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CISG CASE PRESENTATION

ICC Arbitration Case No. 8817 of December 1997 (Food products case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/978817i1.html]

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

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Case identification

DATE OF DECISION: 19971200 (December1997)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 8817 of December 1997

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Denmark (claimant)

BUYER'S COUNTRY: Spain (respondent)

GOODS INVOLVED: Food products


Classification of issues present

APPLICATION OF CISG: Yes. Contract silent as to applicable law. Arbitrator applied CISG

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 3(2) ; 7 ; 9(1) ; 80 [Also cited: CISG Articles 25 ; 64 ; 74 ; 78 ]

Classification of issues using UNCITRAL classification code numbers:

3B [Provision for services and sales with proponderant part of obligations arising from sales];

7C22 [Recourse to general principles on which Convention is based: use of UNIDROIT Principles to help deduce general principles on which Convention is based];

9D1 [Parties bound by applicable usages and practices];

80A [Failure of performance caused by other party: party causing non-performance; loss of rights, as a general principle]

Descriptors: General principles ; Distributorship agreements ; Scope of Convention ; Usages and practices ; Estoppel

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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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=398&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Spanish): Unavailable

Translation: (English): ICC International Court of Arbitration Bulletin, Vol 10, No. 2 (Fall 1999) 75-78; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=398&step=FullText>; Yearbook Commercial Arbitration XXV (2000) 355-365 [text reproduced below]

CITATIONS TO COMMENTS ON DECISION

English: [2004] S.A. Kruisinga, (Non-)conformity in the 1980 UN Convention on Contracts for the International Sale of Goods: a uniform concept?, Intersentia at 23; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 7 para. 30 Art. 9 para. 9

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Case text (English translation)

Yearbook Commercial Arbitration XXV, Albert Jan van den Berg ed. (Kluwer 2000) 355-365. Copyright owner: The International Commercial Arbitration Arbitration. Reproduced with permission of ICCA.

ICC Arbitration Case No. 8817 of December 1997

[…]

Subject matters: - applicable law to contract
- characterization of contractual relations
- 1980 Vienna Sales Convention applies to predominantly sales contract
- termination of exclusive distributorship contract
- UNIDROIT Principles
- binding effect of usages
- unfair competition
- EC Directive on Commercial Agents 1986

Facts

Two Danish companies entered into an agreement for the exclusive distribution of certain foodstuffs in Spain and Portugal with the Spanish company J. The contract provided for a one-year notice of termination and allowed for termination without notice in the case of a substantial breach of contract, being defined as court-ordered suspension of payment, "lack of ability" to pay and a "substantial modification in the ownership, organization or management of the distributor". The contract also contained an ICC arbitration clause.

The two Danish companies were subsequently bought by X, also a Danish company. X decreased the time limited allowed for payment and eventually requested J to pay certain outstanding sums within five days. When J failed to do so, X notified J by letter dated five days later that it was terminating the contract as of the same day, alleging J's failure to pay the outstanding sums and changes in J's management, namely the dismissal of its general manager, Mr. A. X subsequently concluded an exclusive distributorship agreement for Spain and Portugal with company S, owned by Mr. A. [page 355]

Several days after the notification, J commenced ICC arbitration proceedings against X, claiming damages for unjustified termination of contract.

The sole arbitrator issued a procedural order on the law applicable to the dispute, holding that the United Nations Convention on Contracts for the International Sale of Goods [CISG] "and its general principles, as presently elaborated in the UNIDROIT Principles on International Commercial Contracts, are perfectly suited to the settlement of the present dispute".

Deciding on the merits, the sole arbitrator held that X had no ground for terminating the contract without notice and directed X to pay damages.

Excerpt

Procedural Order on the Law Applicable to the Merits

[1] "J objects to X's statement that the United Nations Convention on Contracts for the International Sale of Goods [CISG] applies. J maintains that [the Convention] does not apply to distributorship contracts and that it was not in force when the contract was signed. It [also ] maintains that, since this is a distributorship contract, the applicable law must be determined according to Art. VII of the European Convention on International Commercial Arbitration [1] and to Art. 4.2 of the Rome Convention of 1980 on the Law Applicable to Contractual Obligations. This latter text provides that the law of the place with which the contract 'is most closely connected' shall apply and it presumes that this law is the law of the State where the party which shall effect the characteristic performance has its seat. J points out that it is the party effecting the characteristic performance [in this contract], that is, distribution, and that its seat is in Spain. It adds that 'there are other grounds for the application of Spanish law: a) the contract was drawn up in Spanish; b) the parties mostly corresponded in Spanish and when not in Spanish, in English, never in Danish; c) it is indicated in the invoices that the goods are always to be delivered in Spain; d) this is a distributorship contract and it [page 356] is thus the distribution in Spain and Portugal which is the most important activity with respect to this contract.' J contends that it is unnecessary to examine whether the legal relationship between the parties was based on an international sales contract or a distributorship contract. It reasons that in this initial stage of the proceedings the literal text of the contract should be adhered to. However, J recognizes that its claim for indemnity under an international sale contract may be higher than the indemnity it claims as exclusive distributor .

