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CISG CASE PRESENTATION

ICC Arbitration Case No. 10377 of 2002 (Textile product machines case) [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/020377i1.html]

Primary source(s) of information for case presentation: Yearbook Comm. Arb. (2006)

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Case identification

DATE OF DECISION: 20020000 (2002)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 10377 of 2002

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Finland (respondent)

BUYER'S COUNTRY: Portugal (claimant)

GOODS INVOLVED: Machine for production of household textile product


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 80 ; 82

Classification of issues using UNCITRAL classification code numbers:

35A ; 35B [Conformity of goods to contract: quality, quantity and description required by contract; Requirements implied by law];

80A [Failure of performance caused by other party (party causing non-performance): loss of rights];

82A1 [Buyer would have right to avoid contract except: inability to return goods in same condition]

Descriptors: Conformity of goods ; Avoidance ; Restitution ; Failure of performance, other party

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (English): Text presented below; see also 31 Yearbook Commercial Arbitration (2006) 72-94

Translation: Unavailable

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text

Published at Yearbook Comm. Arb'n XXXI, Albert Jan van den Berg, ed. (Kluwer 2007) 72-94. Copyright owner: The International Council of Commercial Arbitration (ICCA). Reprinted with permission of ICCA.

ICC Arbitration Case 10377 of 2002

FACTS

In 1996, the Finnish seller of a machine for the production of a household textile product submitted an "Offer" to the Portuguese buyer for the purchase of the machine, including assembly of the machine. The Offer referred to the General Conditions for the Supply of Mechanical, Electrical and Associated Electronic Products (the ORGALIME). The Offer specified that the machine would produce four to six units per minute and could be operated by one person. The machine was delivered several months later and ninety percent of the purchase price was paid.

The machine was assembled and the seller's technicians conducted trial runs and prepared protocols about the trial runs. Shortly thereafter, the buyer complained to the seller about the production capacity of the machine and the seller sent technicians to improve the situation. As a result of further complaints, [page 72] the seller informed the buyer that there were problems with two motors and that it was necessary to send technicians. Based on the reports of the technicians, the seller informed the buyer that the buyer had caused the problem by using poor quality raw material, a wrong component and that the buyer's employees were not willing to be sufficiently instructed in the operation of the machine. The seller faxed the buyer recommending the use of a component produced by a particular supplier and stated in the same telefax that according to the seller's technician (Mr. T) the machine was capable of producing four to six units per minute. In that telefax, the seller also demanded the remaining ten percent of the purchase price.

During the course of the following year, the seller and buyer exchanged several letters dealing with complaints regarding the production capacity of the machine and the frequent interruptions in the production process. In 1998 the buyer demanded that the seller replace the machine and declared that it would rescind the contract if it were not satisfied. Several months later, the buyer rescinded the contract and subsequently initiated ICC arbitration as provided for in the ORGALIME Conditions.

In the arbitration, the buyer asserted that the machine never produced the capacities set forth in the purchase agreement and that there were other defects. The buyer also asserted that it had validly rescinded the purchase agreement. Consequently, the buyer claimed the return of the portion of the purchase price already paid as well as compensation for economic losses incurred equal to fifteen percent of the purchase price, plus interest on both sums. ... The buyer also requested twelve percent post-award interest.

The seller maintained that the machine conformed to the purchase agreement and that the problems were caused by the buyer. Moreover, the seller maintained that the buyer did not notify it of the defects within the prescribed time limit. Consequently, the seller claimed the remainder of the sales price plus interest. In the event that the tribunal were to hold that the purchase agreement had been rescinded, the seller alternatively claimed compensation for damages based on the depreciation of the machine.

The sole arbitrator appointed an expert who concluded that both parties had not complied with the agreements made and that it would be equitable to reduce the price of the machine by twenty-five percent.

The sole arbitrator noted that the dispute was governed by the ORGALIME supplemented by the 1980 Convention on the International Sale of Goods (CISG). Under the ORGALIME terms, the purchase agreement could be terminated if the machine was defective when delivered, the buyer notified the seller of the defect, the seller did not rectify the defect, the defect was so [page 73] substantial as to deprive the buyer of the benefit of the contract and the termination right was not excluded by any other applicable rule. The defects alleged by the buyer were either not established, were not timely notified or were not substantial enough to be considered as depriving the buyer of the benefit of the contract.

The sole arbitrator then looked to the CISG. Under Art. 82(1) CISG the buyer loses the right to terminate the contract or the right to substitute goods if it is impossible to make restitution of the goods substantially in the condition in which they were received. Under Art. 82(2) CISG, however, the contract could be terminated if the impossibility was not due to an act or omission of the buyer. The sole arbitrator determined that the buyer had used the machine after the defect had been discovered and also after having declared the termination of the purchase agreement thus causing the impossibility. This led to the conclusion that even though the machine was defective, the termination right was excluded since it was impossible to return the machine in the condition in which it was received and the claim for repayment of the ninety percent of the purchase price was unfounded. Furthermore, since under ORGALIME, the claim for compensation for loss suffered is dependent on the right to termination, the buyer could not claim compensation for losses suffered.

The sole arbitrator rejected the seller's counterclaim to the remaining ten percent of the purchase price as the machine had been defective at the time of delivery. Thus, the seller was only entitled to ninety percent of the purchase price.

