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CISG CASE PRESENTATION

ICC Arbitration Case No. 12173 of 2004 (Frame contract case) [English text available]
[Cite as: http://cisgw3.law.pace.edu/cases/0412173i1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20040000 (2004) [assigned date]

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 12173

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: European country and Non-European country (respondents)

BUYER'S COUNTRY: Non-European country (claimant)

GOODS INVOLVED: Frame contract


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 7 ; 8 ; 45 ; 46 [Also cited: Articles: 6 ; 28 ]

Classification of issues using UNCITRAL classification code numbers:

4A [Scope of Convention (issues covered): frame contract for sales of goods];

7A3 [Observance of good faith];

8A ; 8B ; 8C [Interpretation of party's statements or other conduct: intent of party making statement or engaging in conduct; Interpretation based on objective standards; Interpretation in light of surrounding circumstances];

45B [Remedies under articles 46-52 do not bar damages];

46A [Buyer's right to compel performance]

Descriptors: Scope of Convention ; Frame contracts ;Good faith ; Intent ; Cumulation or election of remedies ; Specific performance

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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): 34 Yearbook Commercial Arbitration (2009) 111-129

Translation: Unavailable

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text

Published at Yearbook Comm. Arb'n XXXIV, Albert Jan van den Berg ed. (Kluwer 2009) 111-129. Copyright owner: The International Council of Commercial Arbitration (ICCA). Reprinted with permission of ICCA.

ICC Arbitration Case 12173 (partial award)

Assigned date: 2004

FACTS

The parties concluded a Frame Contract for the sale and purchase of a certain product. Sect. 7.4.1 of the Frame Contract (the specific performance provision) provided that Seller and Seller's subsidiary company (collectively, Respondents) would either repair or replace products with serious generic defects (that is, defects repeated throughout the product) within a contractually established Warranty Period. Sect. 21.2 of the Frame Contract (the liquidated damages provision) provided that Respondents would have a ninety-day period to remedy major faults of the product that were attributable to them and that if the fault was not remedied within that period, Claimant would be entitled to liquidated damages. Sect. 27 of the Frame Contract (the liability cap provision) provided that (i) Respondents indemnify Claimant for all claims and expenses resulting from damage due to Respondents' negligence, malicious act or recklessness up to sum B (Sect. 27.1); (ii) total liability in respect of any default shall not exceed sum A (Sect. 27.2) and (iii) neither party shall have any liability for incidental or consequential damages (Sect. 27.4). Sect. 36 of the Frame Contract provided that the agreement was governed by and should be interpreted in accordance [page 111] with Swiss law; it further provided that disputes be referred to ICC arbitration in Zurich.

A dispute arose between the parties and arbitration proceedings commenced in Zurich as provided for in the Frame Contract. The parties agreed that the arbitrators render a partial award on three issues concerning the construction of the Frame Contract, namely:

   (1)    the relationship between the liquidated damages provision and the liability cap provision;
   (2)    the relationship between the specific performance provision and the liability cap provision and
   (3)    the relationship between the specific performance provision and the liquidated damages provision.

The parties reached an agreement in respect of the second issue, finding that the liability cap provision did not prevent a specific performance claim. The arbitrators therefore examined only the first and third issues. The Arbitral Tribunal stated at the outset that the United Nations (Vienna) Convention on the International Sale of Goods (CISG) applied to the Frame Contract because the Frame Contract was a purchase agreement. It noted that the principles of contract interpretation under the applicable Swiss law, and the CISG, require that the parties' common understanding as to the meaning of a specific provision be determined first. If no such common understanding can be established, then the express wording of the contract must be considered, and then the contract negotiations, both in respect of the individual provision and within the context of the agreement (systematic analysis). Further, contract interpretation must consider the principle of good faith and take into account the rules of conventions and trade usages.

Applying these principles, the Arbitral Tribunal held in respect of the first issue that claims for liquidated damages under the Frame Contract were subject to the liability limitations of Sect. 27.2 but not to the limitations of Sect. 27.4.

In respect of the third issue, the arbitrators concluded that claims for specific performance under the specific performance provision could co-exist with claims for liquidated damages under the liquidated damages provision.

Excerpt

I. SCOPE OF PARTIAL AWARD

[1] "This Partial Award deals only with three discrete issues concerning the construction of the Frame Contract, as follows (the Issues): [page 112]

   (i)    What is the relationship between Sect. 21.2 of the Frame Contract (liquidated damages) and Sect. 27 of the Frame Contract (liability cap)?
   (ii)    What is the relationship between Sect. 7.4.1 of the Frame Contract (specific performance) and Sect. 27 of the Frame Contract (liability cap)?
   (iii)    What is the relationship between Sect. 7.4.1 of the Frame Contract (specific performance) and Sect. 21.2 of the Frame Contract (liquidated damages)?

In fact, as recorded below, the second issue has since been agreed by the Parties (see [at [42] of this Partial Award)."