[2] "The defendant and counterclaimant, X, maintains that J is partly a distributor and partly a buyer; it insists that J bought most products for its own industrial use. Hence, the CISG applies to the entire dispute according to its Art. 3(2) [rectius: (1)]. [2] If the Convention is found not to apply, X maintains that Danish law then applies, being the law of the domicile of the seller according to Art. 3 of the 1955 Hague Convention on the Law Applicable to International Sale of Goods.[3] As far as the distributorship contract is concerned -- if this is to be separated from the international sale contract --X maintains that Danish law applies since the goods produced by X, a Danish company with seat in Denmark, are the essential element of the distributorship contract.

[3] "First, the contractual relationship between X and J [has] ended, and the arbitrator has the only task to settle this dispute. Hence, the arbitrator shall not examine the applicable law which the parties could have chosen when entering into the contract. [page 357]

[4] "Second, Art. 13(3) of the [ICC Rules] [4] provides that the arbitrator determine the law applicable to the merits. The arbitrator considers that the starting point for determining the applicable law are the claims and counterclaims filed in the dispute.

[5] "If we analyze this first claim for damages, we must conclude that it is based on less than a tenth of J's loss of profit on the products produced by it. Hence, if we look at this business relationship globally, the sale contract prevails over the distributorship. The two further claims by J either are a consequence of the termination (loss of profit) or concern the circumstances of the termination of the business relationship (unfair competition). These two claims are thus defined on the basis of the definition given to the contractual relationship.

[6] "The counterclaim filed by X concerns the payment of the price of goods delivered.

[7] "Given that the contractual relationship is globally defined as a sale, the arbitrator shall determine the appropriate law to settle the dispute, as he is also required to do by Art. 13(3) of the [ICC Rules]. According to established jurisprudence in arbitration practice, a criterion for the appropriateness of a provision is that provision's presence in the legal systems of both parties. This is the case of the CISG, which was signed in Vienna on 11 Apri11980. This Convention entered into force in Denmark on 1 March 1990 and in Spain on 1 August 1991, that is, after the contract was signed but long enough for it to have been studied and specifically commented upon in Spain. The reservation made by Denmark excluding the application of the second part of the Convention does not hinder, in the present case, the determination of a law which only applies to the formation of the contract.

[8] "According to Art. 3(2) [rectius: (1)] of the above-mentioned CISG, the Convention applies where, as here, there are both a supply of services and a sale, and the preponderant part of the obligations is based on the sale. The Convention itself also favours the application of one law only, chosen by the parties, to the merits of the dispute.

[9] "The Convention and its general principles, as presently elaborated in the UNIDROIT Principles on International Commercial Contracts, are perfectly suited to the settlement of the present dispute. Among others, and in order to [page 358] facilitate the future task of the parties, the arbitrator mentions the following Articles: Art. 9(1), which grants contractual value to the practices established by the parties among themselves; Art. 25, which defines a fundamental breach of contract; Art. 64 on the termination of contract; Art. 74 on compensation for damages; Art. 78 on interest.

[10] "Also, the provisions of the contract signed in August 1987, being the law of the parties, shall apply ."

Decision on the Merits

[11] "As is indicated in the Terms of Reference, the issues of this dispute to be settled are the following: 1) whether X is liable for its decision to terminate the exclusive distributorship contract; 2) whether there was unfair competition on the part of X and what are the consequences thereof; 3) whether J has proven its damages; 4) set-off…. The arbitrator notes that there is a connection between the termination of the contract, in particular in so far as it was based on the dismissal of Mr. A, and X's alleged unfair competition. However, for the sake of the award's clarity, the arbitrator shall deal in succession with the issue whether the termination of the exclusive distributorship contract was justified, whether X is liable for discontinuing the supply of products which J needed in order to manufacture its own products, and whether or not there has been unfair competition on the part of X."

[…]

1. Termination of Contract

[12] "X mentioned two grounds [for termination] in its letter: [J's] 'lack of ability' to pay the outstanding sums within the time limit set by X, and the change in its management. The arbitrator must examine whether either ground is founded."

1. Failure to Pay

[13] "This a ground for termination without notice if it falls within the scope of the agreement of the parties. The contract provides that 'serious and repeated disregard of the clauses and conditions of the present contract' is a fundamental breach of contract. The contract further provides that there is a fundamental breach of contract when 'one of the parties is bankrupt or [page 359] insolvent, its payments are suspended or it makes an agreement with its creditors'.

[14] "In application of the rule specialia generalibus derogant, the contract provides for the financial grounds for termination. It lists situations in which the debtor is unable to pay, either because it does not manage its affairs directly (bankruptcy) or because it experiences extreme financial difficulties due to a lack of means (insolvency or suspension of payment). It does not consider a delay in payment to be a ground for termination.

[15] "J has submitted bank certificates indicating that it had several lines credit ..., thus showing that it was neither bankrupt nor insolvent nor under a regime of suspension of payment

[16] "For the sake of intellectual satisfaction, we can also examine whether J's delay in paying is a serious and repeated act of disregard in the performance of the contract, the general ground for termination in the contract. To the effect it is necessary to examine the financial relations between the parties in the last years preceding the termination. Until X decided otherwise, J had 90 days to pay. It did happen that that limit was extended to 120 days and 150 days…. The letters submitted to the arbitrator show that several years earlier J had difficulties in complying with the date of payment, and that the parties agreed on a payment schedule. The main consequence of this delay was that X set an interest rate between 9% and 15%. Among the documents submitted to the arbitrator, only one letter shows X's dissatisfaction. Mr. D wrote for X: [English original]: 'It is quite unacceptable that the payment terms are exceeded in this way without our consent, and I must therefore insist on immediate payment'. This complaint foreshadows the latter agreements according to which, after the date on which payment became due (generally 90 days plus days for delivery), J had a further month to pay, during which it paid interest

[17] "X denies the existence of these agreements. However, although they were not formalized, one can see that they existed…. In any case, there is no document of X in which X threatens to terminate the exclusive distributorship contract if there is a delay in payment. Mr. A and Mr. D have confirmed that J never received a formal notice of delay. In this situation, Mr. B, J's financial manager, was entitled to believe, as he declared in Paris, that he had a further month in which to pay the invoices.

[18] "[Six months before the contract was terminated], there is an escalation: X lowers the time limit for payment from 90 to 60 days; X draws Mr. B's attention on J's overall debt, and requests that it be paid immediately; further letters have the same contents; by a fax, X requests that the debt be paid within five days; five days later, X terminates the contract. [page 360]

[…]

[19] "This sequence of events shows that X tried to change the practices and usages of the parties…. The change affects the time limit for payment and the need for a continuous balance between the deliveries of goods and their payment.

[20] " According to Art. 9(1) [CISG], 'the parties are bound by any usage to which they have agreed and by any practices which they have established between themselves'.This rule has been extended to all international commercial contracts by the UNIDROIT Principles. Principle 1.8 provides that 'the parties are bound by any usage which they have agreed to apply and by any practice which they have established between them'.

[21] "The arbitrator considers that this provision is perfectly suited to the settlement of the dispute between J and X, although the contract that was terminated was an exclusive distributorship agreement. Consequently, a modification of previous practices requires that a proposal made by one of the contracting parties be accepted by the other party. In its final statement, X maintains that J consented to the reduction of the time limit to pay. It also maintained the same in a fax. J denies that it agreed. J's refusal is established in a fax by X itself, the last paragraph of which states [English original]: 'Re the payment conditions we fully understand your reluctance to accept the change from the former 90 days to 60 days. However it is X's policy to standardize these terms worldwide.' Further, there is no reason which could lead J to accept a reduction of the time limit to pay since, as affirmed by Mr. E [for X], there was no advantage for J.

[22] "The modification wished by X should have been negotiated with and accepted by J. Lacking an agreement between the parties, the arbitrator holds that J's continued application of the practices previously accepted at least tacitly by the parties does not constitute 'serious disregard'. This is all the more so if we consider that J's overall debt was decreasing and in any case it was by far lower than the maximum set by X in its letter ... in order to comply with its agreement with the Danish Foreign Debt Council.

[23] "Consequently, if we compare the ground for termination based on the delay in payment with the ground for termination mentioned in the contract, we do not see that the agreement of the parties was seriously and repeatedly disregarded, as X alleged in its letter. The arbitrator does not consider that the ground for termination of the contract based on the lack of means to pay [the outstanding sums] to X within the time limit set by X is founded."