As the buyer's claims were substantially denied and the seller's counterclaims were totally unsuccessful, the sole arbitrator concluded that it was reasonable for the parties equally to bear the costs of the arbitration and the expert. In awarding the legal fees, the sole arbitrator took into account that the buyer had instituted the arbitration, the buyer's claims were substantially unsuccessful, the respondent's counterclaims were totally unsuccessful and the amount of the claims greatly exceeded the amount of the counterclaims. Accordingly, the seller was awarded a portion of its legal fees.

Excerpt

I. APPLICABLE RULES

[1] "In the Terms of Reference, the Parties have agreed that the dispute shall be governed by the ORGALIME supplemented by the Convention on the [page 74] International Sale of Goods (CISG). Even without this agreement the CISG would supplement the ORGALIME since the ORGALIME provide in No. 45 that any dispute 'shall be governed by the substantive law of the country of the Supplier's place of business most closely connected with the contract'. Since [Seller] as the supplier is a Finnish company, Finnish law applies. Finland signed the CISG on 26 May 1981 and ratified the CISG on 1 January 1989.[1]

[2] "According to Art. l(l)(b) CISG, the CISG applies to contracts of sale of goods between parties whose place of business is in different States when the rules of private international law lead to the application of the law of the Contracting State. According to the Finnish rules of private international law, parties may enter into choice of law clauses. The parties in the case at hand have chosen to apply Finnish law. Finland is a Contracting State and thus the CISG would apply even without an express agreement of the parties."

II. ANALYSIS

[3] "ORGALIME No. 33 b) provides:

'Where the defect has not been successfully remedied as stipulated under Clause 32, where the defect is so substantial as to significantly deprive the Purchaser of the benefit of the contract, the Purchaser may terminate the contract by notice in writing to the supplier. The Purchaser is then entitled to compensation for the loss he has suffered up to a maximum of 15 per cent of the purchase price.'

Thus, [Buyer] would have a right to terminate the purchase agreement, according to No. 33 b) ORGALIME, if

(a) the Machine had a defect at the time of the delivery,
(b) [Buyer] timely notified [Seller] of the defect,
(c) [Seller] did not remedy the defect,
(d) the defect is so substantial as to significantly deprive the purchase of the benefit of the contract and
(e) the termination right of [Buyer] is not excluded by any other applicable rule (such as the CISG)." [page 75]

1. Alleged Defects

[4] "From [Buyer]'s allegation for purposes of analysis under No. 33 b) ORGALIME, six types of defects must be distinguished:

(a) the insufficient production capacity of the Machine,
(b) the excessive use of the component,
(c) the stain damages on the product,
(d) the significant deviation of weight of the product produced,
(e) the lack of the safety measure for the operating staff and
(f) the frequent interruptions in the production process.

As will be substantiated below in more detail, the problems described above under (a) to (c) have, in the opinion of the Arbitral Tribunal, not been established by [Buyer] to be defects. Regarding the problems described under (d) and (e), defects have been established, but the Arbitral Tribunal finds that [Buyer] did not timely notify [Seller].

[5] "Lastly, the problem referred to under (f) has been proven to be a defect which has also been timely notified by [Buyer]. However, it appears doubtful whether it constitutes a defect so substantial as to deprive [Buyer] of the benefits of the purchase agreement. This issue, however, can be left open since the Arbitral Tribunal holds in any event a termination right of the contract to be excluded under the applicable CISG rules."

a. Production capacity

[6] "The Arbitral Tribunal is convinced that the Machine meets the contractually agreed production capacity. The first question to be answered is which production capacity was actually agreed upon. In this respect, the Arbitral Tribunal interprets the meaning of the contractual stipulations in accordance with the opinion of the Expert, i.e. that the production capacity mentioned in [Seller]'s Offer (... rendement de la ligne ...) refers to the net operating time of the machine without taking into account breaks in the production process. A specification of the production capacity of a machine regularly states the number of units a machine is capable of producing during the net time of its operation. In this context, the parties to a purchase agreement generally have the opportunity to stipulate either a maximum or a minimum production capacity. The maximum production capacity reflects the number of units the machine is capable of producing under optimum conditions whereas the minimum [page 76] production capacity states the number of units the machine must be capable of producing in any event.

[7] "The Parties entered into the purchase agreement based on the specifications in [Seller]'s Offer (the Offer). The pertinent specification in the Offer reads as follows:

'Le rendement de la ligne est jusqu'à 4-6 ... par minute ...'

Because of the word 'jusqu'à' this specification must be understood as a description of the maximum and not the minimum production capacity of the Machine. Hence, the Offer solely states the number of the units the Machine is capable of producing under optimum conditions. It follows that a minimum capacity was not expressly stipulated. This is not to say that [Buyer] could not reasonably expect some minimum production capacity based on implied terms. This capacity, however, is not identical with the stipulated maximum number and would allow some downward deviation from this number, as long as such deviation is not so significant as to frustrate [Buyer]'s reasonable expectations.

[8] "It is undisputed (and confirmed by the findings of the Expert) that the Machine is capable of producing at least 3.4 units per minute during its net operating time. This is conceded by [Buyer] itself and during the test runs conducted in the presence of the Expert even a level of 'slightly above 4 units per minute' was achieved. The Arbitral Tribunal concludes that this deviation from the stipulated maximum production capacity range is not outside the reasonable expectations [Buyer] could have under the circumstances. This conclusion is also based on a comparison with the results of the Expert's inspection of the similar machine in Germany, which [Buyer] inspected before ordering the Machine in question. Even though the (German) machine is fitted with two filling boxes, it produced 3 units per minute i.e. less than the Machine. Thus, the production capacity is in conformity with the purchase agreement as has also been confirmed by the Expert.

