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CISG CASE PRESENTATION

Mexico 30 November 1998 Compromex Arbitration (Dulces Luisi v. Seoul International) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/981130m1.html]

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

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Case identification

DATE OF DECISIONS: 19981130 (30 November 1998)

JURISDICTION: Arbitration ; Mexico

TRIBUNAL: Compromex [Comisión para la Protección del Comercio Exterior de México = Mexican Commission for the Protection of Foreign Trade] [arbitration decree in this case a "dictamen" (non-binding opinion)]

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: M/115/97

CASE NAME: Dulces Luisi, S.A. de C.V. v. Seoul International Co. Ltd. y Seoulia Confectionery Co.

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Mexico (plaintiff)

BUYER'S COUNTRY: Korea (ROK) (defendant)

GOODS INVOLVED: Candies and sweets


UNCITRAL case abstract

MEXICO: Compromex [Comisión para la Protección del Comercio Exterior de México =
Mexican Commission for the Protection of Foreign Trade] 30 November 1998
(Dulces Luisi, S.A. de C.V. v. Seoul International Co. Ltd. y Seoulia Confectionery Co.)

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/122]
CLOUT abstract no. 1184

Reproduced with permission of UNCITRAL

In the case at hand the claimant, a Mexican producer of sweets and candies, concluded a contract for the sale of its products to two Korean companies (i.e. the respondents).

This agreement followed two prior less significant ones, made over the same kind of products and under the same payment conditions, namely by letters of credit (L/C). Both prior contracts were executed without incidents.

In view of the previous satisfactory business experience and the time constraints, the claimant initiated production of the goods agreed in the third contract before of the L/C. Later on, the representatives of the respondents verbally requested the claimant that the goods be labelled with the date of production and a two-year expiration date.

At receipt of the L/C, the claimant noted discrepancies between the L/C and the agreed terms of contract, for instance the L/C established a one-year expiration date instead of two. In response to the seller’s concerns on the matter, the respondents advised that Korean legislation imposed such a restriction and also required that the L/C be used as they were issued, but they agreed in a certified document to accept any discrepancies between the arranged terms and the L/C. Trusting the good faith of the Korean companies, the claimant decided to ship the goods to the respondents and solve this problem at a later stage.

However, the seller was not paid and it turned out that there was no government requirement as asserted by the buyers. Moreover, the buyers asked the seller to reduce the price of the candies and sweets asserting that the manner in which they were labeled did not conform to the terms of the L/C. The seller submitted a claim before Compromex (or the Commission).

The Commission, in a non-binding decision [Dictamen] referring to Article 7 CISG, stated that the buyers’ conduct had been contrary to the basic principle of good faith. Compromex noted that this principle must prevail through parties’ commercial relations, and must be understood in its international connotation and not in the meaning given by national laws.

Compromex also referred to Article 11 CISG, which states that the absence of a written agreement does not excuse the parties from meeting their contractual obligations and to Article 25 CISG, pursuant to which the buyer had committed a fundamental breach of contract as they had substantially deprived the seller of what it was entitled to expect under the contract. The buyers not only could have foreseen the result, but actually they sought after it by deliberately asking the seller to label the goods in a different way to that specified in the L/C. Moreover, the Commission stated that the buyers had failed to perform their obligation to pay the price for the goods contracted (Article 54 CISG).

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Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 7 ; 25 ; 29(1) [Also cited: Articles 11 ; 54 ]

Classification of issues using UNCITRAL classification code numbers:

7A3 [Observance of good faith: general principle of international trade, to be interpreted internationally without resorting to its meaning under domestic law];

25B [Definition of fundamental breach; substantial deprivation of expectation, etc.; foreseeability test];

29A [Modification or termination of contract by agreement]

Descriptors: Formal requirements ; Modification of contract ; General principles ; Good faith ; Avoidance ; Fundamental breach

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Editorial remarks

EDITOR: Pilar Perales Viscasillas

The CISG was declared applicable. COMPROMEX said that the fact that there is no signed contract between the parties is not an impediment for the performance of the contract in accordance with Article 11 CISG.