2. Substantial Change in Management

[24] "The contract provides as a further ground for termination 'a substantial modification in the ownership, organization or management of the distributor'." [page 361] X considers that, since Mr. A was the general manager of J, his dismissal is 'a substantial modification in the management of the distributor'. X explains that it trusted only Mr. A to guarantee payment by J, and that, although it did not oppose earlier changes in J's management, it did not waive its right to rely on Mr. A's dismissal to terminate the contract.

[25] "Before assessing whether this ground for termination is founded, we must recall that Mr. A was not a manager with J when the exclusive distributorship contract was concluded…. The parties do not dispute that Mr. A did not participate in the negotiation of the contract. Nor do they dispute that at the moment of signing the contract,... neither party thought of Mr. A as one of the people whose leaving J could be 'a substantial modification in the organization or management of the distributor'. However, Mr. A was [later] appointed J's general manager by a decision of the board; in this capacity, he managed J's day-to-day business and shared the responsibility of important decisions with Mr. C, the majority shareholder.

[26] "The documents submitted to the arbitrator ... show that the business relationship and the financial negotiations between X and J were practically all conducted for J by Mr. A. This situation lasted ... for most of the [parties'] contractual relationship. Both parties could thus consider that Mr. A, being general manager, was an important manager of the company, although Mr. C was also one. Consequently, the dismissal of Mr. A could effectively be qualified as a 'substantial modification in the management of the distributor'.

[27] "However, the arbitrator must ascertain whether X may rely on this modification to terminate the distributorship contract. In order to settle this point, we must determine the meaning and effect of the contract provision. This provision does not appear to be an objective rule allowing to terminate the contract whatever the ground for the change in management. We deduce from its main effect, that is, termination without notice, that it [only] sanctions a substantial modification. As is the case with all sanctions, its application may not be requested by those who are even partially responsible for the modification on which they rely in order to terminate the contract.

[28] "The arbitrator must thus examine the ground for the dismissal of Mr. A. The dismissal was negotiated between J and Mr. A. There is no dismissal letter officially explaining the grounds for dismissal. In the statement he made in Paris, Mr. A explained that Mr. C and Mr. F [for] J objected to the setting up and the activities of his company S.

[29] "The role played by X in the creation and activity of company S shall be examined in detail when we examine the claim of unfair competition made by J against X. We are now only concerned with ascertaining whether the termination of the contract was justified and it suffices to say that Mr. A was de facto managing S, that his boss did not know about it, that S' statutory aim [page 362] is identical to J's main activity ..., that this behaviour is not allowed in Spanish labour law (see Supreme Court decision of 17 March 1990) and that X facilitated Mr. A's clandestine activity by delivering to him, on several occasions, goods of the same nature as those delivered to J .

[30] "Contrary to what it affirms in its statement, X knew that Mr. A was the de facto manager of S, since Mr. D [of X] stated that he dealt with Mr. A and with the company's multilingual secretary at S. Mr. D did not say that he had a business relationship with Mr. A's partner and his son. He would have said so if that had been the case. Moreover, we can deduce from the personal, almost intimate relations between Mr. D and Mr. A that the former knew that the latter's partner had no experience in the [particular business field] (Mr. A has declared that his experience mostly related to the real estate sector). It is equally likely that Mr. A's wish to have his own firm, a wish which, according to his own declaration, 'he did not hide', was known to Mr. D.

[31] "The statement ..., according to which Mr. A was merely a consultant to company S, does not persuade the arbitrator as it is at odds with several facts.

[32] "Having business relations with a manager of the enterprise with which a party has habitual, partly exclusive business relations hinders that party from relying on the dismissal of that manager.

[33] "X stresses that it did not supply goods to S which were listed in the exclusive distributorship agreement. However, as we shall see in more detail when examining the claim of unfair competition, its mistake is not the violation of the contract, rather the more comprehensive and clandestine business relations with the dismissed manager

[34] "The arbitrator believes that the physical persons representing X in its contacts with J hid the secret activity of Mr. A, either because he asked them to do so or because they had their own interest in doing so. By so doing, they became accomplices of Mr. A. Consequently, X had no relevant justification for terminating the contract on the basis of a substantial modification in the management of J, being the dismissal of Mr. A that X partly caused.

[35] " As neither ground invoked by X to justify the termination without notice of the exclusive distributorship agreement is legally valid, X should have observed the one-year notice before terminating the contract."