[9] "According to the Expert, the maximum production capacity is influenced by numerous factors, particularly the nature of the raw material, the amount of the component used and the expertise of the operating staff. Under the given circumstances, namely in the absence of a clear minimum capacity requirement in the Order, [Buyer] could not expect that the Machine would produce more than 3.4 units per minute. Furthermore, it has to be taken into account that, based on the Expert's findings [Buyer]'s workers are not trained appropriately, which inevitably must have a negative impact on the production capacity. [page 77]

[10] "Thus, the Arbitral Tribunal finds that the Machine meets the contractually agreed upon production capacity. If [Buyer] wanted to stipulate a minimum production capacity it should have insisted on an unequivocal stipulation in the order, for instance by replacing the term 'up to' by the term 'at least' or, according to the French language of the purchase agreement to replace 'jusqu'à' by 'au moins'. Thus, the Arbitral Tribunal holds that, with regard to the production capacity, the Machine is not defective."

b. Use of component

[11] "As far as [Buyer] alleges that the Machine requires a certain amount of component which leads to an increase in the production costs, also no defect can be found. The Arbitral Tribunal's conclusion in this respect is based on the observations of the Expert expressed in his oral testimony and the Expert Opinion.

[12] "The Expert's observations with regard to this point, are particularly logical and free from any contradictions. His examination of the Machine mainly comprised of three test runs and a drying test. His on-site inspection was preceded by an inspection of a comparable machines in Germany. Thus, the Expert diligently carried out his task. Moreover, the Expert outlined his observations in a convincing way during the Oral Hearing. These aspects together with the personal impression of the Arbitral Tribunal of the Expert and his expertise led the Arbitral Tribunal to come to the conclusion that the Expert's observations can be used for the present arbitration without qualification.

[13] "As the Expert states in his Expert Opinion, the production capacity of the Machine depends on the component treatment of the raw material. In other words, the production capacity is also directly linked to the amount of component used. Based on this observation of the Expert, the Arbitral Tribunal comes to the conclusion that the fact that during the inspection of the Machine, a production capacity of slightly over 4 units was achieved, might also be the consequence of increasing the amount of the component.

[14] "In any event, since the Machine is capable of producing 3.4 units per minute, even without increasing the amount of the component, the fact that an excessive amount of such component was used during the test runs is not relevant. The increase in the amount of component used is thus not required since the Machine would still produce an amount of units sufficient to remain within the contractually agreed parameter. Thus, the Arbitral Tribunal concludes that, due to the fact that the Machine already meets the agreed production capacity without excessive use of the component, the excessive amount of the [page 78] component used during the test runs carried out by the Expert and increased production costs incurred thereby also does not constitute a defect."

c. Stain damage on product

[15] "The same is true for [Buyer]'s allegation that the Machine produces stain-damaged products by using an excessive amount of the component. The production of the product damaged by stains is to be distinguished from the increase in the production costs. Even though both are caused by the excessive use of the component, they do not necessarily need to occur together. However, as it has been set out above, the increase in the amount of the component used is not required for the Machine to produce an amount of units sufficient to remain within the contractually agreed parameter. Thus, the fact that when using an excessive amount of the component in an effort to even further increase the production the Machine produced units damaged by stains is not relevant in the case at hand and cannot be qualified as a defect."

d. Weight deviation

[16] "The inability of the Machine to produce products of equal weight does constitute a defect but [Buyer] did not timely notify [Seller] of such defect. As a general rule, a defect according to No. 22 ORGALIME occurs when the product delivered deviates from what the parties have agreed upon.[2] In other words, the question of whether there is a defect in the contract object depends primarily on the contract itself.[3] When detailed contract specifications are. lacking, the existence of a defect will depend on an ordinary interpretation of the contract according to the provisions of the background law."[4]

[17] The sole arbitrator quoted the weight specification in the Offer and continued: ".... When the Expert assesses that, in this respect, the Machine does not conform since the distribution of weight is higher than stated in the equipment data sheets, he refers to the ... stipulation [in the Offer]. However, this specification only refers to raw material S. [Buyer] only uses raw material P in its production and only raw material P was used during the test runs. According to the Expert, the raw material element S has to be distinguished from the raw material P. Thus, the ... specification regarding the weight distribution which refers to raw material S cannot be transferred to raw material P. Since the [page 79] Parties have not made any other stipulations concerning the production capacity, the purchase agreement does not contain a specific provision which relates to the ability to produce products of equal weight when raw material is used.

[18] "Thus, the existence of a defect has to be determined based on an ordinary interpretation of the contract according to the provisions of the CISG which provides the applicable statutory law in the case at hand. Art. 35(1) CISG provides:

'The seller must deliver goods which are of the quantity, quality and description required by the contract.'

Art. 35(2)(a) CISG states:

'Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:
(a) are fit for the purpose for which goods of the same description would ordinarily be used;'

[19] "The Arbitral Tribunal finds that with respect to the deviation in the weight of the units produced, the Machine is not fit for the purposes for which machines of the same description would ordinarily be used. The uniform weight of products of one kind is obviously an essential quality. Sellers of the product require a uniform weight in order to base the price on the weight and to provide products of the same quality.

[20] "According to the Expert, the average weight deviation concerning the units produced is 15%. It is not relevant in this respect that the Expert refers to the ... provision in the purchase agreement which is not applicable since this misunderstanding of the contractual stipulation by the Expert has no impact on the observation with regard to the weight deviation.

