- Arbitral Award
- ICC International Court of Arbitration (Paris) 9474
STATE CONTRACTS - SERVICE CONTRACT - ARBITRAL TRIBUNAL REQUESTED TO APPLY “GENERAL STANDARDS AND RULES OF INTERNATIONAL CONTRACTS” – REFERENCE TO CISG “WHICH EMBODIES UNIVERSAL PRINCIPLES APPLICABLE IN INTERNATIONAL CONTRACTS” AND TO THE UNIDROIT PRINCIPLES AND TO THE PRINCIPLES OF EUROPEAN CONTRACT LAW AS “RECENT DOCUMENTS THAT EXPRESS THE GENERAL STANDARDS AND RULES OF COMMERCIAL LAW”.
AVOIDANCE OF CONTRACT FOR FRAUDULENT NON-DISCLOSURE OF CIRCUMSTANCES (SEE ARTICLES 3.5 AND 3.8 OF THE UNIDROIT PRINCIPLES; ARTICLE 4.107 OF THE PRINCIPLES OF EUROPEAN CONTRACT LAW).
TERMINATION OF CONTRACT FOR NON-PERFORMANCE – NOTICE TO BE GIVEN WITHIN A REASONABLE TIME (SEE ARTICLE 7.3.2 OF THE UNIDROIT PRINCIPLES).
Claimant, the National Bank of Country X, entered into a contract with Defendant for the printing of bank notes. After Defendant had made a first delivery of bank notes which did not meet the quality standards set out in the contract, the Parties entered into a new agreement (“executory agreement”) according to which Defendant would at its own expense manufacture another batch of bank notes on the understanding that if these notes met the contractual specifications, Claimant would place a new order for the bank notes it required. According to Claimant Defendant again failed to deliver satisfactory bank notes while Defendant insisted on getting the new order as stipulated in the second agreement.
Claimant first of all claimed that the second agreement was to be considered null and void because of a fraudulent non-disclosure by Defendant of circumstances which should have been disclosed, namely that Mister X, a former employee of Claimant who promoted the agreement, was actually paid by Defandant. In any case Claimant requested damages for faulty performance of the said agreement.
The arbitration clause provided that the Arbitral Tribunal was to decide “fairly” and at the beginning of proceedings the Parties accepted the Arbitral Tribunal’s proposal to apply “the general standards and rules of international contracts”.
The Arbitral Tribunal held that the U.N. Convention on Contracts for the International Sale of Goods (CISG) embodies universal principles applicable in international contracts. However, also in view of the fact that the second so-called executory agreement concluded between the parties was not any longer a mere sales contract but involved components of a settlement agreement, it decided to apply together with CISG “other recent documents that express the general standards and rules of commercial law” such as the UNIDROIT Principles of International Commercial Contracts and the Principles of European Contract Law.
As to the merits of the case the Arbitral Tribunal rejected the Claimant’s argument that the agreement was null and void because of fraud by Defendant arguing that it was not sufficiently proved that Claimant entered into the agreement with Defendant only because of Mister X’s intervention who after all was at that time no longer Claimant’s employee, and to this effect expressly referred to Articles 3.5 and 3.8 of the UNIDROIT Principles and to Article 4.107 of the Principles of European Contract Law. On the other hand, the Arbitral Tribunal upheld Claimant’s request for damages: in rejecting Defendant’s objection that Claimant had not given prompt notice of the defects of the goods and had therefore been prevented from terminating the contract, the Arbitral Tribunal expressly referred not only to Article 7.3.2 of the UNIDROIT Principles according to which notice of termination must be given “within a reasonable time”, but also to Art. 40 CISG according to which a seller is not entitled to rely on a late notice of defects by seller if it knew or ought to have known the defects itself.
 According to the arbitration clauses, the Arbitral Tribunal should decide “fairly”. The meaning of these clauses was discussed with the parties...Both parties accepted the Arbitral Tribunal’s proposal to apply “the general standards and rules of international contracts” (Procedural Order No. 1, para. 1, that amended the Terms of Reference).
 The Tribunal is of the opinion that these “general principles of contract law” are not directly expressed in a specific international convention.
