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CISG CASE PRESENTATION

Netherlands Arbitration Institute, Partial award of 17 May 2005 and Final award of 5 July 2005 (Machines case) [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/050517n1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20050517 (17 May 2005)

JURISDICTION: Arbitration ; Netherlands

TRIBUNAL: Netherlands Arbitration Institute

JUDGE(S): F. De Ly (Chairman), J.P. Eschauzier, H. van Houtte

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (respondent)

BUYER'S COUNTRY: Netherlands (claimant)

GOODS INVOLVED: Machines


Classification of issues present

APPLICATION OF CISG: The Tribunal held that the claims are time barred without regard to whether the CISG or the otherwise applicable law, the Code civile of Italy, applies

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 3 ; 39 ; 40

Classification of issues using UNCITRAL classification code numbers:

3B [Applicability of the Convention where services a part of the obligation];

39A ; 39B [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time; Cut-off period of two years];

40A [Seller's knowledge of and failure to disclose non-conformity]

Descriptors: Services ; Lack of conformity notice, timeliness ; Lack of conformity known to seller

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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) 172-190

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) 172-190. Copyright owner: The International Council of Commercial Arbitration (ICCA). Reprinted with permission of ICCA.

Netherlands Arbitration Institute
Partial final award of 17 May 2002 and final award of 5 July 2005

FACTS

In preparation for a project to build a plant, a Netherlands joint venture (the [Buyer]) concluded an Engineering Services Agreement with a US engineering company (the Engineering Company). Pursuant to that agreement, the Engineering Company produced technical specifications for the plant. Sect. 7 of the technical specifications contained warranty provisions. A tender offer was issued which referred to the technical specifications and the [Buyer]'s General Terms and Conditions for Purchase and addenda thereto.

The contract for the supply and delivery of two types of machines (Machine Type I and Machine Type II) was awarded to [Seller] an Italian manufacturer pursuant [page 172] to a Letter of Intent and a Capital Purchase Order. The Letter of Intent referred to the [Buyer]'s General Terms and Conditions and to Addenda. It also referred to attachments identified in the tender offer and indicated that these were to become attachments to the purchase order.

Three years after the installation of the machines, an accident put Machine Type I out of operation for approximately six months. Seven insurers, who together had issued insurance covering machinery breakdown and business interruption risks, reimbursed the [Buyer] in part for the damages. They, in turn, sought damages from the successor of the manufacturer of the machine.

The insurers, together with the [Buyer], initiated arbitration against the successor to the manufacturer, relying on the arbitration clause in the [Buyer]'s General Conditions which provided for arbitration under the Rules of the Netherlands Arbitration Institute.

In its Partial Final Award of 17 May 2005, the arbitral tribunal rejected the respondent [Seller]'s argument that the claimant insurance companies did not have standing to bring the claim in arbitration. The arbitral tribunal held that the insurers were subrogated in the rights of the [Buyer] by virtue of the payments under the insurance policies. The 1980 Rome Convention pointed to the law of The Netherlands as the applicable law to the question of subrogation of the insurance companies and under this law, subrogation gave the insurers the same rights as the original creditor. This included the right to rely on the arbitration clause.

The arbitral tribunal next examined which of the various contractual warranties applied. The first warranty was contained in the Engineering Company's technical specifications and stipulated, inter alia, "In addition to the warranty requirements of Buyer's Standard Clauses, the following shall also apply. ..." The Capital Purchase Order referred to the [Buyer]'s General. Conditions of Purchase and to specific addenda. The [Buyer]'s General Conditions of Purchase provided for a one-year warranty period. The first Addendum to the General Conditions was the Machine Type I Addendum and contained a warranty for a period of 16,000 hours of operation which would amount to two years.

The arbitral tribunal found, both in relation to the language of the provision and the context in which it was incorporated, that the warranty contained in the technical specifications had not become a contractual term between the [Buyer] and the [Seller].

The arbitral tribunal then examined whether the warranty provision of the General Terms and Conditions applied or that in the Machine Type I Addendum. The Addendum contained specific language regarding Machine Type I which [page 173] suggested that it prevailed over the general reference to the General Terms and Conditions. Moreover, the context supported this conclusion. The General Terms and Conditions were used by the purchasing department for a wide range of purchasing contracts. The purchase of the machine was a one-off transaction and it would be plausible that the supplier would have insisted and bargained for tailor-made previsions regarding the warranties. Hence the arbitral tribunal concluded that the Addendum controlled in relation to the contractual warranties.

