- Arbitral Award
- ICC International Court of Arbitration 16816
LONG-TERM CONTRACTS - PROJECT CONTRACT - BETWEEN A CHINESE PARTY AND A UNITED STATES PARTY - SILENT AS TO THE APPLICABLE LAW
SOLE ARBITRATOR, HAVING FOUND THAT THE CONTRACT DID NOT INDICATE A GOVERNING LAW. THE PARTIES WERE FROM DIFFERENT JURISDICTIONS AND THE CONTRACT HAD TO BE PERFORMED IN DIFFERENT JURISDICTION, DECIDED TO APPLY THE UNIDROIT PRINCIPLES IN ACCORDANCE WITH ARTICLE 17 ICC ARBITRATION RULES - UNIDROIT PRINCIPLES AS THE MOST APPROPRIATE RULES OF LAW
CONTRACT INTERPRETATION - PARTIES' INTENTIONS DETERMINED ON THE BASIS OF THE LETTER, NATURE AND PURPOSE OF THE AGREEMENT AND THE PARTIES' CONDUCT (ART. 4.3 UNIDROIT PRINCIPLES) - REFERENCE ALSO TO ARTS. 4.4 AND 4.5 UNIDROIT PRINCIPLES
PROJECT MANAGER'S FAILURE TO MEET CONTRACTUAL REQUIREMENTS AND EXPECTATIONS – CLIENT’S RIGHT TO SUSPEND CONTRACTUAL PAYMENTS - APPLICATION OF GENERAL PRINCIPLE OF A PARTY’S RIGHT TO WITHHOLD PERFORMANCE IN CASE OF NON-PERFORMANCE BY THE OTHER PARTY (ART. 7.1.3 UNIDROIT PRINCIPLES)
RIGHT TO WITHHOLD PERFORMANCE PENDING ADEQUATE ASSURANCE OF PERFORMANCE - RIGHT TO TERMINATE THE CONTRACT IN THE ABSENCE OF ADEQUATE ASSURANCE OF DUE PERFORMANCE - REFERENCE TO ART. 7.3.4 UNIDROIT PRINCIPLES
REQUEST FOR TERMINATION OF THE CONTRACT BY THE NON-PERFORMING PARTY - BEHAVIOR CONTRARY TO GOOD FAITH AND FAIR DEALINGS - REFERENCE TO ARTS. 1.7 AND 1.8 UNIDROIT PRINCIPLES
DAMAGES FOR LOSS OF REPUTATION OF THE CLIENT - REFERENCE TO ART. 7.4.2(2) UNIDROIT PRINCIPLES - DAMAGES NON-REFUNDABLE FAILING A DIRECT LINK BETWEEN THE LOSS OF SALES AND THE LOSS OF REPUTATION FOLLOWING FROM THE POOR PERFORMANCE OF THE PRODUCT SUPPLIED BY THE PROJECT MANAGER
A Chinese party (Respondent) and a United States party (Claimant) entered into an agreement under which the latter, as project manager, would design, develop and manufacture a certain product powered by a certain engine in accordance with an agreed program, while the first was to pay a fee according to an agreed schedule. According to the agreement, the Claimant would also manage on behalf of Respondent a team that would make use of some units of the product and participate in certain events for three consecutive seasons.
Initial tests of the product showed substantial problems that were not fixed by the replacement of part of the engine. Although test results continued to be poor, Claimant did not inform the client of negative attitude of its team and kept reassuring Respondent that the problems would be solved. But when the product continued to show serious defects at tests held a few days later, Respondent decided to withhold payment of one of the invoices. Claimant sent to Respondent a formal notice stating that Respondent's failure to pay the invoice was a breach and therefore a repudiation of the agreement. Respondent replied that it accepted the termination.
Claimant commenced ICC arbitration as provided for in the agreement, seeking damages for loss of profit (payments due under the agreement and costs of development). Respondent counterclaimed for reimbursement of the sums paid to Claimant and other costs incurred on a reliance basis, and for damages to its business reputation.
The Sole Arbitrator denied Claimant's claims and granted Respondent's counterclaims.
As to the applicable substantive law, the Arbitrator affirmed that, since the agreement did not indicate a governing law, the parties were from different jurisdictions and the obligations under the agreement were to be performed in different jurisdictions, he would have applied, in the exercise of his power and discretion under the ICC Rules, the lex mercatoria, as reflected in the UNIDROIT Principles of International Commercial Contracts 2004.
On the merits, the Arbitrator found that Claimant breached the agreement between the parties by failing to provide a product meeting the contractual requirements (requirements that the Arbitrator determined by interpreting the contract according to arts. 4.3, 4.4 and 4.5 UNIDROIT Principles). Claimant was therefore not entitled to terminate the contract when Respondent suspended payment under an invoice that had become due: the Arbitrator found that Claimant's request for termination was in bad faith according to arts. 1.7 e 1.8 UNIDROIT Principles.
On the contrary, Respondent was entitled to suspend payment and to terminate the contract, because of Claimant's non-performance. The Sole Arbitrator noted that the right to suspend performance under art. 7.1.3 UNIDROIT Principles may rise also in the case of partial performance and applies not only to the consecutive, but also to the simultaneous performance of contract, without exception due to the fact that payments are made in advance or in agreed installments. At the same time Respondent was entitled to refrain from making the payment on the due date pending adequate assurance of performance from Claimant (art. 7.3.4 UNIDROIT Principles).
As a consequence, Respondent was also entitled to the reimbursement of its payments to Claimant, as well as costs incurred in reliance of the parties' contract, but not to compensation for damages based on loss of reputation. Although such damages are in principle payable under the UNIDROIT Principles (art. 7.4.2(2) UNIDROIT Principles), in the case at hand Respondent had failed to establish a direct link between its loss of sales and the loss of reputation following from the poor performance of the product supplied by Claimant.
Albert Jan van den Berg (ed), Yearbook Commercial Arbitration 2015 – Vol. XL (Kluwer Law International 2015) pp. 236-293}}