- Arbitral Award
- ICC International Court of Arbitration 9479
LONG-TERM CONTRACTS - LICENSING AGREEMENT - BETWEEN AN ITALIAN COMPANY AND ANOTHER ITALIAN COMPANY WITH AN AFFILIATE REGISTERED IN THE UNITED STATES - SILENT AS TO THE APPLICABLE LAW – REFERENCE BY ARBITRAL TRIBUNAL TO “USAGES OF INTERNATIONAL TRADE” – REFERENCE TO THE UNIDROIT PRINCIPLES
HARDSHIP – SUPERVENING CHANGES IN THE LAW – HARDSHIP ONLY WHERE CAUSING FUNDAMENTAL ALTERATION OF CONTRACT EQUILIBRIUM (UNIDROIT PRINCIPLES ARTICLES 6.2.1-6.2.3).
CONTRACT FOR AN INDEFINITE PERIOD – RIGHT OF TERMINATION - EXCLUDED WHERE PARTIES INTENDED TO CREATE PERPETUAL OBLIGATIONS (UNIDROIT PRINCIPLES, ARTICLE 5.8 [ART. 5.1.8 OF THE 2004 EDITION]).
Two Italian companies, set up following the dissolution of a family owned textile manufacturing firm, entered into a contract regulating the right to use the original company name. According to the contract Claimant (together with its affiliate registered in the USA) was entitled to use the company name as a registered trade mark, while Defendant was entitled to use it only to identify itself as manufacturer of the goods it would distribute world-wide. Claimant subsequently accused Defendant of breach of contract by having deliberately created confusion between its own name and the Claimant’s trademark, and sued Defendant for damages.
As to the applicable law, the Arbitral Tribunal noted that the contract expressly indicated the law of the State of New York as the law governing the validity of the agreement and concluded that the silence with respect to all other matters was to be understood as an indication of the parties’ intention not to have these matters governed by a particular domestic law. The Arbitral Tribunal decided to apply, in addition to the terms of the agreement, “the usages of international trade”, having regard whenever necessary to “international public policy” and for this purpose to refer to the UNIDROIT Principles which it considered an “accurate representation, although incomplete, of the usages of international trade”.
Defendant invoked hardship as a counterclaim. It argued that following the adoption in 1989 of the European Directive on Trademarks (89/104/EEC) which introduced more liberal terms than those originally agreed with Claimant the contract should be revised or, alternatively terminated, with respect to the territory of the European Union, and to this effect invoked Article 6.2 of the UNIDROIT Principles. In rejecting this counterclaim the Arbitral Tribunal stated that a subsequent evolution of the legislative context of a contract does not constitute hardship when it does not destroy the balance of the parties’ respective obligations. Though admitting that Defendant might not have concluded the contract on the same terms if the EU Directive had already been adopted, the impact of the latter on the equilibrium of the agreement was not that substantial, all the more so since the agreement covered not only the territory of the European Union but was intended to regulate Defendant’s rights and duties world wide.
Defendant also invoked its right to terminate the contract, at least in so far as it applied to European Union territory, on the ground that the contract provided for perpetual obligations. The Arbitral Tribunal rejected also this argument. It is true that a number of domestic laws provide for a right of termination of contracts for an indefinite period, and that a similar rule is set out also in Art. 5.8 [Art. 5.1.8 of the 2004 edition] of the UNIDROIT Principles. Yet in the case at hand the contract clearly demonstrates the parties’ intention to create perpetual obligations as a direct consequence of the indefinite duration of the trade mark.
Before dealing with the claims and counterclaims, the Arbitral Tribunal must express its views as to the law applicable to the merits of the dispute, since the parties are in disagreement in this regard.
According to article 13(3) of the ICC Rules of Arbitration: “The parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrators shall apply the law designated as the proper law by the rule of conflict which he deems appropriate.” According to article 13(5) of the same Rules: “In all cases, the arbitrator shall take account of the provisions of the contract and the relevant trade usages.” As a result of these provisions, an arbitral tribunal must first apply the provisions of the contract, in the light of and, in case of need, supplemented by the usages of international trade, provided the validity of such provisions is not questioned by the parties or [such provisions] do not appear to the tribunal to be incompatible with international public policy in the sense of truly or transnational public policy (see Pierre Lalive, “Transnational (or Truly International) Public Policy and International Arbitration”, in ICCA Congress Series No. 3, p. 257).