The most important issue of the case is the behaviour of the Korean buyers, which the Tribunal found contrary to the good faith principles of Article 7 CISG. Article 7, in the opinion of the Tribunal, imposes upon the parties a standard of behaviour in accordance with the principles of good faith. Referring to the principle of good faith as one of the general principles of international commercial trade, the Tribunal stated that the parties cannot exclude or modify this principle and that the principle of good faith must be interpreted internationally without resorting to its meaning under Mexican law.

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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=374&step=Abstract>

Spanish: CISG-Spain and Latin America database at http://www.uc3m.es/cisg/rmexi3.htm

CITATIONS TO TEXT OF DECISION

Original language (Spanish): CISG-Spain and Latin America database "http://www.uc3m.es/cisg/smexi3.htm"; Diario Oficial (México) 29 January 1999, I, 69-74; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=374&step=FullText>

Translation: (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Osuna (2000) [his case commentary is presented below]; Zeller, Leap forward towards unified international sales (May 2000) [Good faith: n.58]

French: Rosch, Dalloz, Cahier Droit des Affairs (7 December 2000) No. 43/7009, 449-450

Spanish: Osuna González, La Compromex y su Aplicación de La Convención de las Naciones Unidas sobre La Compraventa Internacional de Mercaderías (September 2000)

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Case text (English translation) and Case commentary

Reproduced with permission of 19 Journal of Law & Commerce (2000) 265-281

Dictamen [*] relativo a la queja promovida por
Dulces Luisi, S.A. de C.V en contra de Seoul International Co. Ltd. y Seoulia Confectionery Co.
[30 November 1998]

Translation by Alejandro Osuna González [**]

[CASE TEXT]

In Mexico City, Federal District, on this the 30th day of November [1998] the Commission for the Protection of Foreign Commerce of Mexico, [1] pursuant to articles 2, section IV and [article] 14 of its law, proceeds to analyze file number M/115/97 regarding the complaint filed by Dulces Luisi, S.A. de C.V. [seller, who is a Mexican company] against Seoul International Co. LTD. and Seoulia Confectionery Co. [buyer(s), who are Korean companies], so as to issue this recommendation pursuant to the following:

Procedural History

I.   On October 23, 1997 the [seller] filed a statement requesting the intervention of the Commission for the Protection of Foreign Commerce of Mexico, hereinafter "Compromex," requesting from the [buyers] the following:

Payment in the amount of $940,957.22 U.S.D. [U S. Dollars] (nine hundred forty thousand nine hundred and fifty seven dollars and twenty two cents), derived from the [buyers'] lack of payment from the sale of various shipments of sweets effected by the [seller] during the first months of 1997.

II.   The [Mexican seller] supports its claim on the following facts:

      1) That the Korean companies mentioned above, represented by Kim Tai [page 265] Won and Kim Jei Hak are in the business of marketing sweets, caramels and treats in general and that they import such goods from Mexico.

      2) That the individuals mentioned above conspired to commit the fraud which they later perpetrated to the detriment of the [seller], using for such purposes the following: that at the commencement of their commercial relation they made a purchase order for a container of candy valued at $25,849.50 U.S.D. They later made a request for seven containers valued at $167,563.38 U.S.D. Said amount were paid by means of a letter of credit without any problem.

      3) That with regard to the shipments mentioned above, the Korean companies never requested that the date of production or expiry be mentioned in the packaging.

      4) Later, the [buyer] companies requested a bigger shipment, and because of the trust these companies had built, the [seller] saw no inconvenience in accepting [to make such shipment], since payment would be effected by means of a letter of credit. The order would be shipped during the second half of February and the month of March of 1997, and taking into account the favorable precedent from the previous dealings with the Korean companies, and the brief period the [seller] had to ship the goods, [seller] proceeded to order the materials [ingredients] and to produce [the goods] even before the letter of credit was opened. Large quantities of the inputs consisted of printed coils that would only be useful for this client, since they were in Korean and had their brand-name.