[21] "An average weight deviation of 15% cannot be regarded as conforming since this number has a material impact on the production costs, transportation costs and on claims of buyers of the product which are not equal in weight. Since the Machine is not capable of producing units of equal weight it does not conform with the purchase agreement. Thus, it is defective in this respect."

e. Lack of safety measures

[22] "The same is true for the lack of safety measures which has been established based on the findings of the Expert. The purchase agreement does not contain a stipulation concerning the safety measures for workers operating the Machine. [page 80] Thus, it is decisive whether the Machine is fit for the purposes for which machines of the same description would ordinarily be used. The Expert observed, that due to the lack of safety measures, it is possible that the hands of workers operating the Machine can be injured by the cutting cylinder. Machines of the same description like the one in question are regularly fit to produce the product without injuring or endangering workers. As the Expert states, due to the lack of safety measures, the Machine does not meet this standard. The Machine is not fit for the purposes for which machines of the same description would ordinarily be used and, therefore defective since it is not fitted with the required safety measures in order to protect the workers who operate the Machine. Thus, the Machine does not conform with the purchase agreement."

f. Faulty design which led to frequent interruptions

[23] "The Machine is also truly defective with regard to its faulty design leading to frequent interruptions in the production process which requires a high level of maintenance and cleaning. In the view of the Arbitral Tribunal, the issue of interruptions in the production process has to be distinguished from the' production capacity, as analyzed above under a. The specification of the production capacity of a machine does not necessarily indicate for which period the specified production capacity can be upheld. As set forth above, it only indicates the performance of a machine during the net time of its operation, regardless of any breaks and interruptions. The fluency of the production process is a separate issue. Even though this aspect has, like the production capacity, an impact on the total output of a machine, it should be distinguished therefrom since it includes other specifications of a machine, in particular the level of maintenance required. The Arbitral Tribunal concurs also in this regard with the analysis of the Expert.

[24] "As regards the necessity of frequent interruptions of the production process for purposes of cleaning, readjustment and maintenance, the Machine does not conform with the purchase agreement. As the test runs of the Expert revealed, the Machine requires cleaning and maintenance works at the latest one hour after the production had commenced. During test runs 2 and 3, the Machine even stopped production only 30 minutes after it had commenced. During the inspection of the similar machine delivered by [Seller] in Germany, the Expert observed only 15 minutes of cleaning and maintenance works during an eight hour production period. This shows that the Machine is not fit for the purposes for which machines of the same description would ordinarily be used. [page 81]

[25] "The Expert comes to the conclusion that the frequent interruptions of the production process due to maintenance and cleaning works are the result of faults in the conception and of the realization but also the incorrect use of the line by the staff. To what extent these two causes are responsible for the defect is not relevant at this point, since it is sufficient that one of the causes observed by the Expert has been caused by [Seller]. Thus, the Arbitral Tribunal finds that the Machine was defective since its faulty design leads to frequent interruptions in the production process.

[26] "Consequently, defects of the Machine have been established with respect to:

d. the inability to produce products of equal weight,
e. the lack of adequate safety measures and
f. faulty design which leads to frequent interruptions."

2.Timely Notification of the Defects

[27] "The three groups of defects must again be distinguished with regard to the requirement of timely notification by [Buyer] to [Seller]."

a. Unequal weight and defective safety measures

[28] "With regard to the inability to produce units with equal weight and the lack of adequate safety measures, according to Nos. 23 and 25 ORGALIME, [Buyer] is no longer entitled to have the defects remedied since it did not timely notify [Seller] of the defects.

[29] "No. 25 ORGALIME provides:

'The purchaser shall without undue delay notify the supplier of any defect which appears. Such notice shall under no circumstances be given later than two weeks after the expiry of the period given in Clause 23. Where the defect is such that it may cause damage, the notice shall be given immediately. The notice shall contain a description of the defect. If the Purchaser does not notify the Supplier of a defect within the time-limits set forth in this Clause, he shall lose the right to have the defect remedied.'

No. 23 ORGALIME states: [page 82]

'The Supplier's liability is limited to defects which appear within a period of one year from delivery. If the daily use of the Product exceeds that which is agreed, this period shall be reduced proportionately.'

[30] "Since the delivery was carried out in November 1996, the relevant period for the notification in the case at hand runs from December 1996 to November 1997. Throughout this period, [Buyer] communicated numerous complaints but did not notify [Seller] of the two types of defects here in question. The following excerpts from the documents submitted to the Arbitral Tribunal show that [Buyer] notified [Seller] of the (non-existing) defect of insufficient production capacity and the defect of frequent interruptions in the production process but did not submit evidence of complaints, during the relevant time period, concerning weight deviation and safety measures." (....)

[31] The sole arbitrator reviewed the correspondence between the parties and concluded "the broadest interpretation of the above cited correspondence could not lead to the conclusion that [Buyer] had timely notified [Seller] of the defects in question. In contrast, it appears that these defects were only determined by the Expert during his test runs and then made part of [Buyer]'s complaint. The weight of the product produced and lack of safety measures required are aspects to be clearly distinguished from the production capacity and the production process. Thus, even taking into account that the purchaser does not have to specify the defect in detail, [Buyer]'s notifications did not include complaints about the weight of the units produced and the lack of safety measures.