II. POWER AND DISCRETION TO RENDER PARTIAL AWARD

[2] "The Arbitral Tribunal has the power to render a partial award limited to certain questions (Art. 2(iii) of the ICC Rules). It is a matter of the discretion of the Arbitral Tribunal as to the circumstances in which a partial award should be made (Craig / Park / Paulsson, International Chamber of Commerce Arbitration, 3rd ed. (2000), p. 361). Here, the Parties have specifically agreed with the Arbitral Tribunal that a partial award be rendered on the Issues.

[3] "The Arbitral Tribunal considers it useful to render a partial award on the Issues, since the questions involve important issues of contract interpretation, the resolution of which will set part of the framework for deciding the many claims in dispute. However, as the parties will be aware, given its limited ambit this Partial Award does not, of itself, finally dispose of any claims.

[4] "The scope of this Partial Award is strictly confined to the Issues. Again as the Parties will be aware, this Partial Award does not cover other questions of contract construction such as (amongst others) the actual calculation of the liability cap, or the calculation of liquidated damages pursuant to Sect. 21.2 of the Frame Contract. Further, nothing in this Partial Award has any bearing upon Claimant's case as to the Respondents' alleged gross negligence, and the impact this is said to have upon the provisions of the contract. Lastly, nothing in this Partial Award has any bearing upon Claimant's reliance on antitrust issues." (...)

III. THE PARTIES' SUBMISSIONS

[5] "Each Party has filed detailed submissions and put forward numerous arguments on each of the Issues. The Arbitral Tribunal has carefully considered [page 113] each point. In the interests of brevity, however, the Arbitral Tribunal has set out a brief summary only of each Party's case, rather than rehearsing each submission in full. Further reference to each Party's submissions is made ... below."

1. Claimant

[6] "In the Request for Arbitration, Claimant addressed the issue of the relationship between Sects. 27 and 21.2 of the Frame Contract, although only indirectly. Claimant stated that the right to claim substantial liquidated damages as provided for in Sect. 21 of the Frame Contract compensates Claimant for the fact that Sect. 27.4 of the Frame Contract drastically limits the possibility for Claimant to claim damages for indirect or consequential loss.

[7] "In Claimant's Brief I, Claimant focused on the question whether or not Sect. 27 of the Frame Contract and the limitation of liability provided for applied, to the right to claim liquidated damages under Sect. 21.2 of the Frame Contract. Claimant relied on the following arguments in order to demonstrate that the liability cap in Sect. 27 of the Frame Contract does not apply to liquidated damages under Sect. 21.2 of the Frame Contract:

      (a) There are no cross-references between Sect. 27 and Sect. 21.2 of the Frame Contract. Further, there is no explicit delimitation. Claimant concludes that, therefore, the Sections are independent from one another;

      (b) Sect. 27 of the Frame Contract covers cases of liability for default, whereas Sect. 21.2.1 of the Frame Contract applies where a major fault has occurred;

      (c) Sect. 27.1 of the Frame Contract deals with direct damages only, whereas Sect. 21.2 of the Frame Contract mainly addresses consequential damages;

      (d) Sect. 27.2 of the Frame Contract applies only to claims made under Sect. 27.2 of the Frame Contract;

      (e) Sect. 27.5 of the Frame Contract shows the intention of the parties that the limitation of liability is subject to any other explicit provision of the Frame Contract;

      (f) The complicated formula of Sect. 21.2.2 of the Frame Contract for calculating liquidated damages would not make sense if Sect. 27.2 of the Frame Contract were to apply;

      (g) Mr. Y [who negotiated the Frame Contract on behalf of] Claimant stated that a cap of sum A or 15% of the price of the product would not have been acceptable;

      (h) The contract history shows that Respondents had to abandon their attempts to limit their exposure to liquidated damages. [page 114]

Claimant also discussed the relationship between Sect. 27 and Sect. 7.4.1 of the Frame Contract. It argued that Sect. 27 of the Frame Contract does not limit the right of specific performance under Sect. 7.4.1 of the Frame Contract. This follows from Sect. 7.5 of the Frame Contract, which reads as follows: 'This Sect. 7 shall be without prejudice to the provisions of Sect. 2.'

[8] "Claimant presented its final submission with respect to the Issues on date Z. The submission is not repeated here. The arguments submitted by Claimant are considered further below."

2. Respondents

[9] "In their Preliminary Answer, Respondents argued that their liability with regard to any breach is capped at sum A or 15% of the price of the product supplied under the Frame Contract.

[10] "In their Brief II, Respondents argued that the wording of Sect. 27 of the Frame Contract is such as to set forth a comprehensive liability cap without limitations. Respondents further contend that in the draft Agreement no. 5 Claimant had suggested to limit the scope of Sect. 27 of the Frame Contract by adding the introduction 'Subject to any other Section of the Contract'. However, this introduction was deleted in further negotiations. In a later draft, Claimant suggested that Sect. 27.2 of the Frame Contract be amended by adding the phrase 'however without prejudice to claimant's other rights and remedies under this Frame Contract'. This sentence, however, was struck out.

