- Arbitral Award
- ICC International Court of Arbitration, Paris 8547
INTERNATIONAL SALES CONTRACT - GOVERNED BY THE 1964 UNIFORM LAWS ON THE INTERNATIONAL SALE OF GOODS (ULIS) AND ON THE FORMATION OF CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (ULFC) - REFERENCE TO THE UNIDROIT PRINCIPLES AS A MEANS OF SUPPLEMENTING THE TWO INTERNATIONAL UNIFORM LAW INSTRUMENTS
CONTRACT INTERPRETATION – CONTRACT TERMS TO BE INTERPRETED AS TO GIVE EFFECT TO AS MANY OF THEM AS POSSIBLE (UNIDROIT PRINCIPLES, ARTICLE 4.5)
DELIVERY OF NON-CONFORMING GOODS – BUYER’S RIGHT TO STOP PAYMENT OF PRICE - APPLICATION OF GENERAL PRINCIPLE OF A PARTY’S RIGHT TO WITHHOLD PERFORMANCE IN CASE OF NON-PERFORMANCE BY THE OTHER PARTY (UNIDROIT PRINCIPLES, ARTICLE 7.1.3).
Under an international sales contract involving successive deliveries, the buyer (Defendant) stopped payments on the ground of non-conformity of the goods. Seller (Claimant) questioned the valid conclusion of the contract and contested buyer’s right to suspend payment until such time as non-conformity had been established.
As to the applicable law the Tribunal noted that the parties had agreed that the two 1964 Uniform Laws on the International Sale of Goods (ULIS) and on the Formation of Contracts for the International Sale of Goods (ULFC) should govern their contract. However, with respect to questions not settled by the two instruments the Arbitral Tribunal, referring to Article 17 of the ICC Arbitration Rules, decided to turn to the UNIDROIT Principles which it considered to “provide useful complement to fill the lacuna and allow to find proper solutions.”
As to the merits of the case the Arbitral Tribunal held that the contract had been validly concluded. Admittedly Defendant’s reply to Claimant’s offer, containing terms which materially altered the terms of the offer, constituted a counter-offer which had not been expressly accepted by Claimant. The contract had, however, been concluded by the Claimant’s commencing performance by delivering the goods, and by the Defendant’s acceptance of them (cf. ULFC Article 6(2)). Accordingly, the Arbitral Tribunal stated that the terms contained in Claimant’s offer – and which had not been contested by the parties at any time – were valid, whereas the other terms (price and insurance) were negotiated anew for each and every delivery. In support of this conclusion, the Arbitral Tribunal referred to Article 4.5 of the UNIDROIT Principles according to which the terms of a contract should be interpreted so as to give effect to as many of them as possible.
As to Defendant’s right to stop payment until an agreement is reached between the parties as to the degree of lack of conformity of the goods and as to how to proceed in regard to the non-conformity, the Arbitral Tribunal held that although this was not expressly provided in ULIS, it followed from the general principles of law referred to in Article 17 of ULIS. The Arbitral Tribunal referred in this connection to Article 7.1.3 of the UNIDROIT Principles which state that a party may withhold its performance until performance has been effected by the other party. It concluded that the degree of non-conformity was irrelevant, and that notice of non-conformity was enough to justify stopping payments pending agreement by the parties on the lack of conformity.
(1) The applicable law on the substance of the case is The Hague Convention of 1.7.64 as the law chosen by the Parties and the Unidroit Principles as supplementary rules which the Arbitral Tribunal deems appropriate to apply where necessary in accordance with art. 17 sect. 1 ICC Rules.
(a) As stated in provision no. 20 of Claimant’s telex of December 3, 1991, the contract shall be governed by “the Uniform Law for the international sale of corporal movables (Hague Convention 1/7/64)”. This clause has evidently been accepted by Defendant. Its telex of December 4, 1991 shows no objection concerning the applicable law proposed by Claimant.
The Arbitral Tribunal is therefore of the opinion that the relationship of the Parties is governed by the substantive law chosen in no. 20 of Claimant’s telex. This includes the Convention relating to a Uniform Law on the International Sale of Goods (ULIS) and the Convention relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF). According to art. 4 ULIS, the Conventions shall apply where they have been chosen as the law of the contract by the parties, regardless of whether or not the States of their places of business are parties to the Convention. This is in accordance with the principle of party autonomy, which states that parties are free to choose the law to govern their contract.
(b) In so for as the Conventions ULIS and ULF did not cover all questions and referring to article 17 of the ICC Arbitration Rules, the Arbitral Tribunal felt it appropriate to turn to the Unidroit Principles which provide useful complement to fill the lacuna and allow to find proper solutions.