In case the arbitral tribunal does not find in the contract or in the usages of international trade a solution to the problems raised by the parties’ claims, it must revert to the law applicable to the contract. If any of the parties contends that one or more provisions of the contract, or the contract as a whole, are null and void, an arbitral tribunal must decide the question by referring to the mandatory rules of the law applicable to the contract or to any mandatory rules which it would be justified to apply, bearing in mind that the applicability of such rules must always be confronted with the real intention of the parties and their legitimate expectations.
In the instant case, the parties have dealt with the problem of the law applicable to the Agreement in its article 12(b) which reads:
In view of the facts that one of the parties to this Agreement and Stipulation is a New York corporation having its principal office in such State, the litigation settled herein took place in New York and this Agreement and Stipulation was negotiated substantially in New York, the parties hereto agree that the law of the State of New York (without regard to its conflicts of law rules) shall determine any dispute relating to the validity of this Agreement and Stipulation.
None of the parties now dispute that the law of the State of New York governs tile validity of the Agreement. However, while the Claimants consider that the intention of tile parties was that the Agreement be generally subject to the law of the State of New York, [Defendant] proposes a restrictive construction of article 12(b) which would exclude from tile province of tile law of tile State of New York any question which is not stricto senso a question of validity. In particular, [Defendant] underscores that what it describes as “tile restoration to equity of the contract”, in fact the main object of its counterclaims, is not governed by the law of the State of New York. It is [Defendant] ‘s view that, with the exception of the question relating to its validity, the Agreement is governed by Italian law, on tile basis of the 1980 Rome Convention regarding the applicable law to contractual obligations, which has been incorporated within the Italian conflict regulations by article 57 of the Italian law of May 3 1st 1995.
On the basis of the briefs exchanged by the parties and the oral argument presented by counsel at the . . . hearing, the Arbitral Tribunal came to the conclusion that when the parties indicated in article 12(b) of the Agreement that any dispute relating to its validity would be determined according to the law of the State of New York, they were perfectly aware of the restrictive implication of the language that they were using. Indeed, the first draft of the Agreement . . . indicates that “the laws of the State of New York shall be the law pursuant to which this Agreement shall be construed and enforced at any arbitration proceedings brought under this Agreement”. A comparison of this language and of that of article 12(b) of the Agreement eventually executed in 1987 leads to the conclusion that, after negotiations, the parties agreed to restrict tile intervention of the law of the State of New York to questions relating to the validity of the Agreement. However, contrary to [Defendant]’s submission, this finding does not imply that the parties were contemplating that any other state law would govern their Agreement. On the contrary, their silence after negotiations as to the applicable law indicates that they considered that the intervention of a national law was necessary for problems of validity only. In the context of an ICC arbitration concerning a contract which was supposed to be performed in the whole world that implied intention of tile parties is quite reasonable and in perfect conformity with the interpretation of articles 13(3) and 13(5) of the ICC Rules exposed above by the Arbitral Tribunal. Thus, the Arbitral Tribunal finds that any question concerning the validity of the Agreement must be decided under the law of the State of New York. Any other question will have to be decided according to the provisions of the Agreement in the light of, and, in case of need, supplemented by the usages of international trade. Whenever necessary, the Arbitral Tribunal will have regard to international public policy.’
(i) The principal counterclaim of [Defendant] is that tile Agreement should be modified, only for its effects on the “European Territory”, by a substitution of the terms of its article 7(b) with the terms of article 6 of the EEC/89/104 Directive. The Claimants object to such modifications.
By European Territory, the parties mean tile territory of the European Union.
