breach of contract, which entitled the buyer to withhold payment of the last delivery and obtain the difference between the higher price of the substitute purchases and the contractual price. The seller insisted that its refusal to make further deliveries was justified by a change in the market conditions and force majeure, which in its view had released it from its contractual obligation. It also claimed the payment of the last delivery, alleging that the buyer's withholding of payment was a fundamental breach of contract.
As to the applicable law, the Arbitral Tribunal found that the contract contained a choice of law clause in favour of Swedish law. It therefore decided to apply CISG to the merits of the dispute, as it was embodied in the 1987 Swedish Act on International Sales.
With respect to the buyer's claim for anticipatory breach of contract by the seller, the Arbitral Tribunal observed that the fact that the buyer had begun to make substitute purchases in February 1994 amounted to an avoidance (termination) of the contract pursuant to Art. 72(2) CISG, rather than to a suspension of the performance under Art. 71 CISG. However, CISG does not recognize the ipso facto avoidance (termination), and any avoidance (termination) of the contract of sale has to be expressly declared by the buyer (Art. 60 CISG). Moreover, the right to avoid (terminate) the contract for anticipatory breach requires that it be clear that the other party will commit such an anticipatory breach (Art. 72(2) CISG), but this conclusion can hardly be inferred from the fact that the parties had agreed to renegotiate their contract. In the opinion of the Arbitral Tribunal, it was the buyer which had avoided (terminated) the contract, but its declaration of avoidance, only made in January 1995, was not effective, because it was well beyond the reasonable time laid down in Art. 49(2) CISG.
Therefore, the Arbitral Tribunal held that, since none of the conditions for avoidance (termination) required by CISG had been fulfilled, the buyer had breached the contract by withholding payment of the last delivery. However, it added that the withholding was not a fundamental breach under the circumstances of the case.
The Arbitral Tribunal further noted that, in the event of a breach of contract by the buyer, the seller may either declare the contract avoided (Art. 64 CISG) or fix an additional period of time for performance (Art. 63 CISG). However, the seller had resorted to neither.
With regard to the buyer's request for damages arising out of the higher price of the substitute transactions, the Arbitral Tribunal stated that it could not be based on Art. 75 CISG, because the buyer had failed to make an effective declaration of avoidance (termination), which is a requisite under that provision. Nor could damages be awarded pursuant to Art. 76 CISG, because, as pointed out by an author: [a] party that has entered into a substitute transaction within the meaning of Art. 75 […] must proceed under that provision and cannot claim damages under Art. 76 CISG. Nevertheless, the Arbitral Tribunal awarded the buyer damages on the basis of Art. 74 and Art. 77 CISG, since the contract of sale was still in force in 1994 and the substitute transactions at a higher price than the one agreed upon in the contract could be considered as a measure undertaken to mitigate damages.
Article 21 of the Agreement includes an arbitration clause providing for ICC arbitration in
Stockholm according to the following.
21. Applicable law and arbitration
This Agreement shall he governed by and construed in accordance with the laws of Sweden. All disputes arising in connection with the Agreement shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce ICC by one or more arbitrators appointed in accordance with the Rules.
The arbitration will be conducted in Stockholm, Sweden, in the English language.
With respect to the issue of anticipatory breach :
Claimant considered itself justified in invoking anticipatory breach on the part of the Respondent and that the withholding of the payment of the Last Shipment was decided on this basis.
The question is then, whether the Claimant was justified in withholding this payment and, if not, whether the Respondent because hereof was justified in suspending further the deliveries of [metal] concentrate.