      5) That the [seller] received a verbal notice from the [buyer] (sic) asking that it print a two-year expiration date [on the packaging]. But upon receipt of the letters of credit, [seller] noted that there were inconsistencies in the same. [Seller] therefore proceeded to contact the Korean companies, who in turn insisted that the letters of credit should be handled as issued since it was required by Korea's international regulations. Additionally, the [buyer] companies made assurances that there would be no problems and that they would accept [the goods] in spite of the discrepancy [with the letter of credit], and even issued a certified document in which they accepted any discrepancies.

      6) That based on the [facts] above, and believing that the Korean companies were acting in good faith, [seller] proceeded to ship the goods hoping he would resolve the problems with the letters of credit at a future date.

      7) That there were some production set-backs which did not allow [seller] to ship the complete order in the month of March, but [seller] offered to ship the remainder in the month of April, to which the Korean companies acquiesced, and additionally [seller] scheduled a trip to Seoul, Korea in [page 266] the month of May hoping to solve the pending issues.

      8) That during the trip that took place in May, Mr. Kim Tai Wong was informed that there was a Korean statute that reduced the life of the candy to one year (sic) and that was the reason why they established a one-year expiry date of the goods in the letters of credit. The [buyers] also alleged that since the shipment had arrived late they would require an additional period to pay the letters of credit. An agreement was reached with the Korean companies where they would pay on that month the amount of $151,334.78 U.S.D., and that the balance would be paid on October 15, 1997. They also argued that it would be easier for the Korean companies to effect payment via wire transfer and not through the letters of credit, since it would allow them to avoid some of the taxes; and that regardless, the expiration date on the letters of credit would be extended to November 30 of that year, and would serve as a guaranty.

      9) Not being satisfied with the results as mentioned above, the [seller] began an investigation and arrived at the following conclusions:

 a) There were no limits in Korean laws concerning the one-year shelf life of the goods. They obtained some samples of similar sweets from the Korean market made by other manufacturers that had a shelf life expectancy of more than one year and also found that under Korean law, the shelf life of these goods varies depending on each products' characteristics and to the agreement reached between the manufacturer and importer.

 b) Concerning the alleged avoidance of taxes on the wire transfers, this was apparently due to the fact that the [buyers] retrieved and stored the sweets with the Korean customs' warehouse in Pusan, without paying the official tariff, since they had reached an agreement with the customs officials to evade the payment of duties.

      10) During the month of July 1997, the representatives of the Korean companies came to Mexico asking for a price reduction and for an additional period to pay for the different amounts owing. Again they reached an agreement with the [seller] who offered a discount provided [that] they complied with their side of the bargain. A document memorializing the agreement was signed. The [seller] went to Korea again hoping to enforce the agreement but managed only to make a final written agreement contemplating a discount that would become effective only if the [buyers] complied with their payments and that [buyers] return part of the goods during the month of September and paid pursuant to a schedule of which the last instalment would be paid in January of 1988 [ sic]. [page 267]

      11) The shipping company informed the [seller] that it had twenty-two containers pending clearance and that the shipping had not been paid and that there was a debt of $43,600.00 U.S.D.

      12) The problems with the shipping company were resolved since it was thought that there could be a problem when the goods were finally cleared if the bank had not endorsed the bills of lading. It is important to note that notices that the goods had been shipped were sent in March directly to the Korean companies since these did not conform to the terms in the letters of credit, therefore the dispatch of the containers was made without the bank's endorsement.

The Korean companies asked that a new agreement be made for the payment of the goods to which the [seller] refused, adding that they were no longer willing to make any other agreement, therefore no settlement was reached.

After informing the Korean companies that the Mexican Government's collaboration would be sought, Mr. Kim Tai Wong said that this would make it more difficult and would only complicate the matter. He further added that if the [seller] filed a claim, they would file one [a counterclaim] for damages above and beyond $1,000,000.00 U.S.D., and that the basis for their claim would be that the [seller] did not comply with the conditions set forth in the letters of credit.

III. In support of the alleged facts, the [seller] submitted various documents, among which were the following:

      a) Purchase order dated January 7, 1997 signed by Mr. Kim Tai Wong, for a total value of $1,027,022.00 U.S.D.

      b) Three letters of credit dated February 6, 19 and 27, 1997, with their amendments, in the amount of $982,842.00 U.S.D.

      c) Documents issued by Banamex informing the [seller] of the discrepancies in the letters of credit, as well as a response from the Korean bank (Kookming Bank) indicating that the client had not accepted the discrepancies in the documents.

      d) Certified document signed by Mr. Kim Tai Wong in which he accepts any possible discrepancies in the letters of credit mentioned above.

      e) A promissory note made by Mr. Kim Tai Wong dated July 11, 1997, agreeing to pay the amount of $802,000.00 U.S.D.

      f) Agreement dated July 11, 1997 signed by the involved companies providing that Dulces Luisi, S.A. de C.V. would discount $138,457.22 U.S.D. and that the [buyers] would cover the amount of $802,000.00 U.S.D. on the 21st of October of that same year.

      g) Invoices and bills of lading that originated from the transactions. [page 268]

      h) A letter dated April 9, 1997, signed by Mr. Kim Tai Wong in which he claimed to have a strong influence over the Customs Director in Korea, and that he had paid large amounts of money to some of the Customs agents, and thus, that he would have no problem in clearing the containers from customs.

      i) A letter issued by Mexico's Trade Representative in Korea stating that there is no requirement to place an expiration date on the goods, as well as a letter issued by Banamex with similar wording.

      j) A letter dated April 10, 1997, in which the director of the Korean company states that honesty is of the essence and that he would come through with his promise to pay.

      k) A criminal complaint filed by the [seller] against the directors of the [buyer] companies, filed with the Korean courts and a report from the attorney who investigated the case.

IV. Pursuant to the procedures set forth in the Compromex Law, on October 27, 1997 notice was served to the [buyer] companies, inviting them to try and resolve the dispute by conciliation to the satisfaction of both parties. It is worth noting that Mexico' s Trade Representative in Seoul, Korea personally served the summons to Mr. Kim Tai Wong, on November 4, 1997.

V.  On November 5, 1997 a report was received by Mexico's Trade Representative in Seoul, Korea, in which he indicated that the representative of the Korean company had requested a reasonable time to submit all the documents and to make a proposal to settle the dispute.

VI. On November 27, 1997, the [seller] submitted a letter to Compromex informing that the negotiations had broken off with the Korean companies, since they had refused to receive any communications or to hold a meeting, and that therefore the matter would continue through the legal channels.

VII. Statement of claims submitted by the [seller] dated July 13, 1998, requesting that this Commission issue a recommendation and documents supporting the facts claimed in the Procedural history.

Legal reasoning

1. This Agency has the authority to issue an opinion on this matter, pursuant to articles 2, Section IC and 14 of the Law Creating a Commission for the Protection of Foreign Commerce of Mexico, such being pleaded by the [seller], and because it is this Commissions' opinion that there is no legal impediment to do so.

2. The [seller] demanded from the [buyer(s)] payment in the amount of $940,957.22 U.S.D., as established in paragraph 1. This claim is based on the facts alleged in number II of said chapter.

3. It is this Commission's opinion that the contractual relationship is [page 269] evidenced with the documents on record, which obviate the fact that the parties exchanged communications establishing the general terms and conditions of the commercial relationship they had.

