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CISG CASE PRESENTATION

ICC Arbitration Case No. 6281 of 26 August 1989 (Steel bars case) [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/896281i1.html]

Primary source(s) for case presentation: Michael R. Will; text of case


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Case identification

DATE OF DECISION: 19890926 (26 August 1989)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Case report does not identify presiding arbitrator(s)

CASE NUMBER/DOCKET NUMBER: 6281 of 1989

CASE NAME: Case report does not identify parties to proceedings

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Yugoslavia (defendant)

BUYER'S COUNTRY: Egypt (claimant)

GOODS INVOLVED: Steel bars


Case abstract

ICC Arbitration Case No. 6281 of 1989

Case law on UNCITRAL texts (CLOUT) abstract no. 102

Reproduced with permission from UNCITRAL

The parties, of Egyptian and Yugoslav nationality, concluded a contract for the FOB sale of a certain quantity of steel. In conformity with the contract, the buyer announced that it wished to exercise its right to buy an additional quantity of steel at the price and on the conditions stipulated in the contract. The dispute arose from the seller's refusal to deliver the additional quantity of steel at the contract price, since the market price had gone up, as a result of which the buyer was forced to obtain the goods from another source at a higher price.

The tribunal found that, pursuant to Article 100(2) CISG, the Convention was not applicable, since the contract was concluded before the Convention entered into force in the countries involved (including France, the place of arbitration), even though those countries were parties to the Convention at the time of issuance of the arbitral award. Applying the private international law rules of the countries concerned and Article 3.1 of the Hague Convention of 15 June 1955 on the law applicable to international sales of goods, to which France is a party, the tribunal concluded that the applicable law was the law of Yugoslavia, as the law of the place where the seller had its principal place of business and where the contract was performed.

The tribunal compared the Yugoslav law with Article 74.1 of the Uniform Law on the International Sale of Goods (ULIS) and with Article 79(1) CISG and found that by refusing to deliver the additional goods at the contract price the seller had committed a breach of contract. The tribunal held that the seller could be relieved of the obligation to deliver the goods at the contract price only if the contract contained a price adjustment clause, or in case of frustration of the contract, which was not the case here, since the increase in the market price was, in fact, neither sudden nor substantial nor unforeseeable.

In order to determine the amount of compensation due to the buyer, the tribunal compared Yugoslav domestic law with Articles 75 CISG and 85 ULIS and held that the buyer was entitled to the difference between the contract price and the price actually paid in order to obtain the goods from another source.

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Classification of issues present

APPLICATION OF CISG: No, but tribunal interpreted the CISG

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 74 ; 75 ; 77 ; 79(1) ; 100(2) [Also cited: Articles 9 ; 85 ]

Classification of issues using UNCITRAL classification code numbers:

74A [Damages, general rules for measuring: loss suffered as consequence of breach];

75C1 [Damages established by substitute transaction: substitute transaction after avoidance (made by aggrieved seller)];

77A [Obligation to take reasonable steps to mitigate damages];

79G [Impediments to excusing party from damages: other problems (in this case, hardship and related issues)];

100B1 [Applicability (sale of goods): applicability based on date of contract]

Descriptors: Applicability ; Exemptions or impediments ; Cover transaction ; Damages ; Mitigation of loss

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Editorial remarks

EDITOR: Albert H. Kritzer

CISG issues ruled upon:

Applicability. The parties were from Yugoslavia and Egypt. The arbitration was conducted in France. The contract was concluded in 1987. The CISG was not then in effect in any country. Citing Article 100(2), the tribunal ruled that the CISG "cannot be applied as such". Applying the law of seller's country, the tribunal ruled for the buyer -- drawing support from comparable results that would have been achieved under the CISG.

The facts were a quantity of goods (80,000 tons of steel bars) purchased on 20 August 1987, with buyer granted an option to purchase an additional 80,000 tons at the same price -- provided he exercised this option prior to 15 December 1987. Buyer did so. Seller refused to honor the option. On 26 January 1986, Buyer made a cover purchase. The cover price was $26.50 (13.16%) higher per ton, less a $2.50 per ton freight saving buyer effected (a difference of $24.00 per ton).