(a) The States of both parties are now bound by the UN Convention on Contracts for the International Sale of Goods (“the Vienna Convention”). However, many of the circumstances of the present arbitration predate [Claimant State]’s ratification of the Convention. Although it is generally recognized that the Convention embodies universal principles applicable in international contracts, whether or not the States of the parties are signatories of the Convention (see esp. Final Award in case no. 5713 of 1989, Collection of ICC Arbitral Awards 1986-1990, p. 223 if), the Tribunal considers that, if the parties had wanted to submit their agreements to the convention, they would have introduced an express clause in that sense.
Besides, in the opinion of the Tribunal, the 1993 Agreement is not merely a sale of goods contract; even if the Agreement has been concluded in the frame of a sale of goods, it entails other components which are typical of a settlement agreement.
(b) There are other recent documents that express the general standards and rules of commercial law, in particular the Principles of European Contract Law and the Unidroit Principles of Commercial Contracts. Nevertheless the general standards and rules of international commercial law have to be applied to the specific circumstances of the case and in particular to the object of the contract that reflects the intentions of the parties.
The Tribunal shall tackle this issue more precisely as to each one of the specific questions it has to solve in this award.
 The general principles of international contracts may also be found among various rules of domestic law, of both common and civil law systems, as applied to international contracts, such as the American Uniform Commercial Code. The Tribunal considers however that in the present litigation neither [Defendant State’s] nor [Claimant State’s] law offers relevant and applicable rules. This may be inferred again from the fact that the parties did not refer expressly to any of their domestic rules.’
Validity of the 1993 agreement
 The question at issue in this section is related to contentions made by the Bank in regard to fraud and mistake that could affect the validity of the 1993 Agreement.
The position of the parties:
 (a) According to the Bank, the 1993 Agreement must be considered null and void . . . According to [Defendant], Mr [X] was paid . . . as “Public Relation and Consulting Fees” relating to the settlement agreement with the Bank . . . [Defendant]’s non-disclosure of the payment of this generous fee to Mr [X] constitutes a fraudulent non-disclosure of a circumstance which according to reasonable standards of good faith should have been disclosed, with reference to the Unidroit Principles of International Commercial Contracts, arts. 3.5 and 3.8, and the Principles of European Contract Law 1997, art. 4.107 . . .
(b) According to [Defendant], the Bank’s charges, according to which [Defendant] made improper payments to Mr [X] in connection with the conclusion of the 1993 Memorandum of Agreement, are false, unsupported by any evidence and made with malicious and defamatory intent.,
The position of the Tribunal
 The Arbitral Tribunal is of the opinion that the Bank’s allegations of fraud and mistake against the validity of the 1993 Agreement are not supported by sufficient evidence and must therefore be rejected.
 First of all, the payment of “Public Relations and Consulting fees” to Mr [X]. It has not been demonstrated that this payment was done with a fraudulent intent, as it may be inferred from the following arguments and facts.
(a) Even if Mr [X] was formerly a representative of the Bank, he had been introduced to [Defendant] as no longer being the latter’s representative.
Finally, the nature of the relationship between the Bank, [Defendant] and Mr [X] may also be confirmed by the fact that the Governor . . . referred to discussions with Mr [X] as to discussions with an “outsider”.
(b) In addition, Mr [X] had never met anyone of [Defendant] before the meeting . . .
(c) Moreover, the fact that he had represented [Defendant] on some occasions was well known to the Bank, and this from the beginning of the negotiations . . .
(ci) Thus, the payment did not amount to corruption and its non-disclosure to a fraudulent non-disclosure.
 Secondly, the extent of the influence. The Bank which has the burden of proof of its allegation did not bring sufficient evidence of its allegations as to the exact extent and consequences of Mr [X]’s undue influence.
Moreover, it did not prove that Mr [X] knew enough about the agreement to be able to influence and induce the Bank fraudulently. Finally, the Bank confirmed the agreement without reservation and never referred to the fact that its consent could have been vitiated.
 Thirdly, the responsibility and effect of the mistake that has been alleged to influence the conduct of the Bank is not supported by sufficient evidence.
(a) The mistake, that was due to the paper supplier’s concealment, is not sufficiently established in that their consequences on the Bank’s conduct were not direct. Indeed, the non-disclosure of the fraudulent payment to Mr [X], in case it was established, does not demonstrate that the latter, or [Defendant], was also responsible for the non-disclosure of the paper supplier’s action.