[Defendant] explains that the above mentioned EEC/89/104 Directive, which was issued after tile execution of tile Agreement in 1987, explicitly allows the owner of a name to use it in its commerce, as long as it does so in a manner consistent with honest and fair principles, even when said name constitutes the trademark of another businessman. Since [Defendant] entered into the Agreement at a time when Italian law (namely the Bima law of 1967) restricted drastically the use of a name as a trademark when such name was used as a trademark by someone else, the liberalization introduced by the European Directive put [Defendant] in a situation of hardship. On the basis of article 6.2 of the Unidroit Principles, [Defendant] is entitled to an equitable modification of the Agreement so that, on the territory of the European Union, [Defendant] might benefit from the liberal solutions resulting from the application of the Directive. As a further justification for its requests, [Defendant] also refers to article 1467 of tile Italian Civil Code.
The Claimants’ position:
The Claimants first stress that tile law of the State of New York is applicable to [Defendant] ‘s request for equitable modifications of the Agreement and that, under the New York law, a Court (or an arbitrator) should not modify a contract because of a change of law, even should this change create additional burdens or advantages for either party. The Claimants, although on a slightly different basis, come to the same conclusion by application of Italian law. In particular, they point out that the entry into force of the EEC Directive cannot be seen as an “extraordinary and unforeseeable event”.
The Arbitral Tribunal’s position:
As explained above, the Arbitral Tribunal has found that the law of the State of New York only applies to the validity of the Agreement and that [Defendant]’s request for equitable modification of the Agreement cannot be characterized as a question of validity of tile Agreement. Moreover, the Arbitral Tribunal has found that besides the law of New York, no national law had been made applicable to the Agreement. Thus, since tile provisions of the Agreement do not contemplate the possibility of its modifications on equitable grounds, the Arbitral Tribunal will turn to the usages of international trade in order to supplement the provisions of the Agreement. In this respect, [Defendant] has referred to the Unidroit Principles which the Arbitral Tribunal recognize as an accurate representation, although incomplete, of the usages of international trade.
Article 6.2.2 of the Unidroit Principles reads:
There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and
(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;
(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
(c) the events are beyond the control of the disadvantaged party; and
(d) tile risk of the events was not assumed by the disadvantaged party.
According to article 6.2.3, paragraph 4:
If the Court finds hardship it may, if reasonable,
(a) terminate the contract at a date and on terms to be fixed, or
(b) adapt the contract with a view to restoring its equilibrium.
However, these provisions must be read in conjunction with article 6.2.1 which reads:
Where performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.
On the basis of the above-mentioned definitions, the Arbitral Tribunal admits that it would be entitled to make an equitable modification of the Agreement, but it is not convinced that [Defendant] is being faced with a situation which maybe characterized as “hardship”. Indeed, the issuing of the EEC Directive did not alter in any way the equilibrium of the Agreement among the parties. Tile situation of [First Claimant] and its affiliates remain unaffected in so far as their entitlement to the . . . trademark is not concerned by tile Directive. [Defendant] does not meet any new difficulty in complying with the restriction on tile use of the . . . name. As a matter of fact, [Defendant] does not really allege that so would be the case. Indeed, the thrust of [Defendant]’s submission is that since the EEC Directive has been made, tile Agreement imposes on the use of the name . . . restrictions which have disappeared from the laws of all countries members of the European Union. As a result, the Agreement, into which [Defendant] entered in order to meet the requirements of the Italian Bima law deprives it of a freedom in the use of the name . . . that it would enjoy in the absence of the Agreement. It is the reason why [Defendant] requests the Arbitral Tribunal to substitute article 7(b) of the Agreement with the terms of article 6 of the EEC Directive as for as its effects on tile territory of tile European Union is concerned. [Defendant] would obtain more or less the same result with its subordinate counterclaims aiming at obtaining the termination of tile Agreement at least as regards its effects in Europe.
The Arbitral Tribunal does not accept tile view, expressed by the Claimants, that a change in the law cannot be the source of hardship. It may well be the case, when a new law makes tile performance of the contractual obligations of a party more onerous or when the value it receives from the performance of tile other party is severely reduced. However, tile Arbitral Tribunal has already found that the introduction of the EEC Directive had no effect on tile performance of the Agreement by the parties.
