Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography
Search the entire CISG Database (case data + other data)

CISG CASE PRESENTATION

ICC Arbitration Case No. 8740 of October 1996 (Russian coal case) [English text]
[Cite as: http://cisgw3.law.pace.edu/cases/968740i1.html]

Primary source(s) of information for case presentation: Case text

Case Table of Contents


Case identification

DATE OF DECISION: 19961000 (October 1996)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 8740 of October 1996

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Norway (claimant)

BUYER'S COUNTRY: Norway (respondent)

GOODS INVOLVED: Russian coal


Classification of issues present

APPLICATION OF CISG: Yes. Although from the same Scandinavian country, at the hearing the parties agreed to have the CISG apply (the CISG is also the domestic sales law of Norway).

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 35 ; 73 ; 74 ; 75 ; 76 ; 77 ; 78

Classification of issues using UNCITRAL classification code numbers:

35A [Obligations of the seller (conformity of the goods to contract): quality, quantity and description required by contract];

73A ; 73A1 [Avoidance in installment contracts: fundamental breach with respect to installment];

74A [General rules for measuring damages: loss suffered as consequence of breach];

75A [Damages established by substitute transaction: substitute transaction after avoidance];

76A [Damages based on current price: abvoidance without purchase or resale under article 75];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Conformity of goods ; Avoidance ; Installment contracts ; Damages ; Cover transaction ; Mitigation of loss ; Interest

Go to Case Table of Contents


Editorial remarks

Go to Case Table of Contents


Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=462&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (English): ICC International Court of Arbitration Bulletin[ICAB], Vol. 11/No. 2 (Fall 2000) 63-68; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=462&step=FullText>; Case digest presented below

Translation: Unavailable

CITATIONS TO COMMENTS ON DECISION

English: van Houtte, ICAB (Fall 2000) 24 n.11 [choice of CISG by parties], 31 n.76 [interest], 83 [mitigation of loss]; Liu Chengwei, Recovery of interest (November 2003) nn.240, 264; Henschel, The Conformity of Goods in International Sales, Forlaget Thomson (2005) 162; Schwenzer & Fountoulakis ed., International Sales Law, Routledge-Cavendish (2007) at p. 544

Go to Case Table of Contents

Case digest

EDITOR: Daniel J. Morse [*]

ICC arbitration award
Case No. 8740 of October 1996

Facts. Claimant [seller] and Respondent [buyer] entered into contracts for the sale of quantities of Russian coal. Upon delivery of the final shipment, [buyer] failed to make payment for that portion. [Buyer] claimed that [seller] owed funds to [buyer] well in excess of the invoiced amount of the final shipment and requested that its own claims serve to off-set those of the [seller] and that the [seller] be ordered to pay the excess in [buyer's] favor.

Applicable law. Both parties agreed to be bound by Swiss Law, which meant, according to statements made by each at a hearing, the United Nations Convention on Contracts for the International Sale of Goods.

With respect to the [buyer's] first counterclaim (damages for low volatile coal) examined in light of Article 74 of the CISG.

[Buyer's] position. Although [buyer] admits that the shipments were made, it denies that it owes any liability to the [seller] as it has claims under three headings against the [seller] which far exceed any moneys owed by it to the [seller].

According to the [buyer], the coal delivered in one of the shipments had a volatility of only 20.4%. The difference is so substantial that the [buyers] asserted that surely they would have had the right to reject this delivery. In lieu thereof, [buyers] used the coal after expending considerable expense in order to make it usable. Such expense would have been avoided if coal of the proper volatility had been delivered.

[Seller's] position. In principle, the [buyer] is not entitled to set-off any amount, however, even if the [buyer] were allowed to set-off an amount, such set-off would still result in a claim favorable to the [seller].

Although the [seller] admits the deficiency in the volatility of the coal delivered, this deficiency would not result in the amount of damages asserted by the [buyer]. The [seller] asserted that the coal provided was technically possible to use and, therefore, no penalty was due.

"Where there are no economical quality influences, this is reflected by a penalty clause. Some users do not wish to recover too many volatiles.

"Users blend different coals to suit their specific needs. Lower volatiles may not have any impact, but [seller] has no knowledge of this. ..." [page 64] [**]

The [seller] concludes this argument asserting that the contract contains no penalty clause for volatiles, and surely had this addition been included, it would have not been accepted by the [seller].

Arbitral Tribunal's decision. The issue facing that Arbitral Tribunal was whether the [buyer] had a valid claim for low volatility in the subject shipment and, if so, how this claim would be measured.

To resolve this issue, the Arbitral Tribunal applied Article 35 of the CISG which provides that: "The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract." [pages 64-65] Since the [seller] conceded that it did not do so, the [buyer] had a claim.

The Arbitral Tribunal rejected the argument of the [seller] regarding the lack of a penalty clause in the contract, holding that the [buyer] was not seeking a penalty but damages.