II. Discontinued Delivery

[36] "J claims damages ... because X discontinued delivery of the products J needed for manufacturing (its own products], by making new deliveries [page 363] conditional upon payment of previous debts and by requesting payment in advance for the new deliveries.

[37] "In order to solve this issue we must determine whether X was entitled to modify the habitual practices between the parties concerning payment conditions. We must also ascertain whether X, in the absence of J's agreement, could terminate their contractual relationship and whether it could do so without notice.

[38] "As we already saw when discussing the modification of payment conditions under the exclusive distributorship agreement, the practices between the contracting parties,... provided for a time limit of 90 days, to which a further period, generally one month, could be added, against payment of an interest between 9% and 15%. X insisted that the overall debt of J be kept under the limit, a sum which had been negotiated with and accepted by the Danish Council of Export Debts. We must remember that at the time of the termination of the contract J owed X approximately half that amount.

[39] " Art. 9(1) of the CISG of 1980, which deals specifically with the international sale of goods, requires the parties to comply with the practices established between them. This does not mean that, as a relationship develops, a party may not effect changes to contractual clauses; it is also a principle of contract law that there are no perpetual obligations and that a contracting party may always free himself from obligations which he no longer wishes to have.

[40] "X correctly draws our attention to the fact that it was not under the obligation to supply given quantities of the goods to J. However, when merchants have habitual sale relations, in particular when they are bound by an exclusive distributorship contract, there is breach when one party suddenly modifies payment conditions. In the present case, this modification led, in a few weeks, to lowering the time limit for payment from 90 to 60 days, to having to pay the existing debt within five days, to excluding all time limit in the future and, further, to having to pay beforehand for deliveries

[41] "This sudden rupture of contractual (sale) relations that had existed for eight years entitles J to indemnification for the loss it incurred."

III. Unfair Competition

[42] The arbitrator examined the activities of Mr. A and of X and concluded inter alia that "based on sure facts only, ... X helped Mr. A in his secret activities at S, which led to Mr. A's justified dismissal. A month later, X appointed the same Mr. A its exclusive agent, and this after terminating the exclusive distributorship agreement with J without notice. Since X facilitated [page 364] the guilty behaviour of Mr. A, which led to his dismissal, it is not fortuitous that Mr. A was then appointed its exclusive agent. His appointment made it possible for X to continue similar activities to those of J on the Spanish market and to avoid uncertainties with a new agent. J lost a general manager and had to replace him by a less effective person, at least for the first months. Consciously acting in this manner, alongside terminating the exclusive distributorship agreement, is unfair competition on the part of X."

IV. Debts of X's US Daughter Company

[43] "J claims from X certain sums owed to J by a US daughter company of X, XX, Inc. J explains that the policy of X was to lower its credit towards J and to 'establish a credit of J vis-à-vis XX, Inc., a US company of the X group ...'. X replies that it cannot be directed to pay the debts of a separate US company as it cannot be held liable for XX, Inc. not meeting its obligations. It argues that the arbitrator has no jurisdiction over XX, Inc., which is not a party to the arbitration proceedings.

[44] "The sole arbitrator notes that the effect of an international arbitration agreement may extend to other legal entities belonging to the same economic group even if they have not signed the agreement at issue. This possibility exists where the interests of the various companies of the group are closely linked and these companies intend to act jointly. Further, the arbitration agreement must show the intention of the parties to apply it to all companies of the group which participate in the execution of the contract.

[45] "X did not object to the application of the arbitration agreement signed by other legal entities. However, we cannot infer from the fact that XX, Inc. was a customer of J that it was also a party to the execution of the exclusive distributorship contract which contains the arbitration agreement. Furthermore, the Terms of Reference signed by both parties and by the sole arbitrator do not mention the payment by X of the debts of XX, Inc. as a claim by J or as an issue. Hence, the arbitrator has no jurisdiction over this issue…." [page 365]


FOOTNOTES

1. Art. VII of the European Convention on International Commercial Arbitration reads in relevant part:

"1. The parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable. In both cases the arbitrators shall take account of the terms of the contract and trade usages."

2. Art. 3 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."

3. Art. 3 of the 1955 Hague Convention reads in relevant part:

"In default of a law declared applicable by the parties under the conditions provided in the preceding Article, a sale shall be governed by the domestic law of the country in which the vendor has his habitual residence at the time when he receives the order. If the order is received by an establishment of the vendor, the sale shall be governed by the domestic law of the country in which the establishment is situated. (…)"

4. Art. 13(3) of the 1988 ICC Rules of Conciliation and Arbitration reads:

"The parties shall be free to determine the law to be applied by the arbitrator to the merit of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate."

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