[11] "Further, Respondents pleaded that, in the course of the contract negotiations, Mr. Y of Claimant had accepted the liability cap and understood Respondents' position in a discussion with Respondents.

[12] "Moreover, Respondents argued that the defaults referred to in Sect. 27 of the Frame Contract encompass a major fault as set forth in Sect. 21.2 of the Frame Contract. In particular, Respondents submitted that it is contradictory to argue that Sect. 21.2 of the Frame Contract provides for a pre-quantification of future damages while at the same time maintaining that Sect. 21.2 of the Frame Contract is not covered by Sect. 27 of the Frame Contract.

[13] "Respondents also discussed the relationship between Sect. 21.2 of the Frame Contract regarding liquidated damages and the right to specific performance as set forth in Sect. 7.4.1 of the Frame Contract. Respondents argued that it follows from the wording of Sects. 21. I and 21.2 of the Frame Contract that the liquidated damages shall be in lieu of any other remedy thereby excluding specific performance. [page 115]

[14] "On date X, Respondents presented their final submission with respect to the Issues. The submission is not repeated here. The arguments submitted by Respondents are considered further below."

III. ANALYSIS

1. Relevant Provisions of the Frame Contract

[15] "For the sake of convenience, the relevant provisions of the Frame Contract are set out in full below.

'Sect. 7.4.1:
In the event that serious generic defect arising from the manufacture or design of the product occurs in the operational part of the product purchased under this Frame Contract during the Warranty Period or within ten (10) years after Warranty Period, Seller and/or Seller's subsidiary company, as appropriate at its option shall either repair or replace the defective item free of charge, as soon as possible from the date of Buyer notifying Seller and/or Seller's subsidiary company, as appropriate of such defect, or Seller and/or Seller's subsidiary company, as appropriate observing such defect, whichever the earlier. Any item so repaired or replaced will be warranted for the balance of the Warranty Period. For the purpose of this sub-Section, a "serious generic defect" is a defect which is repeated throughout the product.

Sect. 7.5:
This Sect. 7 shall be without prejudice to the provision of Sect. 27.

Sect. 21.2.1:
In the event that a major fault, seriously affecting the use or performance of the product, occurs during the term of the Frame Contract for reasons directly attributable to Seller, there shall be a ninety (90) days grace period commencing from the date of notification of such fault by Buyer to Seller, or the observation of such fault by Seller (whichever the earlier) within which Seller and/or Seller's subsidiary company, as appropriate shall remedy such fault. [page 116]

If the fault in question is related to a responsibility of Seller contained in this Frame Contract, the assumption shall be that the fault is due to a reason directly attributable to Seller.

If the fault in question is not related to a responsibility of Seller contained in this Frame Contract, the assumption shall be that the fault is due to a reason not directly attributable to Seller.

Sect. 21.2.2:
In the event that such fault is not remedied within the said 90 day period, Buyer shall be entitled to claim liquidated damages from the date that such 90 day period has expired calculated as follows:

-    For the first 2.5 years of this Frame Contract, 1% per week;
-    For the second 2.5 years of this Frame Contract, 0.5% per week;

to an aggregate maximum of 10%, such percentages to relate to the value of the product purchased under this Frame Contract as the date of notification or observation of such fault. Such value will be calculated using the prices in Appendix 1.

Sect. 21.3:
Buyer's remedies under sub-Sects. 21.1 and 21.2 shall be in lieu of any other remedy in respect of loss incurred by Buyer due to the occurrence of the faults described in sub-Sects. 21.1 and 21.2 above. However, for the avoidance of doubt, in the event that maximum liquidated damages are claimed under sub-Sect. 21.2 and the fault in question has not been remedied at such time, Buyer shall be entitled to terminate Seller and Seller's subsidiary company's right to exclusivity under Sect. X above. This shall be without prejudice to any implied legal rights which Buyer may have.

Sect. 27:
Seller's and/or Seller's subsidiary company's, as appropriate, entire liability, whether in contract or tort including negligence and Buyer's only remedies in respect of any default are as set out in this Sect. 27.

Sect. 27.1:
Seller and/or Seller's subsidiary company, as appropriate shall indemnify Buyer and its officers, agents, affiliates and employees against all claims and expenses whatsoever resulting from damage to property and/or physical injury and/or death of persons arising out of or in connection with Seller [page 117] and/or Seller's subsidiary company, as appropriate negligence, malicious act, or recklessness. Upon Buyer's request, Seller and/or Seller's subsidiary company, as appropriate shall hold harmless Buyer against any claims raised against it by others on the grounds mentioned above. The indemnity under this Sect. [27].1 in so far as it relates to damage to property shall be limited to sum B, and is subject to Sect. 27.4, or 15% of the price of the product supplied under this Frame Contract in any 12 month period preceding the date that Buyer makes a claim pursuant to this sub-Sect. 27.1, whichever is the greater in the aggregate.