"[Seller] does not question the quantum with reasonable particularity and does not say which figure would be correct in its view. Speculation as to specific needs of uses is irrelevant. The Arbitral Tribunal must presume that commercial parties bargain for what they need, not something else.

"The quantum of US $12 per ton difference for the specification as claimed by [buyer's factory] ... appears reasonable to the Arbitral Tribunal."

The Arbitral Tribunal determined that the method of computation of damages by the [buyer], i.e., the costs incurred by the [buyer] to make the less volatile coal usable, was reasonable. This measure represented the "difference between the value of sound goods and the value of the defective goods." Since the [seller] did not argue that this measure was unreasonable or unnecessary, it was accepted by the Tribunal. As such, it awarded this entire claim of the [buyer] to set-off the claim of the [seller].

With respect to the [buyer's] second counterclaim (damages for late delivery) examined in the light of Articles 74 and 77 CISG

Arbitral Tribunal's decision. The issues presented to the Arbitral Tribunal to determine this counterclaim were:

"In contracts ... is [buyer] entitled to damages for late delivery? If so, how many metric tons were late in delivery? Is [buyer] entitled to moving charges? What were the moving charges per metric ton?" [page 65]

Since it was clear to the Tribunal that no deliveries were made in a timely fashion pursuant to either of the subject contracts, the [sellers] were in breach of a term in each. Thus, the only real issue presented was what losses the [buyer] suffered as a result of this breach.

Initially, the Tribunal addressed the issue of mitigation of damages. According to the Tribunal, the [buyer's] use of coal from its security stock was the most cost-effective means it could have used to mitigate its losses caused by the breach ... It was the Tribunal's conclusion that had the [buyer] failed to react to the situation as it developed in this manner, its losses would have been substantially higher.

The [seller] contended that the [buyer] should have maintained a higher buffer stock given the notoriety of Russian suppliers for being unreliable, and that there was no proof of loss. The Tribunal concluded that these contentions were entirely without merit.

With regard to the first contention, the Tribunal indicated that whether or not the unreliable nature of Russian suppliers is accurate, this was [seller's] risk to absorb and not the [buyer's]. With regard to the second contention, the Tribunal concluded that the cost of moving the replacement coal from stockpiles was substantiated in the invoices provided and represented the loss claimed in the [buyer's] counterclaim.

Accordingly, the Tribunal awarded to the [buyer] the entire cost claimed in this counterclaim, as well as interest running from 8 August, 1994, set-off against the main claim.

With respect to the [buyer's] third counterclaim (damages for non-delivery), examined in the light of Articles 73, 74, 75 and 76 CISG

Arbitral Tribunal's decision. The issues presented in this counterclaim are:

"In contract ... does [buyer] have a claim for damages for non-performance? What was seller's option and under which circumstances could it be exercised? How should the damages, if any, be measured? On the basis of the offer of ... the contract that [buyer] made with ..., or in another way?" [page 66]

The [sellers] conceded that only 13,758 mt of coal were delivered under the contract and the balance remained in default. Their claim that they could rely on the force majeure clause of the contract was abandoned at the hearing. The only remaining issue, therefore, was the amount of the default. The [sellers] contended that the default was only 36,242 mt; the [buyer] contended the default to be 46,242 mt. The determining factor was whether the contract quantity had been effectively reduced to 50,000 mt from the original contracted quantity of 60,000 mt.

The Tribunal found that the aforementioned reduction had occurred.

"The correspondence, however, shows that [buyer] first confirmed 60,000 mt with a particular delivery schedule ... and that then [seller] specified a quantity of 50,000-60,000 mt in seller's option (with an unchanged delivery schedule) . . . and that finally [buyer] made it a condition that any quantity supplied below 60,000 mt would be deducted from the December delivery ... This suggests that [buyers] accepted a minimum quantity of 50,000 mt, and that they only insisted that the deliveries due in July/August, September, October and November of 10,000 mt each would not be shortened."

Despite the conclusion reached by the Tribunal that the contract quantity had been reduced to 50,000 mt, it indicated that the [buyer] was only entitled to recovery for actual damages measured by its substitute purchase of only 10,000 mt. Furthermore, the [buyer's] claim based on the default quantity failed for the "absence of a current price as required by Art. 76 Vienna Convention."

The Tribunal determined that the contract had been properly avoided pursuant to Art. 73 Vienna Convention pursuant to a letter by the [buyer] declaring as such.

The Tribunal first addressed the issue of damages pursuant to Art. 76 Vienna Convention based on the difference between the contract price and the estimated market value of the goods on the date of default. In this regard, the [seller] argued that there is no such thing as uniform coal since the content of various elements in coal differs from one type to the other. Furthermore, even volatility is not a consistent assessment of value since volatility determine caloric yield and, depending on the type of equipment, the user has it may not want coal with the highest caloric yield. Additionally, coal is bulky and shipping costs differ from one port to the next. Thus, there is no one determinative market value for coal given the numerous factors which go into its calculation and, therefore, the [buyer] can only recover if it can establish that it bought in substitute goods.