In applying the terms of the warranty, the arbitral tribunal found that the two-year warranty had elapsed and the claims were time barred. Any further statutory remedies had been excluded by specific language in the Addendum. Hence, the arbitral tribunal concluded that all claims were dismissed.

In its Final Award of 5 July 2005, the arbitral tribunal addressed the costs of arbitration and the parties' legal costs. The claimants were condemned to pay all costs of arbitration, as well as their own legal costs and those of the [Seller]. The arbitral tribunal rejected the claimants' request to mitigate the legal costs of the [Seller] to any reasonable amount. The arbitral tribunal considered that the [Seller] had incurred in-house legal costs which it had not claimed and that it had made substantial costs in contributing to a more complete file.

The arbitral tribunal next considered that in international arbitration, a variety of approaches are used on awarding costs "ranging from awarding a reasonable amount to full costs, subject to a marginal review as to the reasonable nature of costs incurred. Here, the parties were large corporations and may be deemed to have cost control measures regarding litigation costs, and the [Seller] did not know at the time whether it would prevail and be entitled to reimbursement. Consequently, the [Seller] was awarded the full amount of the claimed legal costs.

Excerpt

I. ISSUES, CLAIMS AND ARGUMENTS OF THE PARTIES

[1] "This section of the award attempts to give a fair summary of the main arguments and claims of the parties. As the parties have requested the Arbitral Tribunal to rule first on the preliminary issues and the Tribunal has accepted to do so, this section of the award will only report the claims and arguments of the parties as to the following issues: [page 174]

  1. are claimants parties to the arbitration agreement contained in the [Buyer]'s General Conditions;

  2. are the claims time-barred by virtue of the contractual warranty provisions; and

  3. are the claims time-barred under the applicable law?"

1. Claimants' Position

[2] "As to the first issue, claimants have argued that the [Buyer] as one of the claimants is in any event a party to the arbitration agreement and has standing to bring these arbitration proceedings.

[3] "Furthermore, claimants have advocated that the other claimants, in their capacity of insurance companies, also have standing because they have paid compensation to the [Buyer] by virtue of insurance policies covering the risk and, thus, are subrogated into the rights of the [Buyer] to the extent of their payments. In this respect, claimants consider that Dutch law applies to the subrogation and its effects. Under Art. 284 of the Dutch Commercial Code (hereinafter referred to as ComC), an insurance company is subrogated into the rights of its client if and to the extent of payments made to that client. Claimants, further, argue that any such subrogation also extends to rights under an arbitration agreement. Finally, claimants have observed that if subrogation were not to be admitted, then the [Buyer] would be entitled to the full damages as claimed in these arbitration proceedings.

[4] "As to the second issue, claimants take the position that the contractual warranties apply to the accident and have not expired. In this respect, claimants consider that the warranties contained in the project specifications are special terms that override the general warranties embodied in the capital purchase order's attachments. In relation thereto, they have insisted on the language of the specifications which state that the specification warranties apply in addition to buyer's standard clauses.

[5] "As to the third issue, claimants primarily argue that Dutch domestic law (i.e., Sect. 1 of Book 7 of the Dutch Civil Code (hereinafter referred to as CC) directly or by analogy) applies and that, under the governing law, claimants are not time-barred since they notified [Seller] of the non-conformity within the statutory time period of two years. Also, claimants are of the opinion that Dutch domestic law applies notwithstanding the possible expiration of the contractual warranties on the basis of non-conformity or tort.

[6] "In relation to their arguments that Dutch domestic law applies, claimants dispute that the Convention on the International Sale of Goods (hereinafter [page 175] referred to as CISG) is applicable. In this respect, they have indicated that the choice of law clause in the [Buyer]'s General Conditions providing for the application of Dutch law, is to be interpreted as referring to Dutch domestic law and not to CISG as part of Dutch law by virtue of The Netherlands' ratification of CISG. Also, claimants advocate that the capital purchase order is a turnkey contract which, by virtue of Art. 3 CISG,[1] is not a sales contract governed by CISG. Furthermore, claimants are of the opinion that the contract related to immovable property since the machines were to be integrated on the plant's premises. Finally, because the preponderant part of the contract related to services and not to sales, claimants have concluded that CISG does not apply.

[7] "Alternatively, claimants argue that, if the Tribunal were to decide that CISG applies, their claims are also not time barred under Arts. 39 and 40 CISG [2] because they notified [Seller] within CISG's cut-off period of two years after they have discovered the non-conformity. Furthermore, they have requested the Arbitral Tribunal to rule that, on the basis of actual or constructive knowledge or reasonableness and fairness, [Seller] ought not be permitted to invoke the cut-off period of Art. 39(2) CISG.