(2) The contract was not concluded by exchange of telexes, because the Defendant proposed certain new conditions in its answering telex of December 4, 1991, which materially altered the terms of the contract according to art. 7 ULF. Defendant asked for different conditions concerning the free of charge time regarding delivery the guaranteed price for all of 1992, and insurance of the goods by seller up to delivery to the end user. The different terms requested by Defendant concern mainly the price of the goods and the insurance risk of the seller.
Such demands for changes in the contract by the other parties are considered by jurisprudence to be material alterations which must be specifically accepted by the party having made the initial proposal ... Because the price of the goods is an “essentiale negotii”, anything concerning the price must be considered as a material alteration. The insurance and delivery risk of the seller or buyer are also important terms of the contract, as each party must be able to calculate its possible costs beforehand. Therefore the telex sent by Defendant on December 4, 1991 constitutes a counter-offer and should have been answered by Claimant — either containing a confirmation of the different terms or a new offer. Silence itself cannot have the effect of acceptance, see art. sect. 2 ULF.
(3) However, the contract was formed by Claimant commencing with performance of the contract. The provisions of the contract as proposed in Claimant’s telex of December 3, 1991 and not disputed between the parties at any time are valid. The rest of the provisions were negotiated with each delivery
(a) Claimant began to deliver goods on December 6, 1991 and continued to do so until August 1992. Defendant accepted delivery of the goods. The contract was formed between the parties the latest with the first delivery by Claimant, According to art. 6, para. 2 ULF “acceptance may also consist of the dispatch of the goods”.
(b) The contract was not — as suggested by Defendant — renegotiated wholly for each delivery It continued to exist as the legal framework of the parties to which specific alterations or amendments may have been made from time to time. Those alterations or amendments have no bearing on the present dispute.
(c) Neither Claimant nor Defendant ever objected to the terms of performance of the contract during the time period of delivery of the goods. According to the theory of [implied contract confirmation] this is to be interpreted as agreement on the undisputed terms of the contract as presented in the telex of December 3, 1991, unless the parties specifically agreed on other terms during its performance. Therefore, the provisions of the contract are primarily applicable, supplemented by the rules of ULF and ULIS.
When taking into consideration the internationality of the relations between the parties, the Unidroit Principles become relevant. Article 4.5 Unidroit Principles states that contract terms should be interpreted as to give effect to as many of them as possible. Therefore, if the parties at one point agreed on certain provisions, this needs to be taken into account when trying to resolve a dispute.
In the present case, the Defendant in its answering telex mainly wanted to alter the matters of price and insurance. Since these matters were put in writing for each and every delivery (as shown by the telexes), they can be said to have been renegotiated and agreed upon every time within the existing framework of the contract.
(5) It was the Defendant’s right to stop payment because of the non-conformity of the goods.
(b) Although the degree of non-conformity of goods has not been proven, it was the Defendant’s right to suspend payment after raising the exceptio non adimpleti contractus.
The contract was to be performed step by step, i.e. payment was to follow the delivery of goods. If the goods are not of the quality agreed upon in the contract, the buyer must give notice of the non-conformity. Until an agreement is reached between the parties as to the degree of the lack of conformity and as to how to proceed in regard to the non-conformity the buyer does not have to pay the price. The further development of the contract at that point is unclear. It would amount to a curtailment of the rights of the buyer if he had to continue payment of the goods without knowing what will happen in regard to the non-conformity
This is not expressly stated in ULIS, but follows from the general principles of law referred to in article 17 ULIS. According to article 7.1.3 Unidroit Principles a party may withhold its performance until performance has been effected by the other party. Thus the above reasoning is in accordance with these principles of law.
(c) Once the seller knows of a possible non-conformity it is his duty to act upon this knowledge to clear up the degree of the non-conformity.
Since the oral hearing . . . it is undisputed that a meeting took place in . . . the place of business of . . . the end user of the purchased products, concerning the quality of the goods. This is proof of the fact that Claimant knew of the possible non-conformity of the goods.
The degree of non-conformity is therefore irrelevant in regard to the right of the Defendant to suspend payment. It is sufficient that Defendant informed Claimant of the non-conformity and then suspended payment until an agreement concerning the lack of conformity was reached. Defendant suspended payment after the meeting in . . . took place. This is not a violation of Defendant’s contractual duties.’}}
Excerpts from the award published in ICC International Court of Arbitration Bulletin Vol. 12, No. 2, Fall 2001, 57-60}}