Sect. 27.2:
Subject to Sect. 27.4 below, except in the case of any liability on the part of Seller and/or Seller's subsidiary company, as appropriate referred to in sub-Sect. 27.1 above, Seller's and/or Seller's subsidiary company's, as appropriate total liability in respect of any default or defaults shall not exceed sum A, or 15% of the price of the product supplied under this Frame Contract in any 12 month period preceding the date that Buyer makes a claim pursuant to this sub-Sect. 27.2, whichever is the greater in the aggregate.

Sect. 27.3:
Subject to Sect. 27.4 below, and notwithstanding Sect. 27.2 above, Seller and/or Seller's subsidiary company, as appropriate shall be liable in respect of the patent and copyright indemnity as provided for in Sect. 24 for all direct losses suffered by Buyer as a result of an infringement of third party.

Sect. 27.4:
Except as provided in sub-Sect. 27.1 above, neither party shall have any liability for incidental or consequential damages, including, but not limited to, loss of profit, revenues, business, goodwill, loss, corruption or interruption of data, loss of anticipated savings, loss of use of the Products or any associated equipment, cost of capital, or downtime costs, even if foreseeable by or in the contemplation of that party or any claim made against Buyer by any other person.

Sect. 27.5:
Except as expressly stated herein, all conditions, warranties representations and undertakings implied, statutory or otherwise, are [page 118] hereby excluded provided that nothing in this Frame Contract shall prejudice the parties' statutory rights.

Sect. 27.6:
For avoidance of doubt, where liability occurs under this Sect. 27 due to a default relating to a Seller's subsidiary company obligation, as set out in Sect. 3 above and throughout this Frame Contract, Seller's subsidiary company shall be liable in accordance with the terms of this Sect. 27, and where liability occurs under this Sect. 27 due to a default relating to a Seller obligation, as set out in Sect. 3 above and throughout this Frame Contract, Seller shall be liable in accordance with the terms of this Sect. 27.

Sect. 36:
This Frame Contract is governed and interpreted in accordance with the laws of Switzerland, without reference to other laws'."

2. Qualification of the Frame Contract

[16] ôThe parties are agreed that the Frame Contract qualifies as a purchase agreement, because other (non-purchase) elements are clearly subordinated. There is no reason for the Arbitral Tribunal to question this conclusion. This classification is important, since the Vienna Convention on the International Sale of Goods ('CISG') is thereby applicable."

3. Applicable Law

[17] ôIt is common ground between the parties that the Issues are to be determined in accordance with Swiss law, including the CISG. The Frame Contract provides that it is governed and to be interpreted in accordance with the laws of Switzerland, without reference to other laws (Sect. 36 of the Frame Contract). The reference to Swiss law fails to specify whether the reference includes the Swiss conflict of law rules. Claimant argues that these conflict of law rules do apply. These provide for the application of the law chosen by the parties (Art. 118 of the Private International Law Act in connection with Art. 2 of the Hague Convention of 15 June 1955 on the Law Applicable to the International Sale of Goods). On Claimant's analysis, Swiss law includes the CISG. [page 119]

[18] "Respondents in their submission plead the application of Swiss law and of the CISG without giving reasons for this. Further, in the course of the hearing, Respondents expressly agreed on the application of Swiss law and of the CISG.

[19] "As there are no reasons to doubt the validity of the choice of law made in Sect. 36 of the Frame Contract, Swiss law and hence the CISG (Art. 1 lit. b CISG) apply to the Issues addressed in this Partial Award."

3. Contract Construction

[20] "For the principles of contract interpretation under Swiss law and the CISG, Claimant refers to the expert report submitted by Claimant. The expert explains that the basis of contract interpretation consists in the determination of the parties' common understanding as to the meaning of a specific provision. If an actual common understanding cannot be established, an objective contract interpretation applies. Such interpretation starts with the express wording of the contract, and then the contract negotiations. Contract interpretation must consider the principle of good faith. Further, a systematic analysis is called for. Finally, general conventions and trade usages are helpful. In Claimant's view, the subsequent behaviour of the parties must also be considered.

[21] ôRespondents generally agree with such principles of contract interpretation. In their final oral submissions Respondents stated that by and large the parties are agreed on the interpretation principles, although there may be some issues on the margins. Respondents were not specific as to the precise ambit of such 'issues on the 'margin'.

[22] "The Arbitral Tribunal follows the construction principles of the CISG (Art. 8). Indeed, even aside from the CISG, the Arbitral Tribunal arrives at the same result applying all of the criteria suggested by each Party."

4. Relationship Between Sect. 21.2 (Liquidated Damages) and Sect. 27 (Liability Cap)

[23] "Both parties rely on the wording of Sects. 27 and 21.2 of the Frame Contract to support their viewpoint, reaching, however, contradictory conclusions. It is therefore necessary to first analyze the relevant wording. The introductory phrase of Sect. 27 of the Frame Contract reads as follows:

'Seller's and/or Seller's subsidiary company's, as appropriate, entire liability, whether in contract or tort including negligence and Buyer's only remedies in respect of any default are as set out in this Sect. 27.' [page 120]

The relevant portion for the issue in question then continues:

'Subject to Sect. 27.4 below, except in the case of any liability on the part of Seller and/or Seller's subsidiary company, as appropriate referred to in sub-Sect. 27.1 above, Seller's and/or Seller's subsidiary company's, as appropriate total liability in respect of any default or defaults shall not exceed sum A, or 15% of the price of the product supplied under this Frame Contract in any 12 month period preceding the date that Buyer makes a claim pursuant to this sub-Sect. 27.2, whichever is the greater in the aggregate.'

With respect to incidental and consequential damages, Sect. 27.4 provides as follows:

'Except as provided in sub-Sect. 27.1 above, neither party shall have any liability for incidental or consequential damages, including, but not limited to, loss of profit, revenues, business, goodwill, loss, corruption or interruption of data, loss of anticipated savings, loss of use of the Products or any associated equipment, cost of capital, or downtime costs, even if foreseeable by or in the contemplation of that party or any claim made against Buyer by any other person.'

Relevant for the relationship at hand are only Sects. 27.2 and 27.4 of the Frame Contract.

[24] "The wording suggests that Sect. 27 1imits Respondents' liability in respect of any default. Sect. 27.2 of the Frame Contract more precisely limits the total liability of Respondents in respect of any default or defaults. Hence, at first sight, the wording seems to be clear.

[25] "As understood by the Arbitral Tribunal, Claimant in essence argues that Sect. 27 of the Frame Contract fails to cover the liquidated damages remedy in Sect. 21.2 of the Frame Contract. In Claimant's view the latter constitutes a self-contained regime.

[26] "The first of Claimant's arguments in support of this analysis is that there is no cross-reference between Sect. 21.2 and Sect. 27 of the Frame Contract. This statement is correct. However, the wording of Sect. 27 of the Frame Contract undoubtedly governs the liability of Respondents; therefore no cross-reference is necessary. Further, there is no consistent use of cross-references within the Frame Contract as a whole. [page 121]

[27] "Secondly, Claimant argues that the concept of 'liability' under Swiss law does not encompass liquidated damages. This line of reasoning can be followed to the extent that it means that liquidated damages is a more specific -- but not entirely distinct - concept than the general 'liability' concept. Liquidated damages are pre-quantified damages (expert opinion mentioned above). A claim for liquidated damages is a damages claim which gives the party suffering damage a procedural advantage (expert opinion mentioned above). Therefore, since liquidated damages as a concept exists within the notion of 'liability', no conclusions as to the relationship between Sect. 27 and Sect. 21.2 of the Frame Contract can be drawn from such a distinction.

[28] "Claimant argues that Sect. 27 of the Frame Contract covers cases of 'default' whereas Sect. 21.2 of the Frame Contract deals with 'major faults'.

Claimant maintains that a 'major fault' describes a technical situation, whereas a 'default' is a breach of a contractual obligation. The Arbitral Tribunal understands this position as meaning that Sect. 21.2 of the Frame Contract is a performance mechanism. If the agreement were not to be performed in kind, the performance obligation would be transformed into a payment obligation, which would not amount to a 'default'.

[29] "The parties agree that Sect. 21.2 of the Frame Contract provides for liquidated damages, i.e. for a pre-quantification of damages in case of non-performance as opposed to a penalty provision. Hence, the liquidated damages claim is the consequence of a breach of contract and not a performance mechanism, i.e. a penalty provision. Indeed, Claimant concedes that a major fault which is not remedied within 90 days becomes a default.

[30] "Based on the wording, Claimant further argues that the provision in Sect. 21.3 of the Frame Contract providing that the liquidated damages claim' shall be in lieu, of any other remedy in respect of loss incurred by Buyer' suggests that there is a choice for a claiming party to bring either a liquidated damages claim under Sect. 21.2 of the Frame Contract or a general damages claim under Sect. 27 of the Frame Contract.

[31] "This argument is not convincing. The fact that the liquidated damages claim shall be in lieu of any other remedy does not have any impact on the relationship between Sect. 21.2 and Sect. 27 of the Frame Contract. Sect. 21.3 of the Frame Contract clarifies whether or not the claim for liquidated damages is the sole remedy with respect to loss. It obviously does not address the question whether or not such damages claim is subject to the limitations provided for in Sect. 27 of the Frame Contract.