[8] "On the basis of these arguments, claimants have requested the Arbitral [page 176] Tribunal to hold that all of them are parties to the arbitration agreement and, must have standing to sue as well as to declare that their claims are not time barred under the contractual warranties and under the governing law."

2. [Seller]'s Position

[9] "[Seller] has taken the position that claimants' arguments lack merit and that the claims are to be dismissed because claimants have no standing and because their claims are time barred by virtue of the contractual warranties and the governing law. In that respect, [Seller] has developed the following reasoning.

[10] "As to the first issue, [Seller] has taken the position that claimants have failed to prove that they made payments to the [Buyer] and, thus, that they are subrogated into the [Buyer]'s rights. Furthermore, [Seller] has disputed that subrogation, if any, may also entail succession to rights under an arbitration agreement. In this respect, [Seller] has argued that in many jurisdictions it is not accepted that an entity may become a party to an arbitration agreement by virtue of subrogation.

[11] "As to the second issue, [Seller] argues that the contractual warranty embodied in the first Addendum to the Capital Purchase Order regarding the Machine Type I applies. By virtue of this contractual warranty, claims under the warranty, to the exclusion of any other warranty, express or implied, statutory or not, could only be brought in relation to the first 16,000 hours of operation amounting to some two years of operation. Since the accident occurred past this period of 16,000 hours, no warranties, contractual or statutory, apply with regard to the accident.

[12] "Alternatively, [Seller] invoked the one-year expiration period of the [Buyer]'s General Conditions under which the claims are also time barred.

[13] "[Seller] denies that the technical specifications have become contract terms and, thus, concludes that these are inapplicable to the contractual warranty Issue.

[14] "As to the third issue, [Seller] advocates that, if the Arbitral Tribunal were to decide that the contractual warranties had not expired, the claims are still time barred under Arts. 39 and 40 CISG because claimants brought their claims past the two year cut-off period of Art. 39(2) CISG and because Art. 40 CISG is not applicable in the present case. In relation thereto, [Seller] emphasizes that more than two years have lapsed between delivery and the occurrence of the accident.

[15] "In relation to the proposition that CISG applies to the Capital Purchase [page 177] Order, [Seller] argues that a choice of law for Dutch law as embodied in the [Buyer]'s General Conditions implies that CISG applies as part of Dutch law. Also, [Seller] has contested claimants' argument that the Capital Purchase Order constitutes a turnkey contract and has argued that it is a sales contract which falls within the substantive scope of CISG.

[16] "On the basis of its arguments, [Seller] has requested the Arbitral Tribunal to hold that claimant's claims are without merit and are to be dismissed. More specifically, [Seller] has requested that the Arbitral Tribunal declares that it does not have jurisdiction over the insurers, that all contractual warranties have expired or are inapplicable, that CISG applies to the contract and that the CISG claims based on non-conformity have expired in 1998. [Seller] also requested that the claimants are ordered to pay to [Seller] the full costs of the arbitration, including but not limited to compensation for arbitrators' fees, administrative costs and legal fees, and expenses incurred by [Seller] in connection with the present dispute, including costs of its own personnel in responding to the proceedings commenced by the claimants, as well as interest on the above at an appropriate rate. Finally, [Seller] has requested the Arbitral Tribunal to grant it any further relief that the Arbitral Tribunal may deem fit and proper."

II. ANALYSIS OF THE ARBITRAL TRIBUNAL

(....)

1. Jurisdiction

[17] "The parties are in agreement that the arbitral clause contained in the [Buyer]'s General Conditions applies. This clause provides for arbitration under the rules of the NAI [Netherlands Arbitration Institute]. Thus, the Arbitral Tribunal has jurisdiction to hear the case, subject to determining whether the claimants or any of them are parties to the arbitration agreement in accordance with the first preliminary issue referred to the Tribunal."

2. Place of Arbitration

[18] "Absent determination of the place of arbitration in the arbitral clause referred to above or by agreement between the parties, the Arbitral Tribunal ... by virtue of Art. 22(1) NAI Arbitration' Rules, has determined that the place of arbitration shall be The Hague, The Netherlands." [page 178]

3. Applicable Law

[19] "The parties agree that [the applicable law clause] of the [Buyer]'s General Conditions applies by virtue of which the contract shall be governed by and interpreted in accordance with the laws of The Netherlands. Thus, the Arbitral Tribunal will apply Dutch law to the rights and obligations arising under the capital purchase order." (....)