[Buyer] countered the argument of the [sellers] indicating that those involved in the sale and purchase of coal know about the industry prices as they are published on a regular basis. Thus, an experienced trader would be capable of establishing a price for a particular quality of coal to be delivered at a certain time to a certain place.

In determining this issue of damages, the Tribunal focused on the inability of the [buyer] to state a market price for coal in general or for coal of a particular quality. Nor did the [buyer] dispute that there is no commodity exchange and thus no commodity exchange price for coal. Furthermore, the [buyer] itself pointed out that coal has quite different specifications and that requirements of consumers vary. Additionally, coal from different origins also has different heating values.

"It remained undisputed that certain product specifications may be relevant for some purchasers, but not for others ... or that some purchasers prefer a high volatile content, others a low volatile content, or that some purchasers prefer a low ash fusion temperature, others a high-ash fusion temperature ... Equally, it remained undisputed that the particular quality elements may be viewed differently by the purchasers and that accordingly each customer values a specific coal differently according to his requirements ... This leads to the conclusion that the prices that are paid cannot be ascertained merely on objective grounds ..." [page 67]

The Tribunal concluded that the [buyer] was not able to show that there is a market price within the meaning of Art. 76 Vienna Convention. The value of coal is dependent on numerous factors including the needs of the purchaser as well as shipping requirements. Thus, the value of coal is primarily subjective in nature and dependent on the specific needs of the consumer and, therefore, there is no market value on which to award damages.

The Tribunal ruled based on the consideration that the basis for allowing recovery for market or current price is that such can be determined with some amount of certainty as stated by Ernst Rabel in 1936 in his comparative study on the sale of goods, Das Recht des Warenkaufs, Berlin 1936, p. 462. [pages 67-68]

"The Arbitral Tribunal is also of the opinion that Art. 76 Vienna Convention cannot be applied as there is in this trade no market institution which could be compared to a stock or commodity exchange and which would guarantee that a market price could be established. It was therefore said for the Uniform Law on the International Sale of Goods [ULIS], a predecessor of the Vienna Convention, that prices continuously achieved by a producer outside of any organized market or the prices achieved in the individual case do not constitute market or current prices (cf. Junge in Dölle (ed.): Kommentar zum Einheitlichen Kaufrecht, München 1976, Art. 12 N 4).

The Tribunal summarized its determination of this issue of damages as follows:

"Finally, the Arbitral Tribunal is of the opinion that generally, only a party that went out into the market to make a cover purchase has a credible case that it suffered damage. There is an exception to this, only where a commodity is in question which is regularly traded on the market, in other words, a commodity that has not just a market price but a regular market with many purchasers and sellers actively engaged in regular trading. Only when there is a market in this sense may one assume that whoever has goods may readily sell them and whoever needs goods may readily purchase them. The reason is that where there is a market of that nature it becomes easily believable that the aggrieved party's damages may be measured with reference to the market price, and it becomes unimportant to be able to pinpoint a particular cover purchase. The Arbitral Tribunal however does not find that there is a market for coal in this sense. Consequently, for legal purposes, the Arbitral Tribunal finds that the aggrieved buyer, Defendant, was required to show a cover purchase under the general rule and was not exempted from doing so under the exception of Art. 76 Vienna Convention."

In summary, the Tribunal determined that in order to recover damages in instances where there is no market, the only viable means of doing so is through substitued (cover) purchase. A market is not created where the goods are valued based on subjective needs but rather where there is an objective basis for determining the value of the goods. This objective basis is formulated by the existence of a variety of suppliers and a variety of consumers seeking similar goods and purchasing them for a current value determined on the basis of supply and demand. In the case of coal, where the value of it is dependent on the independent needs of each consumer, such a concise value cannot be obtained given the subjective nature of the goods.

Thus, the defendant was left with recovering damages pursuant to Art. 75 Vienna Convention based on cover purchase. Since the only cover purchase substantiated by the evidence was for 10,000 metric tons at US $41 per mt, [buyer] was left to recover the difference between this price and the price it would have paid under the contract. This difference was to again be set off against the main claim. with intererst running from the date the cover purchase was made, 30 January 1995.

There was no claim for damages pursuant to Art. 74 Vienna Convention.

With respect to interest, examined in the light of Article 78 CISG

As the interest rate of 9 percent per annum was not disputed by either party and determined to be reasonable by the Tribunal based on the currency in question, this rate was accepted by the Tribunal. [page 68]


FOOTNOTES

* Daniel J. Morse is a member of the Bar of the State of New York. He is associated with the law firm Hardin, Kundla, McKeon, Poletto & Polifroni.

** Pagination is to publication of the case text at ICC International Court of Aerbitration Bulletin,Vol. 11/No.2 (Fall 2000) 63-68.

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated February 15, 2007
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography