- Arbitral Award
- ICC Court of Arbitration
VALIDITY OF PENALTY CLAUSE - MATTER EXCLUDED FROM SCOPE OF CISG (ART. 4 CISG) - DOMESTIC LAW APPLICABLE
CONTRACTUAL PENALTY IN CASE OF NOT-DELIVERY - BUYER'S RIGHT TO DAMAGES IMPAIRED
AVOIDANCE OF CONTRACT - NON DELIVERY - BUYER'S RIGHT TO AVOIDANCE (ART. 49(1)(A) CISG)
AVOIDANCE OF CONTRACT - FORM OF AVOIDANCE (ART. 26 CISG)
EFFECTS OF AVOIDANCE - RESTITUTION OF PRICE PAID (ART. 81 (2) CISG)
RIGHT TO INTEREST ON REFUNDED PRICE (ART. 84(1) CISG) - RATE OF INTEREST TO BE DETERMINED BY DOMESTIC LAW OTHERWISE APPLICABLE TO CONTRACT
RIGHT TO DAMAGES (ART. 74 CISG)- BREACH OF NON PRIMARY OBLIGATION UNDER CISG - EXCLUDED
EXEMPTIONS (ART. 79 CISG)- SUPPLYER'S FAILURE TO DELIVER GENERIC GOODS - NO EXEMPTION FOR SELLER'S NON-PERFORMANCE
A seller and a buyer concluded a contract for the sale of goods. The contract contained a penalty clause providing for the payment of 2% of the contract price in case of non-delivery. A dispute arose when the price was paid but the goods were not delivered. The buyer started arbitral proceedings asking for damages pursuant to Arts. 45 and 74 CISG, as well as restitution of the price plus interest. The seller objected that it was not the owner of the goods at the time of conclusion of the contract and invoked force majeure. Moreover it argued that the buyer was in any case entitled not to the full amount of damages, but only to the amount fixed by the penalty clause.
The Arbitral Tribunal held that CISG was applicable pursuant to its Art. 1(1)(b), since the rules of private international law led to application of law of Germany, a Contracting State.
As to the merits, the Arbitral Tribunal dismissed the buyer's claim concerning damages, stating that the inclusion of a penalty clause for non delivery prevented the buyer from invoking the provisions on damages laid down in Art. 74 CISG. In order to ascertain the validity of the penalty clause, since it is a matter excluded from CISG in accordance with its Art. 4, the Arbitral Tribunal referred to the domestic law otherwise applicable to the contract (i.e. German law).
However, the Tribunal held that the buyer was entitled to avoid the contract pursuant to Art.49 (1)(a) CISG, since non-delivery amounts to a fundamental breach of contract (Art. 25 CISG).
Moreover, the buyer's declaration of avoidance was validly expressed according to Art. 26 CISG by sending a fax in which the buyer asked for restitution of price.
The buyer was therefore awarded restitution of the price (Art. 81 (2) CISG), plus interest from the date the price was paid (Art. 84 CISG).
As to the rate of interest, the Arbitral Tribunal, after having recalled that CISG does not contain any specific provision, applied German law as the law otherwise applicable to the contract.
However, the Arbitral Tribunal rejected the buyer's claim to obtain damages for non restitution of the price by the seller under Art. 81 (2) CISG. In carrying out its analysis, the Arbitral Tribunal pointed out that the buyer's claim was based on a wrong interpretation of Art. 45 (1) CISG according to which the buyer is entitled to claim damages if the seller fails to perform any of its obligations under the contract or the Convention (emphasis added). Indeed, Art. 45 (1) CISG, when correctly read in conjunction with Art. 30 CISG, only entitled the buyer to damages for breach of primary obligations by the seller, which are those provided for in the contract or, in the absence of any specific stipulation, those laid down in Art. 30 CISG, and not to damages for breach of secondary obligations such as the obligation of restitution laid down in Art. 81 (2) CISG.
On the other hand, the buyer was entitled to the amount set in the penalty clause plus interest, since the avoidance of the contract does not affect the validity of such a clause (Art. 81 CISG.
Finally, the Arbitral Tribunal held that the seller could not rely on Art. 79 CISG alleging that it had entrusted a supplier with the task of acquiring the requested goods and the latter failed to do so. According to the Tribunal, since the goods sold were generic goods, the seller had to bear the risk of non-delivery by its own supplier.
With respect to Claimant's claim for damages under Articles 45(1)(b) and 74 CISG
'Claimant has no claim for damages against Respondent. Damage claims for non performance arising out of the contract in dispute are governed by the "UN-Convention on Contracts for the International Sale of Goods" (CISG). The CISG applies to the contract as part of the applicable German law according to its Art. 1(1)(b). Pursuant to Art. 6 CISG the parties to an international sales contract may derogate from the provisions on damages in Art. 45(1)(b) CISG through inclusion of a penalty/liquidated damages (pld) clause. This is what the parties have done in the case before the Tribunal with the inclusion of the special conditions for non-delivery.
This pld-clause is valid under the applicable German law and precludes any further damage claims for non-performance which the Claimant may have against Respondent.
The validity of this clause is not governed by the CISG but by German law as the law governing the contract ... Art. 4(a) CISG provides that the Convention is not concerned with the validity of individual provisions contained in the contract. This also applies to pld-clauses (see Knapp in: Bianca/Bonell, Commentary on the International Sales Law, 1987, Art. 74, No. 3.7; Piltz, Internationales Kaufrecht, No. 1994, No. 135 in fine; Stoll in: Schlechtriem (ed.), Commentary on the UN Convention on the International Sale of Goods, 1998, Art. 74, No. 46).'
With respect to Claimant's claim for restitution of the amount paid under the L/C pursuant to Articles 26, 49(1)(a) and 81(2) CISG
'Claimant has a claim for restitution of the amount paid to Respondent under the L/C in September 1997 plus 5% interest pursuant to Art. 49 (1) (a), 81(2), 84 CISG and Sec. 352 (1) HGB.
Claimant has duly avoided the contract concluded between the parties pursuant to Art. 26, 49 (1) (a) CISG. Claimant was entitled to avoid the contract. Under Art. 49 (1) (a) CISG, the buyer may avoid the contract if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of the contract as provided for in Art. 25 CISG. An absolute failure to deliver the goods definitely constitutes a fundamental breach (see Huber, in Schlechtriem, id, Art. 49, No. 5).
Claimant has made a valid declaration of avoidance of the contract in its fax-letter to Respondent of December 15 … Claimant has maintained that avoidance of the contract has been declared in the meeting of October 23 … which is reflected in Claimant's fax-message to Respondent of the same day … The declarations made by the parties in this meeting were subject to the approval of Claimant and to the cooperation of … Respondent's supplier. It is, however, one of the major characteristics of the UN-Sales Convention, when compared to its predecessors, the Hague Sales Conventions of 1964, that international sales contracts are not invalidated ex lege but only in case of a clear and unambiguous declaration of avoidance by one of the parties pursuant to Art. 26 CISG. For this reason, a notice of avoidance under Art. 26 CISG must satisfy a high standard of clarity and precision (Leser, in Schlechtriem, id, Art. 26, No. 10 in fine). The statements made during the meeting of October 23 … do not satisfy this high standard. In its fax-message of December 15 …‚ however, Claimant has made it clear to Respondent that it demands repayment of the amounts paid under the L/C. This declaration satisfies the strict standard to be applied under Art. 26 CISG. It does not matter that Claimant did not use the technical terms "avoidance" or "avoid". Declarations of avoidance under Art. 26 CISG may be made implicitly, provided that it is made clear to the other party that the party entitled to avoidance does not intend to stand by the contract any more (see Leser, id.). This is what Claimant did in its fax message of December 15 …
Due to this valid declaration of avoidance, Claimant has a claim for restitution of the amount paid to Respondent under the L/C less the amount already repaid by Respondent … under Art. 81(2) CISG ...
In the oral hearing, Respondent has argued that it is relieved from refunding the purchase price to Claimant because the monies received from Claimant are no longer in Respondent's possession. This view, however, misinterprets the true nature of the restitution system established in Art. 81 et seq. CISG. This system does not establish a condictio indebiti in the proper sense. For this reason, a reference to the rules of unjust enrichment of the applicable domestic law is neither necessary nor permissible (see Magnus, in Staudinger, Kommentar zum Bürgerlichen Gesetzbuch, 13th ed. 1994, Art. 81 CISG, … No. 11). Rather, the system is based on the Roman law model of actio quanti minoris (see Leser, in: Schlechtriem, id, Intro. to Arts. 81-84, No. 10). While the buyer's right to avoid the contract and claim restitution may be foreclosed if he is unable to restitute the goods received by him in an unimpaired condition (Art. 82 CISG), a similar rule does not exist with respect to the purchase price received by the seller. The restitution system is based on the notion that monies received by the seller from the buyer can always be restituted. This is why Art. 84 (1) CISG imposes an automatic duty upon the seller to pay interest on the purchase price. This duty is automatic because it is assumed that the seller has benefited from being in possession of the purchase price since the moment of payment to him (see Kritzer, Guide to the Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, 1989, at 536).