(b) This is confirmed by the fact that the Bank had communicated at once that it was dissatisfied with the banknotes delivery. This comforted [Defendant] in its opinion that it was not necessary to communicate facts that were already partly known by the Bank. This does not in any case establish any intent of concealing these precise facts from the Bank . . .
 The Arbitral Tribunal is of the opinion that the Bank’s allegations against the validity of the 1993 Agreement have not been sufficiently established and must therefore be rejected.’
Eligibility of the claims
 [Defendant] claims that the Bank is barred and/or estopped from claiming noncompliance with the terms of the 1993 Agreement.
[Defendant] contends that the Bank is precluded from asserting its claims of non-performance for the reason that, in reliance to its affirmations or conduct as to the contrary, [Defendant] incurred considerable harm. It relies on the general concept of waiver and estoppel.
 This issue relates to the question of whether the Bank had an affirmative duty to inspect the banknotes for conformity and if not, whether its silence implied an acceptation. In the event of defects, another issue is the issue of the existence of a duty to give notice, of the extent of the notice period and of the precise content of this notice.
The position of the parties:
 (a) According to the [Defendant] cannot meet the burden of proof as to its allegations that the Bank is barred or stopped from claiming non-compliance with the 1993 Agreement . . . As to the alleged waiver of the Bank’s rights, [Defendant] did not receive unequivocal information from the Bank that it had tendered satisfaction of its obligations to the 1993 Agreement. The fact that the Bank required the reimbursement of its advance payment for the banknotes . . . and the cost of the banknote quality inspection did not imply that it renounced its other rights under the 1993 Agreement... Besides, [Defendant]’s tender clearly demonstrated that it was not acting in reliance on any alleged rights under the 1993 Agreement and that it was submitted to new essential terms and conditions. Such a conduct may neither be interpreted as an unequivocal waiver of rights . . . nor as an estoppel by which the Bank would be precluded from asserting a right when it caused another to change his condition to his detriment. The Bank did not cause [Defendant] any harm by not awarding the tender to it and it did not give [Defendant] any reasons to rely to its detriment upon the exclusivity of the reasons stated.
As to the inspection and notice duties, even if they are subject to the general principles of law, parties are generally free to derogate from or vary the effect of any of the principles embodied in conventions of international law... Indeed, for the Bank, the terms of the . . . 1992 Memorandum meant that [Defendant] would remain responsible for banknotes which had not been inspected but which were found to contain printing errors during the period of issue. [Defendant]’s allegations as to the nature of the inspection that the Bank carried on after the first delivery and the derived course of conduct are erroneous as to its promptitude and completeness. Besides, according to the Bank, the 1993 Agreement being an executory accord, it is not subject to the principles governing international sales contracts, but only to general contract principles. Indeed, the fact that the quantity of banknotes agreed on was to be printed free of charge, the agreement was not a “transfer of goods in exchange for a price expressed in money.” Beside the argument of the contractual nature of the Agreement, an executory accord is meant to grant a “limited window of opportunity” within which an obligee can render performance thus making any concern about the cure of nonperformance and its consequences on the price secondary.
The Bank had actually notified [Defendant] on 10th May 1994 that [Defendant] had delivered many bad quality banknotes. Assuming that the Bank was required to give notice and that the 10th May 1994 letter was not sufficient, the Bank considers that the reasonable time of a notice, according to the Unidroit Principles, art. 7.3.2, is meant to prevent any harm due to uncertainty as to whether the Bank would accept the performance, which was not the case given the nature of executory accord of the Agreement. Given these conditions and the strains of the econo-political concerns and the reimbursement question, the Bank did act within a reasonable time.
In case the Tribunal decides that arts. 38 and 39 of the Vienna Convention should apply to the Agreement, the Bank claims that art. 40 of the same convention would defeat Defendant’s right to rely on the Bank’s alleged failure to give notice, since [Defendant] knew or could have been aware of the facts the lack of conformity relates to and could have disclosed them to the Bank. This principle may also be found in various national laws. Indeed, [Defendant] was aware of the Bank’s concerns about specific quality defects of the banknotes printed between 1990 and 1992. Even assuming that the Bank had a duty of notice and that it was not given in conformity with art. 39, art. 44 of the Vienna Convention states that it could still be able to claim damages if it has “a reasonable excuse for its failure to give the required notice.”
(b) According to [Defendant], the Bank met none of the conditions that should be fulfilled once the banknotes had been delivered and received.