In reality, [Defendant]’s position, in a nutshell, is that it would have had no reason to enter into tile Agreement should the EEC Directive have been introduced before April 1987. This has nothing to do with hardship, which is a notion which may play a role when the performance of a contract is at stake but has no function in tile formation of contracts. Even if it is probable that [Defendant] would have entered into tile Agreement, as drafted in 1987, after the adoption of tile EEC Directive in 1989, a subsequent evolution of tile legislative context of a contract does not constitute a hardship when it does not destroy the balance of the parties’ respective obligations. Moreover, without denying that the parties had in mind tile Italian Bima law when they executed the Agreement, it was not made to be enforced in Italy only nor in Europe. The Agreement is a global arrangement, due to be enforced in the whole world. This is underscored by the introduction to the Agreement:
Whereas the parties, after extensive negotiations, have agreed that it is in their respective interests and the interest of their Affiliates that the rights of the parties are fixed and determined in a manner which will avoid, as much as possible, future conflicts, with respect to the use of tile trademark . . . and create definitive understandings applicable to all jurisdictions in which the parties may so legally contract, and in which their respective products are sold and may be sold and/or distributed.
This language indicates that the parties wanted to enter into a final settlement of their conflicts relating to tile use of the trademark ... by agreeing on an arrangement applicable whenever in the world. This probably explains that they limited the scope of the law of New York to the validity of the Agreement, since its worldwide application was at odds with the intervention of a specific national law to govern its performance.
Irrespective of the fact that the adoption of EEC Directive does not constitute a situation of hardship, [Defendant]’s contention that the Agreement be modified in so for as its effects in the territory of the European Union are concerned is in direct contradiction with the intention of the parties to organize their relations as to the use of the trademark . . . by harmonized solutions applicable in any jurisdiction, whatever be the content of the law in that jurisdiction.
[Defendant] is suggesting a balkanization of the Agreement which is incompatible with its very spirit. Should [Defendant]’s approach be followed, there would be no reason not to substitute later on article 7(b) of tile Agreement by the provisions of the law of Ruritania, as for as its effects in Ruritania are concerned, if the law of Ruritania was more liberal than the provisions of the Agreement. For tile above-mentioned reasons, the Arbitral Tribunal decides to dismiss [Defendant]’s first and principal counterclaim.
(ii) In a subordinate counterclaim, [Defendant] requests the Arbitral Tribunal to terminate the Agreement, due to hardship, at least as regards its effects in Europe.
The Claimants object to that subordinate counterclaim as they do in respect of the principal counterclaims, for very similar reasons. In reality, the termination of the Agreement is one of the two solutions available in case of hardship. As indicated in article 6.2.3, para. 4 of tile Unidroit Principles, a Court (or an Arbitral Tribunal) may either terminate a contract or adapt it with a view to restoring its equilibrium.
As the Arbitral Tribunal has found that tile existence of a situation of hardship had not been established and as modifying the Agreement, in its scope in tile case of partial termination, in view of tile evolution of tile law in a specific country or in a group of countries is incompatible with the real intention of the parties which wanted a global application of the Agreement, [Defendant]’s subordinate counterclaim must be dismissed as well as its principal counterclaims.
(iii) In a further subordinate counterclaim, [Defendant] requests the Arbitral Tribunal to ascertain and state that, since the Agreement provides for perpetual obligations, [Defendant] is entitled to recede from it and to terminate it, at least as regards its effects in Europe. In its brief of . . . [Defendant] has clearly specified that its request concerned only the effects of the Agreement in the European Union, stating that “the whole agreement is not put into question, since the scope of tile Agreement extends to tile entire world”. [Defendant]’s position in this respect is that perpetual obligations are valid only when they just reproduce prerogatives existing under tile law. Since it is not any longer the case for tile restrictions opposed by the Agreement to tile use of the name . . . in the European Union, in tile light of the EEC Directive, the perpetual obligations deriving from the Agreement are null and void and the Agreement must be terminated for this part of the world.