Since Respondent is under an obligation to repay the contract price, he also has to pay interest to Claimant under Art. 84 (1) CISG from the date on which the price was paid… The rate of interest is not provided for in the Convention. Reference has to be made in this context to the domestic law applicable to the contract, i.e. German law … Sec. 352 (1) of the German Commercial Code provides for an interest rate between merchants of 5% p.a.
Claimant maintains that in addition to this claim for restitution of the amount paid to Respondent under the L/C, it is entitled to damages for the interest payments to [bank] and the refinancing costs incurred due to the South-East Asian financial crisis under Art. 45(2), 74 CISG. This view is based on the wording of Art. 45 (1) CISG. This Article provides that the buyer may, among other remedies, claim damages if the seller "...fails to perform any of his obligations under the contract or this Convention…". In Claimant's view, this reference to the seller's obligations at law, i.e. under the UN-Sales Convention, includes the seller's duty to restitute amounts received from the buyer in case of avoidance of the contract by the buyer under Art. 81(2) CISG. A violation of this duty under the Convention would, in Claimant's view, trigger a claim for damages. This claim for damages would be due, not for non-delivery, but for Respondent's violation of a duty under the Convention. The damage claim would, therefore, be outside the special condition contained in the contract, the scope of which is limited to damages for non-delivery.
The Tribunal does not follow this view. It is based on a misconception of the relationship between the seller's primary obligations under the contract, the buyer's right to claim damages under Art. 45 (2), 74 CISG and the buyer's right to avoid the contract pursuant to Art. 49 CISG.
The reference made in Art. 45 (1) CISG to the seller's obligations "under the contract or this Convention" takes up the wording of Art. 30 CISG in fine. Art. 30 CISG outlines the seller's primary and principal obligations to deliver the goods, hand over the documents and transfer the property in the goods sold. The wording of Art. 30 CISG makes it clear that the scope and substance of these primary obligations are determined chiefly by the terms of the contract (see Art. 6 CISG). The sole purpose of the reference to the seller's obligations under "this Convention" is to make it clear that the Convention's provisions governing the seller's obligations in Art. 30 et seq. CISG apply only in so far as the contract contains no other specific provision (see Huber, in: Schlechtriem, Art. 30, No. 1) ...
It follows from this interconnection between Art. 30 and Art. 45 CISG that the buyer has a right for damages under Art. 45 (1) CISG if the seller fails to perform any of these primary obligations determined by the provisions of the contract or, absent such agreement of the parties, by Art. 30 et seq. CISG. In the case before the Tribunal it is the non-delivery of the goods by Respondent.
The identical wording of Art. 30 and 45 CISG also makes it clear that the buyer's right to damages is triggered only in case of the seller's failure to perform these primary obligations. The wording "...or this Convention…" in Art. 45 (1) CISG refers in the primary obligations of the seller laid down in Art. 30- 44 CISG [sic] or some ancillary obligations provided for in the Convention (e.g. Art. 85, 88 (2)) or in the contract (see Huber, in: Schlechtriem, id, Art. 45, No. 2). The duty to restitute amounts paid to the seller under Art. 81 (2) CISG does not constitute such a primary obligation arising out of the contract or the Convention. This duty is triggered by a fundamental breach of the seller and therefore does not fall within the catalogue of primary obligations listed in Art. 30 et seq. CISG or agreed upon by the parties. Rather, the duty to restitute is a secondary obligation arising upon the seller's breach of contract. Such secondary obligations are not meant by the reference in Art. 45 (1) CISG to the seller's obligations "under…the Convention".
This view is confirmed by the relationship between damage claims and restitution within the Convention's system of remedies. The drafters of the Convention were well aware that the buyer might have a justified claim for damages in addition to restitution. They have made it clear in Art. 45 (2) CISG that the buyer's right to claim damages which is triggered by the seller's failure to perform one of his primary obligations under Art. 30 et seq. CISG is not foreclosed by the buyer exercising other remedies. This general rule is put in more specific terms for the buyer's right to avoid the contract in Art. 81(1) CISG. This provision provides that avoidance of the contract by the buyer releases both parties from their obligations under the contract, "subject to any damages which may be due". This wording does not refer to a new claim for damages arising due to the seller's failure to refund the purchase price received from the buyer. Rather, this wording provides for the continuation of any claims for damages which may exist due to the seller's violation of his primary obligation under the contract or under Art. 30 et seq. CISG (see Leser, in: Schlechtriem, id., Art. 84, No. 12). This continuing claim for damages covers the part of the loss which exceeds the interest claim under Art. 84 (1) CISG (Leser, id). New claims for damages may arise after avoidance only with respect to the violation of those contractual duties which already existed prior to the avoidance of the contract and which are left untouched by the avoidance according to Art. 81(1) CISG (see Magnus, id., Nos. 7 and 16 in fine).
Thus, under the system of remedies established in the UN-Sales-Convention, it is the same event (i.e. Respondent's non-delivery as a fundamental breach) which triggers Claimant's right for damages and its right to avoid the contract. Art. 81(1) CISG makes it clear that the one (right in avoid) does not interfere with the other (right for damages). As has been explained in detail above …‚ Claimant's claim for damages under Art. 45 (1) (b), 74 CISG, triggered by Respondent's fundamental breach of contract, is precluded by the special condition for non-delivery contained in the contract.'
With respect to Claimant's entitlement to a 2% penalty
'Claimant is entitled to a penalty of 2% of the contract value under the special condition for non-delivery contained in the contract of … plus 5% interest.
The special condition is valid in spite of Claimant's avoidance of the contract. Art. 81(1) CISG provides that avoidance does not affect the validity of any contract provision governing the rights and duties of the parties consequent upon the avoidance of the contract. It is generally agreed that this rule also applies to pld-clauses (see Tallon, in Bianca/Bonell, id, Art. 81, No. 2.3; Leser in: Schlechtriem, id, Art. 81, No. 10).
The conditions of the clause ("non-delivery") are met ...
Respondent has maintained that it is released from any liability for damages under Art. 79 CISG or under the force majeure clause contained in the contract. This view does not constitute a valid defence against Claimant's claim under the special condition clause for two reasons. First, Art. 79 (5) CISG indicates that the release of liability provided for in Art. 79 (1) CISG only applies to claims for damages "under this Convention". As indicated supra …‚ pld-clauses are not governed by the Convention. Since German law as the law applicable to the pId-clause upholds its validity; Art. 79 (5) CISG thus preserves Claimant's right to collect the penalty payment under this clause (see Kritzer, id, at 518).
More important, non-delivery by a supplier does not fall under the concept of exemption from liability laid down in Art. 79 CISG or the force majeure clause contained in the contract. The contract clearly indicates that the goods sold were not a specific lot, but generic goods … In this case, the risk of non-delivery by its supplier ("procurement risk") is clearly on the seller, i.e, Respondent (see Stoll, in Schlechtriem, id, Art. 79, No. 30). This is in line with the constant practice of ICC arbitrators who grant force majeure defences only in extreme cases such as war, strikes, riots, embargoes or other incidences listed in the force majeure clause of the contract. In cases of impediments to performance related to the typical commercial risks involved in the transaction, however, they uphold the principle of "pacta sunt servanda", thus preserving the sanctity of the contract as the magna charta of international contract law (sec 1CC Award No. 8486, Clunet 1998, at 1047, 1048; No. 5485, Yearbook Commercial Arbitration 1989, at 156, 168; No. 5953, Clunet 1990, at 1056).
Claimant's claim for the 2% penalty is subject to interest according to Secs. 284, 288 BGB. Since the penalty clause is not governed by CISG, the non-performance of the penalty clause is subject to the applicable German contract law. The requirements for an interest claim as statutory compensation for default under Secs. 284, 288 (1) BGB are met …'}}
Published in English (excerpt):
ICC International Court of Arbitration Bullettin Vol.11/n.2, 2000, 117-121.}}