4. Standing and Subrogation

[20] "Claimants have argued that they are all entitled to bring these proceedings and that the Tribunal has jurisdiction over all claimants. [Seller] has denied this.

[21] "The Tribunal accepts that the insurors in their capacity of insurance companies have indemnified the [Buyer] under the relevant insurance policy and that claimants have sufficiently proven how these payments were made in the context of the insurance industry's settlement system. By virtue and to the extent of these payments, claimants may be considered as being subrogated into the rights of the [Buyer].

[22] "Under Art. 13(1) of the 1980 Rome Convention on the law applicable to contractual obligations, applicable both in The Netherlands and in Italy, a third party, under a duty to satisfy a creditor or having satisfied a creditor in discharge of such a duty, may be entitled to exercise against the debtor the rights the creditor had against the debtor if and to the extent provided by the law governing the third party's duty to satisfy the creditor.

[23] "Under the provision set forth above, the law applying to the insurance companies' (the insurors') duties to satisfy the [Buyer] applies in relation to their subrogation rights. It has sufficiently been proven that Dutch law applies to the relevant insurance policy the [Buyer] had with the insurors. Thus, Dutch law applies as to the subrogation rights of the insurors. As claimants have argued, Art. 284 ComC governs the position of insurance companies having indemnified an insured. By virtue of that provision, the insurors may be accepted to be subrogated in the rights of the [Buyer] to the extent of their payments.

[24] "[Seller] has disputed this only in general terms by referring to some national legal systems which do not accept the conclusion above in relation to arbitration agreements. However, [Seller] itself has relied on an unpublished ICC award and commented on the subrogation aspects of this case that, under [page 179] French law, subrogation by an insurance company as to the arbitration agreement is acceptable.

[25] "The proposition that subrogation also extends to an agreement to arbitrate is equally applicable under Dutch law.[3] The Arbitral Tribunal endorses this position.

[26] "Technically, subrogation gives the third party the same rights as the original creditor which also includes accessory rights. The Tribunal considers that an arbitral clause is such an accessory right and that the principle of the severability of the arbitral clause (Art. 1053 Dutch Code of Civil Procedure, hereinafter referred to as CCP)[4] does not extend beyond the case of nullity of the main agreement to affect subrogation.

[27] "Moreover, from a policy perspective, the Tribunal also considers that a debtor who agreed to arbitrate disputes stemming from a particular legal relationship, should not be able to avoid arbitration when a third party satisfies the creditor and by operation of law is subrogated into the rights of that creditor.

[28] "On the basis of these considerations, the Tribunal holds that the insurors have standing in this arbitration and that it has jurisdiction in relation to their: claims in which and to the extent they were subrogated. ..."

5. Contractual Warranties

[29] "The parties are in disagreement as to the applicable contractual warranties and their interpretation as well as to the question whether claimants' actions under these warranties have expired."

a. Warranties invoked by the parties

[30] "Before discussing these issues, the provisions regarding contractual' warranties to which the parties make reference, may be cited in chronological order.

[31] "First, the Engineering Company prepared an extensive document, [referred to as] the 'Engineering Company specifications', the 'Engineering [page 180] Company technical specifications' or the 'technical specifications'). The Arbitral Tribunal understands that successive versions of these specifications have been used in relation to the project. ... In all successive versions of these specifications the following identical provision is found under heading 7.0 Warranties and Guarantees:

'In addition to the warranty requirements of Buyer's Standard Clauses, the following shall also apply. ...'

[32] "As the language quoted seems to suggest, the General Conditions of the [Buyer] would not be exclusive and reference might be made to the warranties contained in the specifications. In this respect, it is relevant to note that the specifications do not contain a time bar to bring warranty claims.

[33] "Second, the Capital Purchase Order provides as follows:

'All ordered items shall be in accordance with [the specifications]. The equipment, spare parts and services covered by the Letter of Intent and the Purchase Order will be in accordance with Attachment I -- Buyer "General Terms and Conditions of Purchase" and Addenda thereto entitled "Addendum to Attachment I -- General Terms and Conditions of Purchase specifically for Machine Type I" and "Addendum to Attachment I -- General Terms and Conditions of Purchase specifically for Machine Type II" which is attached. ...'

This clause will hereinafter be referred to as the 'incorporation clause'.

[34] "... [T]he Arbitral Tribunal deduces that the Capital Purchase Order has been amended on a number of occasions to reflect change orders to the project and order other equipment, especially spare parts. These change orders and other modifications apparently were added to the text of the original Capital Purchase Order and received sub-numbers. ... However, the Arbitral Tribunal understands that the clause quoted above was not changed in material ways, except for references to more recent specifications issued by the Engineering Company.