[32] "Thus, during the relevant time period from December 1996 to November 1997 (and even until June 1998), [Buyer] did not notify [Seller] of the defects that the Machine does not produce units of equal weight and lacks safety measures. In order to comply with the procedure foreseen in No. 25 ORGALIME, [Buyer] would have been required ... to notify [Seller] of the facts that would have brought [Seller] into a position to determine that the Machine lacks the ability to produce units of equal weight and devices to protect the operating workers. Thus, the Arbitral Tribunal concludes that according to No. 25 ORGALIME, [Buyer] lost the right to have the above mentioned defects remedied." [page 83]

b. Design defect

[33] "However, with respect to the design defect which led to frequent interruptions of production, [Buyer] has complied with the procedure foreseen in No. 25 ORGALIME." (....)

[34] After reviewing the correspondence, the sole arbitrator concluded that the correspondence "constitute[s] sufficient notification according to No. 25 ORGALIME. It has to be taken into consideration in this context that the required description of the defect need not be very detailed or contain a diagnosis of the cause of the defect.[5] Thus, it was sufficient sat [Buyer] notified [Seller] ... of frequent interruptions in the production process and that (in [Buyer]'s view) these interruptions are due to jammed rollers. From this notification, [Seller], as the producer of the Machine, could assess the nature of the defect and the consequences resulting therefrom.

[35] "In this context, it is not relevant that [Buyer] primarily focused on the production capacity, which in its view, constituted the main defect: As it has been set out above, the fluency of the production also has an impact on the production output even though it should be distinguished from the production capacity. Thus, it is not significant, that [Buyer] focused on this aspect while complaining about frequent interruptions in the production process. Furthermore, the notification was made without undue delay after the defect had appeared. The delivery and assembly of the Machine commenced in November 1996. Taking into consideration a period for adjusting and preparing the machine for production, the first notification on 25 November 1996, in connection with the specification made on 14 February 1997 must be regarded as sufficient.

[36] "Thus, the Arbitral Tribunal concludes that the Machine is defective since its production process is frequently interrupted by maintenance and cleaning works due to faults in the conception and assembling and that [Buyer] timely notified [Seller] of the defect."

3. Failure to Remedy the Notified Defect

[37] "[Seller] has not remedied the frequent interruptions in the production process. Despite the fact that [Seller] sent technicians several times to [Buyer], the Machine, as the Expert observed, is still not capable of producing the product without frequent interruptions in the production process." [page 84]

4. Substantiality of Defect

[38] "No 33 b) ORGALIME provides:

'Where the defect has not been successfully remedied as stipulated under Clause 32, where the defect is so substantial as to significantly deprive the Purchaser of the benefit of the contract, the Purchaser may terminate the contract by notice in writing to the supplier. The Purchaser is then entitled to compensation for the loss he has suffered up to a maximum of 15 per, cent of the purchase price.'

As the Expert observed, the frequent interruptions in the production process are the results (i) of the faulty design of the Machine as well as (ii) of the improper handling of the Machine. [Buyer] has to establish the substantiality of the defect of frequent interruptions in the production process but, during the taking of evidence, it could not be clarified which of these two causes is dominant. The fact that it remained open whether the design of the Machine is the dominant cause for the frequent interruptions in the production process would thus result in [Buyer]'s failure to prove the substantiality of the defect. However, a decision with regard to the substantiality is not required since a right of termination is excluded in any event by the applicable CISG rules."

5. Exclusion of Termination Right

[39] "Art. 82(1) and (2) CISG provide:

'(1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them.

(2) The preceding paragraph does not apply:
(a) if the impossibility of making restitution of the goods or of making restitution substantially in the condition in which the buyer received them is not due to his act or omission;
(b) if the goods or part of the goods have perished or deteriorated as a result of the examination provided for in Art. 38; or
(c) if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the [page 85] normal use before he discovered or ought to have discovered the lack of conformity.'

A termination right of [Buyer] is excluded by Art. 82(1) CISG since it is impossible for [Buyer] to make restitution of the Machine substantially in the condition in which it received the Machine.

[40] "Art. 82(1) CISG is applicable. As stated above the Parties have agreed in the Terms of Reference, that the dispute shall be governed by the ORGALIME supplemented by the Convention on the International Sale of Goods (CISG ).The ORGALIME do not provide an all-encompassing regulation of the contractual relationship governed by them since they are incomplete with regard to certain circumstances namely those which can arise in connection with the exercise of a termination right. The legal consequence foreseen by No. 33 b) ORGALIME is that the purchaser returns the product to the supplier in exchange for the payment made to the supplier.[6]

[41] "However, cases like the one at hand show that sometimes the purchaser is not in a position to return the product in the condition in which it has received it. To argue that the ORGALIME are complete in this respect and that the purchaser may return the goods in any condition would lead to unjust results. The purchaser would receive the full purchase price paid but the supplier would not receive back the product sold in the condition in which it was delivered. Thus, the purchaser could exploit the product sold without being obligated to any kind of reimbursement.

[42] "The Arbitral Tribunal observes that it is already a principle in Roman law that restitution may be claimed only if the buyer can return the goods in the condition in which it received them.[7] This principle has not been incorporated in the ORGALIME. In the light of the unjust results which would arise if damages of the goods are not to be taken into account, the Arbitral Tribunal comes to the conclusion that the ORGALIME are incomplete in this respect and have to be supplemented by the CISG.

[43] " A balanced system of legal consequences if the goods cannot be returned in the condition in which they had been received is contained in Arts. 82-84 CISG. These rules provide the legal consequence in order to provide for fair restitution of the performances of both parties to a purchase agreement. Art. 82(1) blocks the buyer's right to avoid the contract if it is impossible for him to [page 86] make restitution of the goods in an unimpaired condition.[8] The term 'Impossibility' refers to an actual objective impediment to restitution.[9] It is regarded as an actual impediment if the goods have been damaged, lost, destroyed, or stolen.[10] In the case at hand, it is clearly impossible for [Buyer] to return the Machine substantially in the condition in which [Buyer] had received the Machine.