The Bank’s representations and statements testify a relinquishment of rights and an intent not to assert any rights, i.e. a waiver or estoppel of its rights. The Bank is indeed stopped from asserting claims of non-performance by [Defendant] since [Defendant] incurred considerable harm in reliance on the Bank’s assurance of its performance and its inconsistent conduct. Moreover, according to civil law principles and the rules applied in international practice, a forfeiture of rights can be said to occur without consideration or reliance, depending on the circumstances. The Bank’s arguments that the law of sales does not apply to the Agreement are “for-fetched” since an agreement, that was nothing more than an embodiment of the modified terms . . . may be a sales contract. The amendment of a sales transaction must not indeed necessarily be supported by consideration . . . and may be done by mere agreement of the parties (art. 29 Vienna Convention and art. 2-209 UCC). Besides, the banknotes printed pursuant to the 1993 Agreement are not excluded as money or negotiable instruments from the Vienna Convention and the UCC rules.
The extent of the duty of a buyer of goods to inspect the goods that have been delivered depends on the precise circumstances and in particular the course of conduct or customary relationship between the parties, as deriving from the 1990, 1992 and 1993 Agreements. [Defendant] acknowledges the prompt (within two months) and meticulous inspecting of the banknotes delivered in 1992 in accordance with the first two Agreements. It holds however that this course of conduct was the one that was legitimately held to apply to the 1993 series and that the Bank did not respect it by not conducting any inspecting from 1993 to 1995.
[Defendant] further claims that the Bank did not respect its duty of prompt notice. This duty derives not only from legal principles, but also from the course of conduct that maybe derived from the behaviour of the Bank after the first delivery of banknotes in 1992. The 1992 Memorandum of Agreement, that set particular rules as to the inspection and notice of defects, did not have the meaning implied by the Bank, of waiving the applicability of international contract rules, and in view of the mass of contractual documents, this Memorandum did not constitute more than a “freely, formally and unequivocally agreed” contractual waiver of the legal principles applicable. It was certainly not a course of conduct between the parties exempting the Bank from virtually all of the recognized rules applicable to international contracts. It was superseded by further agreements and was only entered on an ad hoc basis for as long as the inspection was not completed. Further, the Bank’s interpretation according to which a buyer could only notify defects he has found straight away years later seems unreasonable. Such a clause of “everlasting guarantee” cannot be inferred from the course of conduct of the parties.
The fact that no notification of defects was communicated until over three years later cannot be considered as constituting a prompt notice . . . as it is confirmed by reference to the average notification period for overt defects according to art. 39 of the Vienna Convention, the UCC or national laws, which is at the most 6 months. This view may be confirmed by the fact that the Bank strongly insisted from 1993 onwards on the reimbursement of its 10% deposit without mentioning the defects it now alleges at all. The Bank’s mention of the existence of many bad quality banknotes in a letter dated 10th May 1994 lacked the specificity required by a notice under art. 19 of the Vienna Convention.
The Bank may not excuse its conduct under art. 40 of the Vienna Convention; the scope of art. 40 is to protect the buyer against the bad faith of the seller. [Defendant]’s knowledge of the Bank’s habits of thorough inspections and the fact that the parties had foreseen the services of a technical expert tend to prove that the Bank knew the non-conformity of the banknotes. Besides, it was inconsistent with good faith for the Bank to be aware of the defects and wait. Further, the Bank had no valid excuse under art. 44 of the Vienna Convention; this Article is not intended to condone a breach of good faith that derives from inconsistent and misleading conduct and statements that may not be justified by “econo-political concerns.”
Finally, the outer limit of two years for a notification of defects according to the Vienna Convention, or six months according to French law, carries also a limit for the existence of the cause of action based thereon. The Bank is therefore barred from prosecuting its claims for failing to bring a claim within a reasonable time.
The position of the Tribunal
 It constitutes a general principal of international contracts that a party may be regarded as barred from pursuing its claims for having renounced its rights expressly or tacitly, by a waiver or an estoppel, or simply for having missed a reasonable notice period. The burden of proof lies on the party that alleges the waiver or the estoppel. The evidence requirements are very strong given the stringent consequences of a waiver or an estoppel.