[35] "As to warranties, the original Capital Purchase Order dated ... refers both to the [Buyer]'s General Conditions of Purchase and to specific addenda.

[36] "Attachment I to the original Capital Purchase Order is named '[Buyer] C.V. General Terms and Conditions of Purchase'. In Art. IX -- Warranty of these General Terms, it is stated in relevant parts: [page 181]

'9.02 Fit for Particular Purpose -- Contractor specifically represents and warrants:

(b) that all Goods furnished under the Contract are in strict accordance with the Drawings and Specifications therein and are free of all defects in design (where furnished by the Contractor), material and workmanship for a period of one (1) year from the date that the equipment is put into service;

These warranties are in addition to, and shall not be construed as restricting or limiting any warranties of Contractor, express or implied, or which are provided by law or exist by operation of law.'

[37] "The first addendum to the [Buyer]'s General Conditions is labelled 'Addendum to Attachment I "General Terms and Conditions of Purchase" specifically for Machine Type I'. This addendum will hereinafter be referred to as the 'Machine Type I Addendum'. In Art. 2.0 on Warranties, Sect. 2.2 on Equipment Warranty, in relevant parts, reads as follows:

'Seller warrants to Buyer that the Equipment to be delivered hereunder ... shall be free from defects in material, workmanship and title. ...

The foregoing warranties (except as to title) for the Equipment shall apply to defects which appear during a period of 16,000 equivalent operating hours (essentially twenty-four (24) months) after the date the facility is Substantially Completed. ...

The foregoing warranties are exclusive and in lieu of all other warranties, whether written, oral, implied or statutory. No implied statutory warranty of merchantability or fitness for particular purpose shall apply.

The foregoing shall constitute the only remedies of Buyer for claims based on defect in or failure of products or services, whether said claims are designated as arising in contract, warranty, tort (including negligence), strict liability, indemnity, or otherwise, whether arising before or after delivery, and however instituted. Upon the expiration of the warranty period, all such liability shall terminate.'

[38] "The dispute between the parties arises in this respect [as] to the different interpretations that the parties give to this set of three differing contractual warranties. To a large extent, this relates to two distinct issues:

1) are the warranties of the Engineering Company specifications contractual warranties and, if so, how do they relate to the [Buyer]'s General Terms and Conditions and the Machine Type I Addendum; and

2) what is the relationship [page 182] between the contractual warranties of the [Buyer]'s General Terms and Conditions on the one hand and the contractual warranties of the Machine Type I Addendum. These two issues will be discussed below."

b. Warranties of the Engineering Company technical specifications

[39] "As to the first issue, the Arbitral Tribunal, on the evidence before it, has not been convinced that the warranty provision cited above and contained in the specifications has become a contractual warranty or should prevail over the warranties contained in the [Buyer]'s General Terms and Conditions or in the Machine Type I Addendum.

[40] "First, the original Capital Purchase Order in its incorporation language merely refers to the items purchased to be in accordance with the Engineering Company specifications. The Arbitral Tribunal interprets this as that the products purchased needed to comply with the Engineering Company's technical specification but does not read that language as necessarily implying that the warranty provision of these specifications was incorporated into the Capital Purchase Order.

[41] "This textual argument is corroborated by a contextual argument. The same incorporation language contained in the Capital Purchase Order also specifically refers to the [Buyer]'s General Terms and Conditions and the Addenda which also contain contractual warranties. The Arbitral Tribunal reads the incorporation clause as, thus, implicitly excluding any other warranty clauses in other documents such as the Engineering Company specifications.

[42] "On this first issue, the provisional conclusion is that the warranty contained in the Engineering Company specifications at the time of contracting did not become a part of the contractual arrangements between the [Buyer] and [Seller].

[43] "This provisional conclusion must be tested on three counts.

[44] "First, it must be contrasted to claimants' argument that the definition of 'Contract' in the [Buyer]'s General Terms and Conditions has incorporated the Engineering Company specifications into the contractual relationship between the [Buyer] and [Seller]. This definition reads as follows:

'1.01 Contract -- means these General Terms and Conditions of Purchase, any specific terms and conditions of purchase provided in the Purchase Order, or in any subsequent Change Order, all Drawings and Specifications pertaining to the Goods, and any other documents mutually agreed upon between Company and Contractor and integrated and [page 183] incorporated to the Contract by reference.'