Avoidance by Reason of Anticipatory Breach:
With respect to the international sales of movable assets the Swedish Act (1987: 822) on International Sales which directly incorporates the 1980 Vienna Convention (except Part II which is not at issue in this arbitration) is applicable (CISG). With respect to anticipatory breach, CISG invests the potentially prejudiced Party with a has right of suspending (Article 71) or terminating avoiding in the parlance of CISG (Article 72) the contract. However, in order for the Party to suspend or terminate his performance, he must give immediate or reasonable, respectively, notice of the suspension or termination. The only situation where this may be dispensed is (according to Article 72) in the event where the other Party has declared that he will not perform his obligations. These requisites which are a reflection of the rule of positive Vertragsverletzung of German customary law is obviously motivated by a concern that the other Party is made clear of the position of its counter party, placing him in a position to provide assurance that he will in fact perform and thereby defeating the assumption of anticipatory breach and the concomitant threat to the orderly fulfillment of the contract. The fact that according to its own statement which has not been disputed by the Respondent) one will have to assume that there is an ipso facto avoidance of the Agreement at this point in time on the part of the Claimant rather than a suspension of performance according to Article°71 of the Convention. However, CISG does not recognize the concept of ipso facto avoidance, see, e.g. Documentary History of the Uniform Law for International Sales, Kluwer (1989): The contract is avoided as a result of the Buyer's breach only if the Seller declare(s) the contract avoided'. Automatic or ipso facto avoidance was deleted from the remedial system in this Convention because it led to uncertainty as to whether the contract was still in force or whether it had been ipso facto avoided, Under Article 60 of [CISG] the contract is still in force unless the Buyer has affirmatively declared it avoided.
So, it had been incumbent upon the Claimant (according to Article 72 (2)) of CISG to give notice to the Respondent regarding its intent to declare the Agreement avoided and to issue a subsequent declaration of avoidance.
Admittedly, the Claimant did avoid the Agreement but then only in a letter of 23 January 1995. This was clearly not within a reasonable time after the circumstance giving right to avoidance had occurred and therefore inconsequential (Article 49 (2) CISG).
A right to avoid an agreement on the basis of anticipatory breach requires in the language of Article 72 (1) CISG that it is clear that the other party will commit a fundamental breach of contract.
From the witness statements dealing with the events of the 16 December 1993 Meeting only the one issued by Mr. [X[ addresses these some specificity In Mr. [XJ 's written witness statement.. which is in essential respects confirmed in his examination at the final hearing it appears that Mr. [Y] representing the Respondent at the meeting only expressed his wish to discontinue deliveries to the Claimant and that in the face of Mr. [Z]'s objection the Parties agreed to continue negotiations early 1994 as at this particular moment concentrate market price for 1994 was not yet fixed. In the opinion of the Sole Arbitrator this outcome of the meeting hardly constituted any alarming development in the Parties' relationship tantamount to any clear indication of anticipatory breach. And in fact, further negotiations did take place not only on 10 March and 14 April 1994, but also on subsequent occasions throughout 1994. At no time is there any mention from either of the Parties of an avoidance of the Agreement throughout 1994 but, on the contrary a request for performance of the Agreement was directed to the Respondent in the Claimant's letter of 10 May 1994.
Non-Compliance with CISG Provisions by the Claimant:
As far as can he deduced from the pleadings of this case the Claimant has not, therefore, undertaken any step required of him under the provisions of CISG addressed above and has not, furthermore, had any basis for doing so in the absence of clear reasons to assume anticipatory breach. Therefore, the Sole Arbitrator concludes that the Claimant breached the Agreement by withholding payment fur the Last Shipment.
However, the payment's relation to a relatively small fraction of the annual volume of [metal] concentrate due for delivery the insignificant delay and the prevailing element of uncertainty regarding the shipping schedule and other parameters impacting on the price fixing and, additionally the fact that the Parties were in a negotiation process with regard to future deliveries when the delay arose all taken together lead to the conclusion that the withholding was not a fundamental breach by the Claimant of the Agreement.
Non-Compliance with CISG Provisions by the Respondent:
In the event of a breach of contract of the part of the buyer, the seller is left with two options according to Article 64 of CISG. Either may the seller declare the contract avoided right away by inferring that the breach is of a fundamental character or he may fix an additional period (so called Nachfrist) for performance by the buyer of his obligations according to Article 63 of CISG.
However, the Respondent has adopted neither of these options just as the Claimant has failed to do this (up to the 23 January 1995 rescission letter).
Right of Damages in the Absence of Avoidance:
The basic principles to govern compensation for breach of contract are laid down in Articles 74-77 of CISG. Damages for breach of contract may be envisaged in a situation, where the contract has been performed or in spite of performance has not for one reason or another been avoided by the aggrieved party. For this situation Article 74 of CISG offers exhaustive, albeit generally phrased principles for measuring the amount of damages.