(a) To renounce its rights expressly, the Bank would have had to clearly state its intentions and nothing in the facts supports it did at the time [Defendant] claims it did. The fact that the Bank required the reimbursement of its advance payment for the banknotes and the cost of the banknote quality inspection did not imply that it renounced its other rights under the 1993 Agreement. In these conditions, the Tribunal considers that the Bank did not act as to waive its rights under the 1993 Agreement.
(b) To renounce its rights tacitly requires that one adopts an attitude that implies a relinquishment of one’s rights, such as a voluntary omission to inspect the goods or to give a timely notice of its defects. One should note however, as to the alleged estoppel of the Bank’s rights that would derive from its incoherent attitude regarding the 1996 tender, that [Defendant]’s tender demonstrated clearly that it was not acting in reliance on any alleged rights under the 1993 Agreement. It was by contrast submitted to new essential terms and conditions . . . and sufficient evidence and notice was given all along to [Defendant] of its inability to guarantee the security of the banknotes tendered. The Bank did not therefore give [Defendant] any reasons by an allegedly incoherent conduct to rely to its detriment upon the exclusivity of the reasons stated. The issue of the coherence and signification of the Bank’s attitudes, and thus of an estoppel of its rights under the 1993 Agreement, further depends on the existence of a duty to inspect and to give a timely and precise notice. It is the purpose of the following lines to discuss this issue.
 As established earlier . . . the Tribunal is invited by the arbitration clause to decide “fairly.” With the agreement of the Parties, this has been interpreted as a reference to the general standards and rules of international contracts. The Tribunal does not regard itself as bound by the provisions of any international convention in particular. It considers that the provisions of the Vienna Convention do not apply directly to the present arbitration. If the parties had meant so, they would have inserted in their agreement a concrete reference to it. The issue should therefore be assessed in a broader perspective.
 The Tribunal renounces examining in detail whether the Bank gave notice of the default properly and in due time; the question may therefore stay open. Indeed, the Tribunal considers that in view of all circumstances it cannot decide to deprive the Bank of its rights to claim compensation for the violation of the 1993 Agreement. Various reasons may be brought forward:
(a) First of all, it is a general recognized principle of commercial law that a vendor cannot rely on a buyer’s failure to inspect the goods and to give timely notice of defects, if the vendor has adopted a conduct which is not in conformity with his own duties. Especially, it is generally admitted that the vendor is precluded from asserting the non-conformity of the notice if it has concealed the existence of the defect (see in particular art. 40 of the Vienna Convention). The same principle applies if the vendor gave the buyer specific guarantees regarding the quality of the goods.
(b) In the present case, [Defendant] knew that there had been flaws among the previous deliveries . . . and especially as to the paper that had been delivered. It had therefore committed itself to new deliveries of quality and to double check all banknotes. It seems however that it did not abide by its duty, as confirmed by the different reports mandated by the Bank.
One may therefore consider that [Defendant] accepted to deliver banknotes without having evidenced to the Tribunal that it had performed its duty to inspect. It constitutes a general principle of international contracts that a party cannot claim the violation of a duty to inspect when it has concealed a defect it was aware of.
(c) Secondly, the particular nature of the relationship between the parties. The 1993 Agreement was concluded in a spirit of conciliation. It meant to put an end to past disputes. [Defendant] committed itself to print new series and deliver banknotes that complied with the contractual requirements. The Bank renounced its past claims and even agreed to future contracts with [Defendant]. As to the general spirit of the agreement, it intended to compromise in order to reach a mutual agreement.
(d) Thirdly, the general attitude of [Defendant] in this matter is a further argument. The Thbunal regards as for-fetched that [Defendant] invokes the Bank’s delay in order to free itself from a part of its obligation under the 1993 Agreement. [Defendant] adopted indeed a negative conduct, especially since it waited more than two years before it accepted to pay the amount it owed. Even in view of the likely link with the provisional award of a new contract, [Defendant]’s reluctance to promptly settle the outstanding sums, especially the Bank’s advance payment, meant that the Bank was reluctant to give notice of defects in a straightforward manner, as the Bank feared that [Defendant] might then refuse to reimburse the sums due. To use the wording of the Bank, it was treated as a hostage and not as a business client.
 In these conditions, the Arbitral Tribunal considers that the Bank may not be deprived of its rights and claims arising from the violation of the 1993 Agreement.’}}
Excerpt of the award published in ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 60-67.}}