[45] "The Arbitral Tribunal does not believe that the provisional conclusion set forth above is to be changed on the basis of the provision cited in the previous paragraph because a definition in a contract document should not control over an express reference in the contract to two sets of incorporated other documents which contain conflicting provisions. Even if the Engineering Company specifications were part of the contract, the Arbitral Tribunal still considers that the warranty provisions contained in the General Terms and Conditions and in the Machine Type I Addendum should prevail over the warranty provision in the Engineering Company specifications because the former are more specific, later in time and more expressly referred to in the Capital Purchase Order.

[46] "Second, the provisional conclusion must also be tested against the history of the contract to which claimants have referred. In this regard, the question must be answered whether the Request for Tender and the Letter of Intent lead to a conclusion different from the one so far envisaged.

[47] "As to the Request for Tender, it again not only refers to a tender to be in accordance with the Engineering Company Specification Package for Machine Type I, but also that all terms and conditions of purchase shall be in accordance with Attachment I entitled 'the [Buyer] B.V. & Co., C.V. General Terms and Conditions of Purchase' and addenda thereto. Again, the Tribunal interprets this language as referring for technical issues to the Engineering Company specifications but regarding terms and conditions to the [Buyer]'s General Terms and Conditions and addenda thereto. On this test too, the provisional conclusion needs not be changed since a tenderer such as the manufacturer knew or ought to have known when tendering that the terms and conditions regarding warranties would in any event not be the ones contained in the Engineering Company technical specifications.

[48] "When testing the provisional conclusion above against the text of the Letter of Intent, the Arbitral Tribunal has concluded that, from that perspective, there also is no need to change the provisional conclusion. Page three of the Letter of Intent dated 11 August 1994 provides that the equipment, spare parts and services covered by the Letter of Intent and the resulting purchase order will be provided in accordance with the [Buyer]'s Terms and Conditions and the Machine Type I Addendum. The Letter of Intent does not refer to the Engineering Company's technical specifications except to 'Seller's Drawing and Data Commitment' form, apparently attached to the Letter of Intent but not produced in these proceedings. The Letter of Intent further states that other attachments as identified in the Request for Tender will also become attachments [page 184] to the Purchase Order. However, the only document further attached to the Capital Purchase Order which has been submitted in these proceedings is the 'Seller's Drawing and Data Commitment Form' (Addendum II to the Capital purchase Order) and does not contain the Engineering Company specifications. Thus, no reference being made in the Letter of Intent to the technical specifications while the Letter of Intent specifically refers to the [Buyer]'s General Terms and Conditions and to the Machine Type I Addendum, the Arbitral Tribunal considers that the Letter of Intent provides insufficient or no reasons to change its provisional conclusion that the warranty provision of the technical specifications became contract document or should prevail over the other terms. Thus, the parties, also on the face of the Letter of Intent, may be considered to have agreed on the application of the contractual warranties of the [Buyer]'s General Terms and Conditions and the Machine Type I Addendum and not on the basis of the warranty of the Engineering Company specifications.

[49] "Third, the provisional conclusion above also raises the question whether later references to revised Engineering Company specifications can change the provisional conclusion. The Arbitral Tribunal does not think so. The references to revisions ... in the opinion of the Tribunal, cannot be held to reintroduce the warranty contained in the original Engineering Company specifications. First, the warranty was identical to the one in the original specifications and, as the Tribunal provisionally has concluded, was excluded or inapplicable at the time of contracting. Thus, it would not seem very logical, absent more specific indications, that a term excluded at contracting would be imported into the contractual content at the time change orders or other contractual modifications were made. Second, the serial numbered capital purchase orders seem to have repeated the incorporation language which was present at the time of contracting. For the reasons set forth in the preceding paragraphs, that incorporation language excluded the warranty provision of the specifications to apply or to become contractual content and, thus, would also exclude that revised specifications containing a warranty, contrary to the incorporation clause, would be reintroduced into a modified contract.

[50] "For the reasons above, the Arbitral Tribunal concludes that claimants have insufficiently proven that the warranty of the Engineering Company specifications in their original form or in any of their revisions applies or has become a contractual term as between the [Buyer] and [Seller]. Since this warranty is not applicable, it cannot determine whether the claims are time barred or not." [page 185]

c. Conflicting contractual warranties

[51] "This conclusion brings the Arbitral Tribunal to the second issue (i.e., whether the warranty provision of the [Buyer]'s General Terms and Conditions applies or whether the warranty provision of the Machine Type I only is to be considered). This issue is relevant because the warranty provision of the General Terms and Conditions does not exclude other warranties (such as statutory warranties) or remedies while the Machine Type I Addendum does exclude any other warranties or remedies.