[44] "... [T]he Expert states:

'The whole machine shows areas of oxidisation, with excessive movement in the access door to the feeder, with useless pearcings (sic!) in the metal and leaks, both of liquid and raw material. It is obvious that the machinery has been running production (sic!) for a long time, as it shows marks where the paint is worn away on the lower part of the filing unit; there is also wear on the sealing joints.'

[T]he Expert furthermore explains:

'I observed that the machine was really used in production (it is, however, extremely difficult to judge exactly in terms of quantity of units produced).'

During the Oral Hearing ... the Expert moreover explained that after being in use for several years the Machine 'is not substantially in the same state in which it was when it was delivered'. The Expert assumed that for each year the Machine was used in production, a decrease in the original value of 25% occurred.

[45] "Based on these observations of the Expert, the Arbitral Tribunal has no doubt that [Buyer] used the Machine over the last years. The respective marks are obvious from the pictures annexed to the Expert Opinion and let the Machine appear substantially worn. [Buyer] received the Machine from [Seller] in a mint condition. As the Expert has explained convincingly, the Machine in its present condition fails to meet the condition in which it has been delivered by far. Thus, the Arbitral Tribunal comes to the conclusion that it is impossible for [Buyer] to return the Machine substantially in the condition in which [Buyer] had received the Machine. Thus, no termination right exists. [page 87]

[46] "Art. 82(1) CISG is not excluded by Art. 82(2) CISG which states that the consequence of Art. 82(1) CISG does not apply if the impossibility of making full restitution of the goods substantially in the condition in which the buyer received them is not due to an act or omission of the buyer. From the observations of the Expert, it is obvious that [Buyer] used the Machine for a substantial period of time even after it had discovered the defect and also after having declared the termination of the purchase agreement. Consequently, the impossibility is caused by an act of [Buyer].

[47] "Furthermore, Art. 82(1) CISG is not excluded by Art. 82(2)(c) CISG which states that Art. 82(1) does not apply if the goods have been consumed or transformed in the course of normal use before the buyer discovered or ought to have discovered the lack of conformity. As it has been set out above, [Buyer] used the Machine before and after it discovered the defects here in question. Art. 82(2)(c) CISG is therefore not applicable. Hence, Art. 82(1) CISG is not excluded by Art. 82(2) CISG."

III. CONCLUSION

[48] "Thus, the Arbitral Tribunal concludes that even though the Machine is defective, a termination right of [Buyer] is excluded by Art. 82(1) CISG, since it is impossible for [Buyer] to return the Machine substantially in the condition in which [Buyer] had received it. Regarding [Seller]'s letter of June 1998, in which it threatens to terminate the purchase agreement based on the nonpayment of the outstanding 10% of the purchase price, it has not been submitted by either Party that [Seller] has actually declared the termination. Thus, the purchase agreement is still in force. The Arbitral Tribunal therefore concludes that [Buyer]'s claim for repayment of 90% of the purchase price is unfounded."

IV. THE ISSUE OF COMPENSATION FOR LOSS SUFFERED

[49] " As it has been set out above, a termination right of [Buyer] is excluded. Since according to No. 33 b) ORGALIME the claim for compensation for loss suffered is dependent upon the termination right, [Buyer] cannot claim any such compensation for losses suffered." [page 88]

V. THE COUNTERCLAIMS

[50] "[Seller] is of the opinion that the purchase agreement is still in force and that, as a result, it is entitled to the outstanding 10% of the purchase price. According to [Seller], [Buyer] has no right to refuse payment. [Buyer] alleges that [Seller] is not entitled to the remaining 10% of the purchase price since the purchase agreement has been terminated. If the Arbitral Tribunal concludes that the purchase agreement has not been terminated, [Buyer] is of the opinion that [Seller] has at least not fully performed its obligations arising from the purchase agreement.

[51] "The purchase agreement between the Parties provides for a purchase price from which 10% remains outstanding. However, [Buyer] has the defence of being entitled to a purchase price reduction of 10% according to No. 33 a) ORGALIME. [Seller]'s claim for the outstanding 10% of the purchase price is therefore unfounded. As it has been set out above under Section III, the purchase agreement between the Parties is still in force. Thus, if [Buyer] would have no defences [Seller] would be entitled to the outstanding 10% of the purchase price. However, [Buyer] has the defence that the Machine was defective which results in a right for [Buyer] to reduce the purchase price based on No. 33 a) ORGALIME. No. 33 a) ORGALIME provides:

'Where the defect has not been successfully remedied, the Purchaser is entitled to a reduction of the purchase price in proportion to the reduced value of the Product, provided that under no circumstance shall such reduction exceed 15 per cent of the purchase price.'

[52] "In its pleadings, [Buyer] has not expressly referred to a defence based on No. 33 a) ORGALIME. The Arbitral Tribunal holds, however, that [Buyer] impliedly raised this defence since it argued that based on the defects of the Machine [Seller] cannot be entitled to the outstanding part of the purchase price. Thus, even without mentioning the pertinent ORGALIME provision [Buyer] raised the defence that it is entitled to a purchase price reduction.

[53] "... [T]he Machine was defective at the time of its delivery and the defect has not been successfully remedied by [Seller] with regard to the defect of frequent interruptions. Thus, [Buyer] is entitled to a reduction of the purchase price according to No. 33 a) ORGALIME. However, in the view of the Arbitral Tribunal, the defect in the case at hand reduces the value of the Machine by an amount of no more than 10% of the purchase price. [page 89]

[54] "As the Expert states, the value of the Machine is reduced by 25% of the purchase price taking into account all defects found by the Expert. ... [T]he Expert states that the defect of the excessive use of the component in his view leads to a reduction of the value by 5% of the purchase price. This defect, however, was not timely notified to [Seller]. From the remaining 20% of value reduction, the Arbitral Tribunal concludes to attribute 10% to the defect of frequent interruptions in the production process and 10% to the other defects found. In the view of the Arbitral Tribunal, this appears to be justified since the ability to produce units of equal weight and the lack of safety measures constitutes defects which reduces the value of the Machine by the same amount as the defect of frequent interruptions in the production process does. Thus, [Buyer] is entitled to a purchase price reduction of 10%.

[55] "Since [Buyer] has the right to reduce the purchase price by 10% [Seller] is only entitled to receive a payment of 90% of the purchase price under the purchase agreement. Because [Seller] already received such amount from [Buyer], [Seller]'s counterclaim is unfounded. In this context, it should be observed that after taking into account the purchase price reduction to which [Buyer] is entitled, the purchase price is deemed to be paid in full and the title to the Machine has passed on to [Buyer]. Thus, the Arbitral Tribunal concludes that [Seller] is not entitled to be paid the outstanding 10% of the purchase price since [Buyer] is entitled to a purchase price reduction of 10%. This counterclaim is therefore unfounded.

[56] "[Seller] further claims compensation for [certain] expenses. ... In the view of the Arbitral Tribunal it has to be distinguished between the expenses incurred by [Seller] prior to the arbitral proceedings and those incurred in connection with the arbitral proceedings. Expenses incurred prior to the arbitration proceedings may be subject to a separate claim while expenses in connection with the arbitration proceedings, after such proceedings have commenced, are adjudicated within the decision on the costs of the arbitral proceedings. [Certain] expenses have been incurred by [Seller] prior to the arbitral proceedings. However, they have to be qualified as costs related to the attempts to remedy defects since they have all been incurred in the course of the dispute between the Parties regarding the conformity of the Machine prior to the institution of the present arbitration proceedings. Since the expenses have been incurred in connection with the attempts to remedy defects, [Seller] is not entitled to reimbursement for the[se] expenses.

[57] "No. 26 ORGALIME provides: [page 90]

'On receipt of the notice in writing under Clause 24 the Supplier shall remedy the defect without undue delay and at his own cost as stipulated in Clauses 22-37 inclusive.'

No. 27 ORGALIME states:

'If the Purchaser has given such notice as mentioned in Clause 25, and no defect is found for which the Supplier is liable, the Supplier shall be entitled to compensation for the costs he has incurred as a result of the notice.'

The Tribunal concludes that [Seller] cannot claim the[se] expenses according No. 27 ORGALIME. ... [C]laimant has notified [Seller] of the frequent interruptions in the production process. As far as [Seller] has incurred expenses in connection with the attempts to remedy this defect it has to bear these costs itself according to No. 26 ORGALIME. [These] expenses have been incurred in connection with the attempts to remedy the frequent interruptions in the production process.

[58] "The fact that [Buyer] also notified [Seller] of the non-existing defect of the (nonexistent) insufficient production capacity is irrelevant in this respect since [Seller] would have incurred expenses claimed in any event due to the existing defect of frequent interruptions in the production process. Moreover, the[se] expenses are not covered by the Terms of Reference and are thus excluded according to Art. 19 ICC-Rules.[11]

[59] "As regards the [remaining] expenses, these are costs directly related to the present arbitration proceedings. As such, they become part of the decision on costs and cannot be subject to a separate claim. Hence, the [remaining] expenses will be subject to the decision on costs. (....)

[60] "The Alternative Counterclaims 1 and 2 are raised only if the Arbitral Tribunal finds that the purchase agreement is terminated. Since this is not the [page 91] case (see above Part Three) the Alternative Counterclaims I and 2 need not be considered further. ..."

VI. COSTS OF THE ARBITRATION

[61] "According to Art. 31(3) ICC-Rules, the final Award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties. The costs of the arbitration shall, according to Art. 31(1) ICC-Rules, include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, as well as the fees and expenses of any experts appointed and the reasonable legal and other costs incurred by the parties for the arbitration.

[62] "The determination of the proportion of total costs to be borne by each party is a matter for the discretion of the arbitral tribunal.[12] Furthermore, arbitrators are completely free to determine, at their own discretion, which of the legal and other costs of the parties they consider as reasonable.[13]

[63] "The Court fixed the ICC administrative expenses and the fees and expenses of the Arbitral Tribunal (together the ICC costs of arbitration). ... The fees and expenses of the Expert are fixed by the Arbitral Tribunal ... according to Sect. 1(11) of Appendix III to the ICC Rules. The ICC costs of arbitration and the fees and expenses of the Expert have already been paid by the Parties in equal parts. It appears reasonable to the Arbitral Tribunal that the Parties bear the ICC costs of arbitration and the Expert's fees and expenses in equal shares. This reflects that [Buyer]'s claims substantially and [Seller]'s counterclaims totally remain unsuccessful and that both claims and counterclaims involve the same issues. The fact that [Buyer] instituted the present arbitration proceedings will be taken into account below.