Article[s] 75 and 76 of CISG address the situation where a contract has been avoided and where damages are based on factual or hypothetical substitute transactions, respectively, while Article 77 imposes a general duty for the prejudiced party to mitigate its damages.
The Claimant requests damages in this arbitration covering the price difference between the contract price and the price of actual, substitute transactions which it has made (cover purchases).
However, in order for these to he recoverable the contract must have been avoided according to the provisions of CISG. This requisite flows from Article 75 of CISG which reads in extenso:
Article 75 (Damages in case of avoidance and substitute transactions.) If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74.
The Agreement was not, however, avoided until 23 January 1995, and no substitute transactions undertaken prior to a reasonable time after that date can be taken into account for purposes of establishing a duty of indemnification based on substitute transactions.
Request for damages may also in certain circumstances be based on Article 76 of CISG enabling a buy[er] to recover the difference between the price fixed by the Contact and the current price as a[t] time of avoidance for the particular goods. However apart from the requisite that a declaration of avoidance must have been made a party that has entered into a substitute transaction within the meaning of Article 75 [...] must proceed under that provision and cannot claim damage under Article 76 (Flechtner, Remedies under the Convention, 8J.L.&Com. 101 (1988)). Therefore, Article 76 cannot be invoked as a basis for damages.
Therefore, the Sole Arbitrator cannot award the Claimant damages on the basis of Articles 75 or 76 of CISG.
However, it remains to be explored whether or not damages cannot be awarded on the basis of the fundamental provisions relating to damages pursuant to Article 74 CISG, i.e. based on the assumption which has to be made in the absence of a declaration of avoidance from either party i.e. that the Agreement was still in force during the year of 1994.
If based on this assumption the Claimant's purchase of [metal] concentrate in substitute transactions may be looked upon as a measure undertaken to mitigate damages pursuant to Article 77 CISG. This could constitute premises for the following argument.
The procurement of an annual volume of 15,000 dmt [metal] concentrate constitutes a marginal contribution (5-10 per cent) to the aggregate input of materials in the processing operation of the Claimant's. . . smelter plant. It may therefore be assumed that the variable cost for processing this marginal quantity [metal] concentrate only to a negligible extent exceeds the landed cost of the [metal] concentrate itself. From this may follow that the loss of profit in terms of the marginal or gross contribution foregone which the Claimant would have suffered if it had chosen not to procure [metal] concentrate in substitute transactions would have been significantly greater than the difference between the price according to the Agreement and the price obtained by the Claimant in the substitute transactions.
This assumption would appear to obtain support by the fact that the Claimant in fact did go ahead and procure [metal] concentrate in substitute transactions exposing itself to financial risk which would not based on reasonable commercial judgement have been undertaken in the absence of their economic viability.
On the basis of these general considerations the assumption made here obviously carries a high degree of verisimilitude. However, more important for the assessment of the Claimant's request for damages is whether the measures taken by the Claimant in purchasing [metal] concentrate in substitute transactions constituted the most appropriate action under the circumstances taking into consideration the aggrieved Party's duty to mitigate damages resulting from the other Party's breach of contract. For purposes of carrying out this assessment there are no materials available to the Sole Arbitrator which shed any light on the cost consequences of any alternative action undertaken by the Claimant, such as the gross contribution arising from sales of processed goods resulting from the processing of [metal] concentrate in the Claimant's . . . smelter plant. Hence, there is no information made available to the Sole Arbitrator in the course of this arbitration addressing issues like unit cost for processing or price levels during the relevant rime period for processed goods making use of [metal] concentrate.
However, it is up to the party who argues that the aggrieved party has not taken appropriate steps to prevent unnecessary damage from occurring which carries the burden of proof for his allegation in this regard.
In this arbitration it has not been argued that there would have been any alternative course of action open for the Claimant which would have produced a less costly outcome than the one actually chosen by the Claimant.
In view hereof the Sole Arbitrator must consider that any relevant difference between the price agreed by the Parties according to the Agreement and the price achieved in substitute transactions must he relevant for purposes of establishing the indemnifiable damages suffered by the Claimant.}}
Publishedin English (excerpt):
ICC International Court of Arbitration Bulletin, n. 2-2000, 57-61.}}