Exemptions (changed circumstances, force majeure, frustration, hardship). Under the law of seller's country, the issue was "whether the increase in the steel price . . . is an extremely sudden and an extremely high price increase . . . and if [so] whether [seller] should have taken such a development into consideration . . . when the contract was concluded [and whether this was a development that] could not be escaped or overcome."

The tribunal took notice of:

The tribunal stated that, as would have been the case under CISG Article 79(1), it is appropriate to apply "a strict approach in assessing lack of predictability". Article 79(1) (and its ULIS antecedent) are referred to as "exonerations for events which a reasonable person in the same situation was not bound (could not be expected) to take into account or to avoid or to overcome". In ruling that seller should not be exonerated, the tribunal concluded that "the increase in world market prices . . . is well within the customary margin. Furthermore, the development was . . . predictable."

Damages. Remarking that "the outcome would have been the same if [CISG] Article(s) 74 to 77 . . . had been considered", the tribunal cited interpretations of CISG Articles 74 and 75, and ULIS antecedent article 85:

"In [ULIS Article 85] the buyer should at least receive the indemnity which results from the simple comparison between the agreed price and the price paid for the goods bought in replacement. ULIS article 85 has been further elaborated in [CISG] Article 75 . . . without changing . . . its main substance. [Under CISG Article 75] if the cover purchase is not made in a reasonable manner or within a reasonable time, damages should be calculated as though no substitute transaction has taken place, that is to say in conformity with Article 74 (which is the general rule for assessing damages and serves in the same function as [the law of seller's country]). Under certain circumstances, further damages may be claimed according to . . . Article 74, also beyond the damages that are due on the basis of a purchase in replacement, in keeping with Article 75."

Mitigation of damages. Seller contended that buyer's cover purchase "cannot be interpreted as a purchase in replacement, since [seller] was not informed in advance of [buyer's] specific purchasing intention . . . moreover, [seller] had offered the steel at a lower price . . . and . . . in addition, defendant's steel was of a better quality."

The tribunal dismissed this contention: (i) it did not regard notice to seller of buyer's intent to cover as a prerequisite to a claim for the difference between the option price and the cover price; (ii) it stated that seller's offer was not at a lower price taking into consideration the fact that buyer's cover price came with a reduced freight charge [the tribunal disregarded a contention that buyer had to pay higher duties on the cover purchase, stating "[buyer] did not claim any [such] additional damage"]; (iii) the tribunal further stated that "[i]t is . . . of no relevance whether the [cover purchase] . . . was of lower quality than the steel [seller] would have delivered. For the [buyer] the steels were of equivalent quality." Also, the tribunal stated, "If [buyer] had bought from [seller], [buyer] would have been in a much more difficult position, since [seller] would have maintained that the price had changed due to novation."

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=11&step=Abstract>

Italian: Diritto del Commercio Internazionale (1992), 652 No. 9

CITATIONS TO TEXT OF DECISION

Original language (English): Yearbook of Commercial Arbitration XV (1990) 96-101 [text presented below]; Collection of ICC Arbitral Awards/Recueil des Sentences Arbitrales de la ICC 1986-1990 (ICC Coll II) 249-254; ICC Bull. 3 (1992) No. 2, 54 = Bull. CCI (November 1992) 57-58; Unilex Database <http://www.unilex.info/case.cfm?pid=1&do=case&id=11&step=FullText>

Translation (French): Journal du Droit International (1989) 1114-1119; 1991, 1054-1056; Collection of ICC Arbitral Awards/Recueil des Sentences Arbitrales de la CCI 1986-1990 (ICC Coll II) 394-399

CITATIONS TO COMMENTS ON DECISION

English: Petrochilos, Arbitration Conflict of Laws Rules and the CISG (1999) n.112; Krüger, Financial force majeure . . . remarks on the impact of CISG Art 79 (1999) nn.65-67; Rimke, Pace Review of the Convention on Contracts for the International Sale of Goods, Kluwer (1999-2000) n.123; DiMatteo, The Law of International Contracting, Kluwer (2000) 245-246; Saidov, Damages under the CISG (December 2001) n.247; Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at nn.792-793; [2004] S.A. Kruisinga, (Non-)conformity in the 1980 UN Convention on Contracts for the International Sale of Goods: a uniform concept?, Intersentia at 137; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 75 para. 9 Art. 79 para. 30; Carla Spivack, 27 Pennsylvania Journal of International Economic Law (Fall 2006) n.155 [commentary on Art. 79 issues]

French: Aguilar Alvarez, Journal du Droit International (1989) 1119-1120; Collection of ICC Arbitral Awards/Recueil des Sentences Arbitrales de la CCI 1986-1990 (ICC Coll II) 399-400; Hascher, Journal du Droit International (1991) 1056-1059 = ICC Coll III, 411-414; Witz, Les premières applications jurisprudentielles du droit uniforme de la vente internationale (L.G.D.J., Paris: 1995) 103-104 n.98, n.103

Italian: Giardina, Rivista dell' arbitrato (1998) 191 [201 n.25, 204 n.35, 206 n.43]

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Case text

Yearbook Comm. Arb'n XV. Albert Jan van den Berg ed. (Kluwer 1990) 96-101. Copyright owner: The International Council of Commercial Arbitration. Reprinted with permission of ICCA.

ICC Arbitration Case No. 6281 of 1989

Subject matter: - applicable law to contract
- frustration of contract
- "purchase in replacement"
- calculation of interest
Facts

On 20 August 1987, the parties concluded a contract for the sale of 80,000 metric tons of steel bars at an average price of US $190.00 per metric ton. The goods were delivered in accordance with the contract between 15 September 1985 and 15 January 1988 to a suitable Yugoslav port.

[Buyer] had the option to increase the quantity to 160,000 metric tons at the same price and conditions, provided it declared its option to purchase the additional 80,000 metric tons at the latest by 15 December 1987 and opened its letter of credit for the first delivery at the latest by 31 December 1987.

On 26 November 1987, [buyer] informed [seller] that it would exercise the option and would open the L/C during the second half of December 1987. On 9 December 1987, [seller] requested a meeting to be held that month, to discuss the prices for the additional quantity of the goods. [Buyer] insisted on the originally agreed price but was prepared to discuss future business transactions. At the meeting held on 28 December 1987, defentant requested US $215.00 per metric ton for the additional deliveries, but [buyer] did not agree.

In its letter of 31 December 1987, [buyer] stated that [seller's] behavior was a breach of contract and requested [seller] to announce the beneficiaries of the future letters of credit. If [seller] did not agree by 6 January 1988, [buyer] would hold [seller] liable for any and all damage, caused by breach of contract. This period was extended to 25 January 1988.

On 26 January 1988, [buyer] bought 80,000 metric tons of the same type of [page 96] steel bars from a Romanian company at a price of US $216.00 per metric ton. [Buyer] alleged that shipping costs from Romania to Egypt were US $2 .00 to US $2.50 per metric ton lower than from Yugoslavia to Egypt.

[Buyer] initiated arbitration under the arbitration clause in the contract which provided for arbitration at the International Chamber of Commerce, claiming compensation for the loss due to the price difference. The sole arbitrator held that [buyer] was entitled to damages due to [seller's] failure to deliver the additional quantity of goods at the original price.

Excerpt

[1] The arbitrator decided that Yugoslav law was applicable:

[2] "It should be determined, first and foremost, in connection with the alleged unreasonableness, due to an increase in world-market prices, which legal provisions should be applied to evaluate the sales contract and, thus also, this central issue. At any rate, the Vienna United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980, cannot be applied as such. The Convention is in force, both in Egypt and in Yugoslavia, as well as in France; yet, according to Art. 100(2) it applies to such sales contracts only that were concluded after the day the Convention went into force, i.e., 1 January 1988. The present sales contract was concluded on 20 August 1987.

[3] "The question, which law applies, must therefore be examined on the basis of the rules on international private law.

[4] "According to Egyptian international private law, the law of that country applies, where the contract is signed, unless the parties agree otherwise, and, in addition, if they have their principal offices in different states (Art. 19 of the 1949 Civil Code).

[5] "According to Yugoslav international private law, the law of that country applies, where the seller had his principal office at the time when he (or the other party) received the offer, if there is no agreement on applicable law between the parties (Bill on International Private Law of 15 February 1982, Sluzbeni list No. 43/1982).