The Claimants object to that subordinate counterclaim that the perpetuity pointed out by [Defendant] is just the obvious consequence of the potential perpetuity of the right to the trademark, in the sense that tile obligations undertaken by tile parties on the basis of tile Agreement last as long as the trademark. They add that they are the ones which should complain to be obliged to tolerate in perpetuity [Defendant]’s certain behaviour which intrudes upon their exclusive right.
The Arbitral Tribunal must stress at the outset, that it results from the text of the Agreement that tile real intention was that its effects would not be limited in time. The preamble of the Agreement indicates that their intention was to “create definitive understandings”. This intention is confirmed by provisions such as article 12(b) or 12(c) which endeavour to make its avoidance or termination particularly difficult, if not impossible. Thus, it is indisputable that tile Agreement creates perpetual rights and obligations. As rightly observed by the Claimants such indefinition of the duration of the Agreement is a direct consequence of the indefinition of the duration of the trademark . . . the ownership of which is recognized to [First Claimant], against tile recognition of [Defendant]’s rights to use “[name] for identification purpose only, under specific conditions”.
[Defendant] is right when it contends that perpetual obligations may be terminated under many national laws, although its counterclaim is grounded mainly on Italian law For example, it is worth indicating that article 5.8 of the Unidroit Principles reads: "A contract for an indefinite period may be ended by either party by giving notice a reasonable time in advance”. However, the Arbitral Tribunal is not satisfied that [Defendant] is entitled to a termination of tile Agreement, effective in the territory of the European Union, as [Defendant] has specified precisely. As a matter of fact, this understandable geographical restriction in the scope of [Defendant]’s request for termination is a symptom of its misconception. As admitted by [Defendant] . . . a perpetual obligation is valid when “it merely reproduces legal precepts”. The problem is that the parties have deliberately avoided submitting the Agreement to any national law, with the exception of problems regarding its validity for which the law of the State of New York is applicable, in order to facilitate its worldwide application. As a result, it is meaningless to compare the rights and obligations created by tile Agreement with any national legal precepts to decide whether they reproduce them or not. Since tile introduction of the EEC Directive, tile Agreement does not any longer reproduce legal precepts in the territory of the European Union, if it even did in all the member countries, but it may still do so in other jurisdictions or even be more favourable to [Defendant] than the law of such other country, the probable reason wily [Defendant] did restrict the effects of its request to the territory of the European Union. Here again, [Defendant] intends to achieve a balkanization of tile Agreement which goes directly against the real intention of the parties.
The Arbitral Tribunal’s view is that, with the 1987 Agreement, the parties have defined, with a view of its worldwide application, the respective status of the owner of tile trademark . . . and of the owner of tile name . . . irrespective of the legal precepts of any national law. Thus, there are no legal applicable precepts to be compared with in order to decide whether the Agreement just reproduces them or not. In such a situation, the Arbitral Tribunal must respect tile intention of the parties which is clearly expressed in the Agreement and, as such, does not need to be supplemented by the usages of international trade, unless it would be contrary to international public policy. It is obviously not the case. First, although tile right to terminate a perpetual obligation is recognized in many national laws, it does not amount to a rule of international public policy. But, more significantly, such right is generally excluded, as already mentioned, when the perpetual rights and obligations are just a reproduction of legal precepts. Thus, the perpetuity as such cannot amount to a violation of international public policy. After all, it would be enough to find just one national law in the world which embodies legal precepts comparable to those introduced by the parties within tile Agreement to validate its perpetual character under that law.
The very fact that the parties chose to organize their relations outside of any national law is not contrary to international public policy as well, as illustrated, for instance, by the provisions of article 1496 of the French New Code of Civil Procedure. Thus, by defining themselves the legal precepts applicable and confirming them in an Agreement with a worldwide scope and an indefinite duration, the parties have exercised prerogatives that the Arbitral Tribunal must recognize. In any case, [Defendant] has never contended that the Agreement was against international public policy as confirmed by its apparent wish to see it applied outside the territory of the European Union.
On the basis of the above, [Defendant]’s second subordinate counterclaim is dismissed.’}}
Original English. Excerpt of the award published in:
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 67-73.}}