[64] "The Parties have submitted to the Arbitral Tribunal their legal and other costs accompanied by invoices of their counsel. ... In the light of the length and the complexity of the arbitration proceeding at hand, the Arbitral Tribunal considers the legal costs claimed by the Parties generally as reasonable. The hourly rates of both counsel appear not to be excessive and the amount of time [page 92] spent appears appropriate. The same is true for the expenses. In the light of the course of the proceedings, they appear to be reasonable. (....)

[65] "However, the fact that the legal fees and expenses incurred are reasonable does not automatically lead to the conclusion that they are fully recoverable. It is in the discretion of the arbitral tribunal to determine the amount of costs recoverable and to allocate these costs between the parties.[14] One method of allocating costs is to determine the win-loss ratio and to base the decision on costs thereon. This method, however, does not always lead to reasonable and fair results in cases where both a claim and a counterclaim have been raised which involve substantially the same factual and legal issues. In such cases it appears to be not determinable which costs have been caused by the claim and which by the counterclaim. Furthermore in such cases, a cost decision which is only based on the win-loss ratio does not reflect the course of the proceedings that can have a substantial impact on the costs incurred.

[66] "Against this background, it appears fair and reasonable to the Arbitral Tribunal to hold that [Buyer] is to reimburse [Seller] from the total legal fees and expenses incurred in a partial amount. This amount reflects the fact that [Buyer] instituted the present arbitration proceedings. While [Buyer]'s claims substantially and [Seller]'s counterclaims totally remained unsuccessful the amount of the claims exceeded by far the amount of the counterclaims but both claims and counterclaims involve substantially the same issues. Thus, the Arbitral Tribunal holds that [Buyer] shall reimburse [Seller] from its total legal fees and expenses incurred in a partial amount. Additional cost reimbursement claims of the Parties are denied.

[67] "[Seller] is entitled to be paid interest in the amount of 10% on its arbitration costs beginning four weeks after this final award has been rendered. The interest rate contained in No. 20 ORGALIME does not apply to the costs and expenses of arbitral proceedings. Thus, it cannot be referred to in the case at hand. The ICC-Rules do not contain any provisions with regard to interest on the costs and expenses of arbitral proceedings. The provisions concerning arbitral proceedings contained in the Sixth Book of the Dutch Book of Civil Procedure, which are applicable in the case at hand according to the Terms of Reference, do also not provide for interest on the costs and expenses of arbitral proceedings. As far as the Dutch Book of Civil Procedure contains provisions regarding the costs of procedures before the Dutch state courts, these provisions are tailored [page 93] to procedures before the Dutch state courts and cannot be transferred to the present arbitration.

[68] "Thus, the determination on the interest rate should be made in the light of the current interest rates on the European market. The Arbitral Tribunal finds it therefore reasonable to fix the interest rate at 10% which compensates [Seller] sufficiently in the event that [Buyer] does not pay. Moreover, the Arbitral Tribunal grants a grace period of 4 weeks after the date of this Award. As far as [Seller] claims further interest, this claim is denied." (....)

VII. THE AWARD

[69] "[Buyer]'s claims are dismissed as far as they regard a repayment of 90% of the purchase price and damages in the amount of 15% of the purchase price. But [Buyer] is entitled to a purchase price reduction of ten percent in conformity with No. 33 a) ORGALIME. In view of the defects of the Machine, [Seller] is not entitled to the outstanding ten percent of the purchase price. Therefore, [Seller]'s counterclaims are dismissed in full.

[70] "The ICC costs of arbitration have been fixed at USD ... which were paid by the Parties in equal shares. The Parties shall bear these costs in equal shares. From [Seller]'s legal fees and expenses [Buyer] is to reimburse [Seller] an amount of EURO ... plus interest in the amount of 10% per annum thereon beginning 4 weeks after the date of this Award. All other cost reimbursement claims of [Seller] and [Buyer] are dismissed. This decision takes into account that [Buyer] instituted this arbitration, the win-loss ratio but also the fact that the claims and the counterclaims involve substantially the same issues.

[71] "The Parties shall bear the fees and expenses of the Expert in equal shares. [page 94]


FOOTNOTES

1."Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) (Munich 1998) page 707."

2. "Orgalime Publication: General Conditions S 2000; Guide on Their Use and Interpretation (Brussels 2000) page 100."

3. "Ibid."

4. "Ibid."

5. "Ibid., page 110."

6. "Ibid., page 139."

7."Schlechtriem, Commentary on the UN Convention on the International Sale of Goods (CISG) (Munich 1998) Art. 82, note 6."

8. "Ibid., note 8."

9. "Ibid., note 9."

10. "Ibid."

11. Art. 19 of the ICC International Court of Arbitration Rules of Arbitration (ICC-Rules) reads:

"After the Terms of Reference have been signed or approved by the Court, no party shall make new claims or counterclaims which fall outside the limits of the Terms of Reference unless it has been authorized to do so by the Arbitral Tribunal, which shall consider the nature of such new claims or counterclaims, the stage of the arbitration and other relevant circumstances."

12. "Craig / Park / Paulsson, International Chamber of Commerce Arbitration, 2nd ed. (Paris 1990) page 339; Redfern / Hunter, Law and Practice of International Commercial Arbitration, 3rd ed. (London 1999) note 8-88."

13. "Craig / Park / Paulsson, op, cit., page 338. Kreindler, Transnational Litigation: A Basic Primer (New York 1998) page 295."

14. "Craig / Park / Paulsson, op. cit., pages 338, 339."

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Pace Law School Institute of International Commercial Law - Last updated January 30, 2007
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