[6] "France is a member of the Convention on the Law Applicable to the International Sales of Goods, done at The Hague on 15 June 1955. Art. 3(2) of the above Convention states that if parties have not chosen another law, the contract is governed by the internal law of the state, where the seller has his habitual residence at the time at which he received the order....

[7] "Since the principal office and the habitual residence of the seller at the time in question was Yugoslavia, and since the sales contract was concluded in [page 97] Yugoslavia, all applicable rules on international private law refer to Yugoslav substantive law.

[8] "Paragraphs 1 and 2 of [Art. 133 of] the Yugoslav Law on Obligations of 1978 read as follows (in an unofficial translation):

'(1) In case of circumstances occurring after the conclusion of the contract, which are of the nature to render the contractual performance of one of the parties difficult or to prevent the scope of the contract to be attained, both to such an extent that it becomes obvious that the contract ceases to correspond to the expectations of the parties and that it would be generally considered unjust to maintain it in force in the unchanged form, the party whose performance has been rendered difficult or which is prevented to attain the scope of the contract by the changed circumstances, can request that the contract be rescinded.

(2) The rescission of the contract cannot be claimed if the party, which invokes the changed circumstances, should have taken these circumstances into account at the time of the conclusion of the contract or could have escaped or overcome such circumstances.'

The above definition corresponds to that of a 'frustration' according to Anglo-American law or of a Wegfall der Geschäftsgrundlage according to German and Austrian law. Yugoslav commentaries (Blagojevic-Krulj; Vizner) speak of a clausula rebus sic stantibus, mainly because of the historical development of Yugoslav law. After all, a 'genuine' clausula rebus sic stantibus would sustain (in a positive sense) legal relationships only for as long as there are no changes at all, giving no consideration to predictability and applicability. Such a concept cannot be found in the law of obligations, nor the commercial law, of any country (except, as the most, for unlimited obligations, such as rent and lease relationships, but mainly for support obligations). Otherwise, any business transaction would be exposed to uncertainty, or even be rendered impossible altogether, whenever the mutual covenants are not performed at the time at which the contract is concluded.

[10] "In addition to Art. 133 of the Law of Obligations, Usage No. 56 continues to be in force under Yugoslav law, which lists 'economic events, such as extremely sudden and high increases or decreases of prices' as one of the reasons resulting in a frustration. "

[11] The arbitrator subsequently examined whether the increase on the steel price from US $190.00 to US $215.00 per metric ton was an extreme sudden and an extremely high price increase (Art. 133(1)) and, if so, whether [seller] should have taken such a development into consideration at the time when the contract was concluded (Art. 133(2)). [page 98]

[12] "The world market prices of products, such as steel, fluctuate, as is known from experience. At the time, when the contract was concluded, steel prices had begun to go up slightly - a trend that continued between the conclusion of the contract and the exercise of the option, and became even more pronounced towards the end of 1988.

[13] "In the opinion of Blagojevic-Krulj, Comments on the Law of Obligations, p. 351, the court must assess the issue, at which amount of damage contract performance is still, or no longer, reasonable, if one of the parties possibly suffers a damage when performing contractual obligations without change of contract. At any rate, such damage must exceed a reasonable entrepreneurial risk. In the present case, the increase in world market prices, i.e., from US $190.00 to US $215.00, amounts to slightly less than 13.16% . Having to sell a product at the agreed price, instead of at a price that is higher by 13.16% , is well within the customary margin.

[14] "Furthermore, the development was also predictable. A reasonable seller had to expect that steel prices might go up further, perhaps even more dramatically than in actual fact. Whether [seller] was a reasonable seller when granting the option ' at the same price' for a relatively long period, given these circumstances, is a matter beyond Arbitrator's terms of reference. In any event, even Yugoslav law precludes that a seller entices a buyer to sign a first contract, containing the option ' at the same price', while having the mental reservation that he can invoke Art. 133 of the Law on Obligations if prices should continue to go up ..."

[16] The arbitrator examined the nature of the damages:

[17] "[Seller] maintains that [buyer's] buying 80,000 metric tons of steel from the Romanian firm cannot be interpreted as a purchase in replacement, since [seller] was not informed in advance of [buyer's] specific purchasing intention, since, moreover, [seller] had offered the steel at a lower price, i.e., US $215.00 per metric ton, and since, in addition, [seller's] steel was of a better quality.