[52] "The text of the incorporation clause contained in the original Capital Purchase Order in the view of the Arbitral Tribunal provides some authority for the proposition that the terms of the Addendum for Machine Type I should prevail over the terms of the [Buyer]'s General Terms and Conditions in case of conflict between the terms. On the one hand, the incorporation clause, in its relevant part, reads that the equipment, spare parts and services covered by the Letter of Intent and the Purchase Order will be in accordance with Attachment I -- the [Buyer] B.V. & Co., C.V. 'General Terms and Conditions of Purchase' and Addenda thereto entitled 'Addendum to Attachments I -- General Terms and Conditions of Purchase Specifically for Machine Type I' which may suggest that both terms are to apply and that no priority rule can be derived from the incorporation language. On the other hand, the heading of the Machine Type I Addendum clearly states that there are specific terms and conditions regarding Machine Type I which may suggest that there is a hierarchy regarding possible conflicts between both sets of contract terms. The Arbitral Tribunal believes that the second argument has more merit. The reference to the Machine Type I Addendum is specific in relation to any such equipment and, absent indications to the contrary, prevails over the general reference to the [Buyer]'s Terms and Conditions.

[53] "Moreover, the Tribunal considers that also the context indicates that the Addendum should prevail over the General Terms and Conditions. The incorporation clause refers to both sets of terms which, so the Tribunal understands, were attached to the original Capital Purchase Order. The contract drafters were aware or may be deemed to have been aware that there were conflicts between both sets of terms. By inserting the word 'specifically' in the heading of the Machine Type I Addendum and repeating that heading in the incorporation clause, they may be deemed to have agreed on the contractual warranties contained in the Addendum in relation to the Machine Type I equipment and to have excluded the contractual warranties of the General Terms and Conditions which were contradicting the former.

[54] "The Arbitral Tribunal also believes that the construction of the [page 186] incorporation clause under which specific terms prevail over general terms, makes sense from the overall background of the contract. The Tribunal understands that the [Buyer]'s General Terms and Conditions were used by its purchasing department for a wide range of purchasing contracts. Since the [Buyer] is not in the business of purchasing such machines but of producing its product, the purchase of such machines is not its day-to-day business but a one-off transaction. Having bargained for the application of its general purchasing conditions, it seems plausible to the Arbitral Tribunal that a supplier of machines like [Seller] insisted and bargained for tailor-made provisions regarding the warranties to be provided and which were, by their nature, not covered by the general terms of plant's purchasing department. From that perspective, it also seems acceptable to the Tribunal that the specific terms of the Addendum prevail over the [Buyer]'s General Terms and Conditions.

[55] "On the basis of the considerations above, the Arbitral Tribunal concludes that the Machine Type I Addendum controls in relation to the contractual warranties.

[56] "Pursuant to the contractual warranties of this Addendum, no claims can be brought or remedies sought on whatever basis in relation to the Machine Type I beyond a period of 16,000 operating hours after substantial completion which is essentially after a 24 months period after such completion.

[57] "In this respect, claimants have not argued or sufficiently proven that any of these conditions in relation to the basis of their claims, the equipment covered by the Addendum or the time period and its computation are not met while [Seller] specifically has relied on the expiration of this contractual warranty. Consequently, the Arbitral Tribunal will hold that the claims and remedies sought by claimants are time barred on the basis of the contractual warranty provision of the Machine Type I Addendum.

[58] "The conclusion stated in the previous paragraph, in the eyes of the Arbitral Tribunal, also applies if the Tribunal were to follow claimants in their argument that there were proven defects in material and/or workmanship. In this respect, the Tribunal is of the opinion that [Seller] can invoke the time bar of the contractual warranty of the Machine Type I Addendum because the Tribunal considers that a 24 months or 16,000 operating hours warranty is not an unreasonable limit on a buyer's remedies. Moreover, any such warranties limiting the recourse against a seller are not unusual provisions in these types of sales involving commercial parties.

[59] "Because the contractual warranty contained in the Machine Type I Addendum does exclude statutory remedies, the Arbitral Tribunal does not need to address the question whether these statutory remedies, based on the CC or [page 187] the CISG, apply. This also applies to statutory remedies based on non-conformity or on tort which the Tribunal considers are opted out by virtue of the broad language of the Machine Type I Addendum specifically covering these statutory remedies.

[60] "The Arbitral Tribunal will, thus, hold that all claims are time barred and to be dismissed." (....)