[32] "Contrary to Claimant's position, Sect. 27.5 of the Frame Contract also fails to give clues that would help resolve the issue under discussion. Sect. 27.5 [page 122] of the Frame Contract provides for the express exclusion of all conditions, warranties, representations and undertakings. Sect. 27.5 of the Frame Contract clearly does not govern the relationship between Sect. 21.2 and Sect. 27.5 of the Frame Contract.

[33] "Therefore, the Arbitral Tribunal concludes that neither the wording of Sect. 21.2 nor of Sect. 27 of the Frame Contract leads to the conclusion that Sect. 27 of the Frame Contract does not apply to the liquidated damages claim. Rather, the contrary is so: the wording of Sect. 27 suggests in terms that it does apply to Sect. 21.2.

[34] "Aside from the express words of the agreement, the main argument of Claimant that claims under Sect. 21.2 of the Frame Contract are not capped under the provision of Sect. 27 of the Frame Contract is a systematic one. Claimant argues that Sect. 21.2 of the Frame Contract prevails over Sect. 27 of the Frame Contract since it is a very specific rule with exhaustive provisions on the limitation of liability. Since Sect. 21.2 of the Frame Contract provides for a distinct, separate and exhaustive liability regime, Sect. 27 of the Frame Contract must be eclipsed. According to Claimant, this view is supported by the fact that the payment of consequential damages is excluded by Sect. 27.4 of the Frame Contract, whereas liquidated damages may encompass consequential damages.

[35] "The contract negotiation history, however, shows that the relationship between Sect. 27 of the Frame Contract and other Sections of the Frame Contract was discussed. In fact, the contract history clearly shows that Claimant wanted to add the qualification 'subject to any other Section of this Frame Contract' as an introductory phrase to Sect. 27 of the Frame Contract. However, this was rejected by Respondents. Thereafter, Claimant suggested the introduction of a similar qualification in Sect. 27.2 of the Frame Contract, which was again rejected by Respondents. The final version does not contain any such qualification.

[36] "This allows for the conclusion that the parties did not want to make the application of Sect. 27 of the Frame Contract subject to any other Section of the Frame Contract. Since the discussions regarding the relationship between Sect. 27 and the other Sections of the Frame Contract continued after the introduction of the concept of liquidated damages in case of major faults as provided for in Sect. 21.2 of the Frame Contract, the finding also applies to the relationship between Sect. 27 and Sect. 21.2 of the Frame Contract. The liquidated damages claim in the event of a major fault was included in the Frame Contract [on a certain date during the negotiations]. The discussion on the relationship between Sect. 27 of the Frame Contract and the other provisions of the Frame Contract continued after such date. In other words, the contract history shows that the [page 123] parties did not want to make the application of Sect. 27 of the Frame Contract subject to other contract clauses.

[37] "The next question to be considered is whether Sect. 21.2 of the Frame Contract, by virtue of its specificity, precludes the application of Sect. 27.2 and of Sect. 27.4 of the Frame Contract. Sect. 21.2 of the Frame Contract governs the consequences of a major fault for which Respondents are responsible and which is not remedied within 90 days. This is a normal stipulation for lack of performance or bad performance. The consequences of such a shortcoming is a liquidated damages claim, i.e. a pre-quantified damages claim. A damages claim falls under the broad concept of liability as used in Sect. 27 of the Frame Contract. The question arises whether the application of Sect. 27.2 and/or Sect. 27.4 of the Frame Contract is nevertheless precluded.

[38] "As for the relationship between Sect. 21.2 and Sect. 27.4 of the Frame Contract, Respondents have not argued that Sect. 27.4 excluding consequential damages prevents Claimant from claiming liquidated damages. Further, a witness for Respondents testified that it was not discussed during the contract negotiations whether Sect. 27.4 of the Frame Contract excludes liquidated damages. The liquidated damages provision does not distinguish between losses and consequential damages. In fact, in the Arbitral Tribunal's view, the specificity of the liquidated damages regime precludes the applicability of Sect. 27.4 of the Frame Contract to the liquidated damages claim. The application of Sect. 27.4 of the Frame Contract to a claim under Sect. 21.2 of the Frame Contract would render a liquidated damages claim virtually impossible because it would require Claimant to prove the origin and precise nature of each element of the damages claim whereas it is the nature of liquidated damages that they represent a pre-quantification of damages without the need to prove such damages. This conclusion is not altered by the fact that Sect. 27.2 begins with the words 'Subject to Sect. 27.4 below'.

[39] "While the right to liquidated damages precludes the application of Sect. 27.4 of the Frame Contract (exclusion of incidental and consequential damages), the right to liquidated damages does not preclude the application of Sect. 27.2 of the Frame Contract. The existence of a cap does not render the liquidated damages claim impossible or devoid of any sense. N or is there a contradiction in the fact that the cap provided for in Sect. 21.2 is only slightly lower than the overall cap provided for in Sect. 27.2 of the Frame Contract.