[18] "First of all, the legal interaction between Arts. 262 and 525 of the Yugoslav Law on Obligations must be defined clearly. Art. 262 grants every contracting party the right to claim compensation for the damage accruing to him, which is due to non-performance, deficient or delayed performance of the obligations by the other party. Art. 525, dealing with purchases in replacement, operates as a relief for the aggrieved party, when bringing evidence for the damage suffered. If one were to assume that damages are not due in case of non-compliance with the ligation to give notice according to Art. 525, then no sanctions could be imposed on the non-delivery of goods, for which there is no equivalent, nor on the non-delivery of goods, where it is no longer possible, in due time, to procure an equivalent by purchase in replacement. [page 99]

[19] "Neither of the parties contested that the world market price for steel (of the grade of the delivery) had gone up to a minimum of US $215.00 per metric ton at the time when the option was exercised. If [seller] states, however, that, given these premises, [buyer] would have been best advised at that price to buy [seller's] steel, then the only reaction to that can be that [buyer] would have been foolish to do so. By invoking [seller's] obligation to damages, in case of non-delivery at the agreed price, [buyer] wanted to balance the difference in price. If [buyer] had bought from [seller], [buyer] would have been in a much more difficult position, since [seller] would have maintained that the price had changed due to novation.

[20] "[Buyer] maintains that he actually obtained a cheaper deal, in the final analysis. He paid US $216.50 per metric ton but saved US $2.00 to US $2.50 per metric ton in freight costs. [Buyer] must accept that this argument is also applied against him - with the higher amount of US $.50, in case of doubt. His damage is therefore less than the difference in world market prices. It amounts only to the difference between US $190.00 and US $214.00, i.e., US $24.00 per metric ton. [Seller] claims that [buyer] had to pay a higher import duty on the Romanian goods than he would have to pay on Yugoslav goods, which is irrelevant since [buyer] did not claim any additional damage, arising from the purchase in replacement. It is also of no relevance whether the steel supplied by [the Romanian firm] was of lower quality than the steel which [seller] would have delivered. For the [buyer], the steels were of equivalent quality.

[21] " It is also of no significance whether Art. 525 must be interpreted to mean that the infringing party must be informed in advance of an actual purchase in replacement. The claim for damages, however, arising from the purchase in replacement, is slightly less than the difference in world market prices at the time in question, when taking account of the lower freight costs. According to Art. 262 of the Law on Obligations, [buyer] cannot claim more than the amount of his actual damage.

[22] "It should be remarked in passing that the outcome would have been the same, if Arts. 74 to 77 of the Vienna Sales Convention had been considered, which has 19 member states so far and which one will soon be able to call universal law, on account of the large number of ratifications and accessions that are intended in the near future.

[23] "The above result is by no means surprising....

[24] "Accordingly, [seller] shall reimburse [buyer] for a damage of 80,000 x US $24.00 = US $1,920,000."

[25] The arbitrator then established the amount of interest.

[26] "According to Art. 277(1) of the Yugoslav Law on Obligations, interest is due to the creditor on the amount of damages, as of the date at which the debtor begins to default. [Seller] did not default by refusing to deliver at the agreed price, nor by [buyer's] conclusion of a purchase-in-replacement contract, nor on the date at which payment was due to the new supplier. [Seller's] default begins on every day at which he should have delivered but did not deliver. According to the sales contract, the 80,000 metric tons of steel under the option should have been delivered in five part shipments of more or less equal quantity between January and May 1988. [Seller] was therefore in default for one fifth of the amount on 1 February, 1 March, 1 April, 1 May and 1 June 1988. For the sake of mathematics, interest can be calculated as though [seller] defaulted on a total delivery, which would have been due on the date of the third shipment, i.e., on 1 April 1988.

[27] "As mentioned before, the interest rate amounted and amounts to 6.25 to 8.25% . No prediction can be made, on how the interest rate will develop. Since there is a time delay between issuing the Arbitral Award and voluntary or enforced performance, the Arbitral Award must also fix an interest rate for the future, i.e., until the voluntary or enforced performance of the award. With a view to the mean value of the development so far, an interest rate of 7.25% is appropriate.... " [page 101]

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Pace Law School Institute of International Commercial Law - Last updated February 20, 2007
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