III. CONCLUSION

[61] "The Arbitral Tribunal accepts jurisdiction in these arbitration proceedings and rules that all claimants are parties to these proceedings; the Arbitral Tribunal, determines that the place of arbitration is The Hague, The Netherlands; the Arbitral Tribunal rules that all claims are dismissed; the Arbitral Tribunal reserves its decisions as to the costs of the arbitration and as to the costs of legal representation which will be dealt with in a final award. ..."

Final award of 5 July 2005

(....)

[62] "Claimants by e-mail objected to the cost submissions in that they provided insufficient information to enable them to reply to these submissions. Also, claimants indicated that the costs of legal representation did not meet the reasonableness test of Art. 60 of the Arbitration Rules of the Netherlands Arbitration Institute (hereinafter referred to as NAI). [Seller] on that same date replied that the information in its opinion was sufficient and that the costs met the criteria of Art. 60 of the Arbitration Rules."

I. ARBITRATION COSTS

[63] "First, the Arbitral Tribunal has to determine and to allocate the costs of these arbitration proceedings. [Seller] having prevailed in these proceedings, the Arbitral Tribunal holds that claimants are condemned to all costs of this arbitration, including the administration costs of the NAI, the fees and disbursements of the Arbitral Tribunal and the costs related to the deposit of the [page 188] partial final award and this award with the Registry of the District Court in The Hague."

II. COSTS OF LEGAL REPRESENTATION

[64] "Claimants having lost these proceedings, the Arbitral Tribunal holds that they shall bear their own costs regarding legal assistance and representation in preparing of and during these proceedings.

[65] "By virtue of Art. 60 NAI Arbitration Rules, this Arbitral Tribunal may award against the losing party the costs of legal assistance incurred by the party in whose favour the award is rendered if and to the extent that these costs are deemed necessary by the arbitral tribunal.

[66] "In this respect, claimants have requested the Tribunal to mitigate [Seller]'s costs of legal representation to any reasonable amount that the Tribunal in its discretion may fix. [Seller] has pointed out that its in-house legal costs are not included in its costs of legal representation submitted to the Tribunal and that Art. 60 NAI Arbitration Rules does not contain a reasonableness test. Further, it has argued that its submitted costs were necessary) in relation to the arbitration.

[67] "The Tribunal first notes that [Seller] incurred in-house legal costs since in-house counsel filed the short answer in these proceedings and was co-counsel in the arbitration. Although [Seller] did not include these, costs in its submission on costs, it certainly is, in the opinion of the Tribunal, an element to be taken into account when [considering] mitigating costs of legal representation.

[68] "Secondly, the Tribunal has noted that [Seller] made substantial costs contributing to compiling a more complete file in relation to its research as to the full set of original contract documents.

[69] "Thirdly, the Tribunal considers that under Art. 60 NAI Arbitration Rules, arbitrators in international cases use different approaches to award costs ranging from awarding a reasonable amount to full costs, subject to a marginal review as to the reasonable nature of costs incurred. In this case, the Tribunal prefers the latter approach in view of the identity of the parties, the nature and the amount of the transaction. In this respect, the Tribunal is particularly reluctant to interfere with and fully review costs of legal representation since the parties involved are large corporations engaged in commercial international transactions and may be deemed to have in place control measures regarding litigation costs. Also, when [Seller] was making and paying these costs, it did not know that it was to prevail on the merits and would be entitled to reimbursement of its [page 189] costs of legal representation or any part thereof.

[70] "Consequently, in view of the three considerations above and using the Tribunal's discretionary powers in assessing costs of legal representation, the Tribunal rules that [Seller]s costs [as claimed] can be granted In this respect, the Tribunal notes that [Seller]'s bills are expressed in US dollars. Since the Tribunal is of the opinion that it can award costs of legal representation in a currency other than that of the place of arbitration if any such costs have been made in such a currency, the order will be expressed in US dollars." [page 190]


FOOTNOTES

1. Art. 3 of the 1980 United Nations Convention on the International Sale of Goods (CISG) reads:

"1. Contracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.

2. This Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services."

2. Arts. 39 and 40 CISG read:

"Article 39

1. The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.

2. In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee.

Article 40

The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer."

3. "Asser-Hartkamp, Verbintenissenrecht, I, De verbintenis in bet algemeen, 12th edition (2004) No. 571 with further references."

4. Art. 1053 of the Dutch Code of Civil Procedure reads:

"An arbitration agreement shall be considered and decided upon as a separate agreement. The arbitral tribunal shall have the power to decide on the validity of the contract of which the arbitration agreement forms part or to which the arbitration agreement is related."

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