[40] "Claimant argues that in fact the parties had a different understanding, and that such understanding was reflected in a Memorandum of Understanding signed by the parties. In this Memorandum of Understanding Respondents agreed to pay a financial contribution that exceeded the cap calculated pursuant to Sect. 27 of [page 124] the Frame Contract. However, in the Arbitral Tribunal's view, the Memorandum of Understanding is not a simple settlement agreement resolving quantified claims. It is rather an agreement in the context of an ongoing relationship that contains various elements and a strong incentive to foster Claimant's purchases. No specific understanding of the relationship between Sect. 27.1 and Sect. 21.2 of the Frame Contract can therefore be deduced from such an agreement.

[41] "Therefore, the Arbitral Tribunal holds that:

      (1) Sect. 27.2 of the Frame Contract applies to Sect. 21.2 of the Frame Contract, i.e. that liquidated damages claims pursuant to Sect. 21.2 of the Frame Contract are subject to the limitations of Sect. 27.2 of the Frame Contract; and that

      (2) Sect. 27.4 of the Frame Contract does not apply to Sect. 21.2 of the Frame Contract, i.e. that liquidated damages claims pursuant to Sect. 21.2 of the Frame Contract are not subject to the limitations of Sect. 27.4 of the Frame Contract."

4. Relationship Between Sect. 7.4.1 (Specific Performance) and Sect. 27 (Liability Cap)

[42] "The parties agree that Sect. 27 of the Frame Contract does not prevent a specific performance claim under Sect. 7.4.1 of the Frame Contract and leaves such performance claim unaffected. Therefore, the Arbitral Tribunal holds that Sect. 27 of the Frame Contract does not affect a performance claim under Sect. 7.4.1 of the Frame Contract."

5. Relationship Between Sect. 7.4.1 (Specific Performance) and Sect. 21.2 (Liquidated Damages)

a. General remarks

[43] "The relationship between Sect. 7.4 and Sect. 21.2 of the Frame Contract must be assessed by reference to the applicable Swiss law (including the CISG). As the parties come from countries with different legal traditions, it is important to note the very significant differences in the approach to the concept of specific performance that exist in civil and common law systems. Clearly, it is the civil law approach that forms the backdrop to this particular issue.

[44] "The question addressed concerns the relationship between claims for liquidated damages and claims for specific performance, and in particular, whether such claims are mutually exclusive, or can co-exist. As a rule, Swiss law provides for the right to specific performance and the right to claim damages as [page 125] cumulative remedies. In other words, unlike in the common law, a payment aimed at curing a loss incurred, as a general rule, does not exclude the availability of specific performance. This is also the case in connection with liquidated damages. Unlike the position for contractual penalties (Art. 160(1) of the Swiss Code of Obligations), there is no presumption that the payment of liquidated damages excludes a claim for specific performance. Indeed, the opposite is the case.

[45] "The CISG also provides for a statutory right for specific performance (Art. 46 CISG). Two observations may be made about this right:

      (i) By providing a right for specific performance, the CISG follows the continental European tradition (von Caemmerer / Schlechtriem, Kommentar zum Einheitlichen UN-Kaufrecht, 2nd ed. Munich (1995) Art. 46 no.3). In other words, the CISG differs from the common law tradition, where specific performance is treated as an alternative remedy to damages, and is generally admitted only to the extent that a damages claim fails to grant sufficient protection to the injured party;

      (ii) Under the CISG, unlike Swiss law, the right to specific performance is treated as a remedy, rather than the exercise of a performance obligation. The uniform sales law does not regard the buyer's right to require performance of an obligation as simply the logical consequence of the seller's contractual obligation, or even as identical to it, but rather as a statutory 'remedy' available in the event of a breach of contract. This is, in principle, tantamount to a right to require performance in all cases of non-performance. However, under the CISG the buyer must not require specific performance if it has resorted to a remedy which is inconsistent with specific performance. Moreover, a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by the CISG (Art. 28 CISG). Under the CISG, the parties are free to agree otherwise (Art. 6 CISG).

[46] "As a matter of approach, bearing in mind the position in Swiss law and under the CISG, the question arises as to whether there is any wording in the agreement that is sufficient to rebut the presumption that specific performance will be available. More shortly, the question is whether there is any wording in Sect. 21 that disapplies Sect. 7.4." [page 126]

b. Analysis of the Frame Contract

[47] "The Frame Contract provides for an obligation to repair or replace items having a 'serious generic defect' within the warranty period and 10 years thereafter (Sect. 7.4.1 of the Frame Contract). The specific remedy provided for in Sect. 7.4.1 of the Frame Contract in principle reflects the remedy for specific performance available under the CISG, thereby adapting the claim for specific performance to the particular needs of the parties in the context of the Frame Contract. On the other hand, Sect. 21.2.2 of the Frame Contract provides a right to claim liquidated damages from the date that a grace period of 90 days has expired up to the date such fault is remedied.

[48] "On a proper analysis, the Frame Contract does not regulate the relationship between Sect. 21.2 and Sect. 7.4.1 of the Frame Contract. However, Sect. 21.3 of the Frame Contract clarifies that the liquidated damages claim shall be in lieu of any other remedy in respect of loss incurred by Claimant due to the occurrence of the faults. Sect. 21.3 of the Frame Contract shall be without prejudice to any implied legal rights.

[49] "On balance, there is no wording in the agreement that would exclude specific performance if liquidated damages are claimed. By stating that the liquidated damages claim shall be in lieu of any other 'remedy in respect of loss' incurred by Claimant, the Frame Contract does not exclude specific performance. Respondents argue that the term 'loss' must not be read narrowly. Given the fact that the contractual remedy pursuant to Sect. 7.4.1 of the Frame Contract can be considered a tailor-made remedy for specific performance and that, as a general rule, specific performance is not excluded unless expressly agreed by the parties, this argument is not convincing. The replacement of a defective product is not properly characterized as a 'loss', since no loss has occurred as long as there is a right for replacement of a defective product.

[50] "Sect, 21.3 of the Frame Contract further provides that the exclusivity under Sect. X of the Frame Contract can be terminated if the maximum damages are claimed and the fault in question has not been remedied at such time. Such course of action presumes that there is an ongoing obligation to cure the major fault even if the liquidated damages claim has started to run after the 90 days, grace period. This is consistent with Sect. 7.4 giving rise to a separate and continuing obligation.

[51] "Further, Sect. 7.4.1 and Sect. 21,2 of the Frame Contract address completely different situations, namely either a serious generic defect arising from the manufacture or design of the product repeated throughout the product, or a major fault seriously affecting the performance of the product that is not cured within 90 days. The set of circumstances envisaged by Sect. 21.2 of the [page 127] Frame Contract is so different from the one in Sect. 7.4. I of the Frame Contract that it is not possible to maintain that the cases captured by Sect. 7.4.1 of the Frame Contract are just a subset of cases of Sect. 21.2 of the Frame Contract. The fact that any particular event might be within the ambit of both Sections does not alter this conclusion, since the contract was clearly drafted in terms of two different regimes, triggered by different criteria.

[52] "The contract negotiation history docs not suggest another interpretation. The final version of Sect. 21.3 of the Frame Contract clearly states that the liquidated damages claim shall be in lieu of any other remedy with respect to 'loss'. Loss is a term of art under Swiss law and does not encompass 'specific performance'. The fact that the provision of Sect. 7.6 of the Frame Contract as included in the draft as reflected in one of the Exhibits classifying that the warranties in Sect. 7 are not the exclusive rights was struck out before signing does not exclude specific performance since such provision did not address the relationship between Sect. 21.2 and Sect. 7 of the Frame Contract.

[53] "Respondents correctly state that Art. 46(I) CISG does not grant specific performance if the buyer has resorted to a remedy which is inconsistent with specific performance. Contrary to Respondents' allegations, Art. 46(1) CISG does not generally exclude the possibility that a person claims specific performance and the restitution of damages. Insofar as the claim for specific performance and for restitution of damages are not inconsistent, Art. 46(I) CISG does not exclude parallel claims (e.g., to the extent the damages refer to loss of income or profit, where there would be no such inconsistency).

[54] "There is no general issue of double recovery as the liquidated damages claim covers the time period as of the end of the grace period up to the point in time when the major fault is remedied. Once the serious generic defect has been remedied, the major fault triggered by the serious generic defect must also have been remedied and as a consequence, the liquidated damages claim is stopped. Any issue of double recovery at a concrete level, should it arise, will obviously be addressed by the Arbitral Tribunal, as the applicable law requires.

[55] "Therefore, the Arbitral Tribunal holds that the claim for liquidated damages does not exclude a simultaneous claim for specific performance."

IV. AWARD

[56] "On the basis of its analysis of the facts and the applicable law as set out above, the Arbitral Tribunal unanimously declares that: [page 128]

      (1) Claims for liquidated damages pursuant to Sect. 21.2 of the Frame Contract are subject to the limitations of Sect. 27.2 of the Frame Contract;

      (2) Claims for liquidated damages pursuant to Sect. 21.2 of the Frame Contract are not subject to the limitations of Sect. 27.4 of the Frame Contract;

      (3) Claims for specific performance pursuant to Sect. 7.4.1 of the Frame Contract are unaffected by Sect. 27 of the Frame Contract;

      (4) Claims for specific performance pursuant to Sect. 7.4. I of the Frame Contract are not per se excluded by the existence of claims for liquidated damages pursuant to Sect. 21.2 of the Frame Contract.

All other issues, including the costs of arbitration occasioned by this Partial Award and all other relief sought by the Parties, are reserved for determination in one or several subsequent award(s)." [page 129]

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Pace Law School Institute of International Commercial Law - Last updated March 3, 2010
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