4. The fact that there is no signed contract among parties does not excuse them from meeting their contractual obligations, pursuant to Article 11 of the United Nation's Convention on Contracts for the International Sale of Goods, adopted in Vienna, Austria on April 11, 1980, in force in Mexico since January 1, 1989.[2]

5. From an analysis of the various documents on file, we find as follows:

      a) Pursuant to the report submitted by the [Korean] State Attorney, Messrs. Kim Tai Won and Kim Jei Hak used the names of two companies, Seoul International Co. LTD. and Seoulia Confectionery Co., but the legal existence of the latter is unverified. Additionally, said persons used the office of president Seoul International Co. LTD.

      b) The officers of the companies involved in the dispute began a commercial relationship in 1996, during the International Candy Fair held in Germany.

      c) The [buyer] companies first ordered a container of sweets. They later made an order for seven additional containers. It is worth noting that in previous transactions, the companies paid the amounts by means of a letter of credit with no complications, since they did not include unusual conditions.

      d) On January 7, 1997 the [buyer] made another request worth $1,027,222.00 U.S.D. and an additional request for $303,300.00 U.S.D. agreeing to effect payment within 100 days after the date on the bill of lading.

      e) Later that January, but before the [seller] received confirmation of the letters of credit, [seller] received verbal instructions from the [buyer] (sic) to print a two-year expiration date on the goods, and sent a diskette with a design and packaging film in [the] Korean [language].

6. Under these conditions and acting in good faith, the [seller] began to manufacture the sweets with a view to meet its obligation to make a timely delivery of the goods. Upon receipt of the letters of credit, the [seller] noticed that they contained conditions different from those that had been agreed to, most notably the fact that the goods should have a twelve-month expiration date instead of [the previously agreed] two years.

7. Because of the inconsistencies, the [seller] asked the [buyer] why it had indicated a twelve-month expiration period when it had previously [page 270] asked for two years, in addition to the fact that the packaging film, sent by the [buyer], indicated a two-year expiration term. The [buyer] replied that this was because a Korean law required a one-year expiration date on sweets, but that there would be no problem, assured the [buyer], and [said] that they would accept any non-conformity, and even delivered a certified document to the [seller] stating they would accept any discrepancy with said letters of credit.

8. As mentioned in the information obtained by the [seller], Korea does not have legal provisions establishing an expiration date on the products, since the applicable statute provides that: "the date of expiration of the product is that determined by the manufacturer and concerning imported goods, it shall be determined by the importer in agreement with the exporter, taking into account the characteristics of the product, packaging material, method of production, storage conditions, and other factors for their adequate conservation." Therefore, the [buyer] company intentionally included different conditions in the letter of credit than those it had agreed to with the [seller], moreover, they agreed to accept the discrepancies.

9. Said conduct by the officers of the Korean companies is contrary to one of the basic principles in international trade provided for in Article 7 of the United Nations Convention on Contracts for the International Sale of Goods, that parties must act in good faith and deal fairly throughout their contractual relations.

10. The duty to act in good faith and fair dealing in international trade is of fundamental importance, since the contracting parties are under a duty to act pursuant to this principle. To limit or exclude it would be equal to a failure to acknowledge the axis that regulates international trade,[3] as understood in international trade, unbound from the meaning given to it in Mexican law.

11. In the case at hand, the Korean companies, by making false representations induced [seller] to make mistakes. As we have noted before, certain representations on which the Mexican company relied to forward the goods were untrue, and [said statements] were made knowing that the letters of credit would not be collected upon.

12. The substance of the matter can be summed up in the Korean companies' breach of their duty to pay for the goods they received, but said breach was a consequence of the misleading actions taken by the Korean companies, since [page 271] as made obvious from the documents on file, they did not intend to pay for the goods they received and marketed. This [finding] is further supported with the report submitted by the [Korean State] Attorney that investigated the case, who found three unsigned letters, in which the [seller] allegedly accepts that there were some deficiencies on his part, and accepts to receive only 10% or 20% of the total value of the goods.

13. Additionally, pursuant to Article 25 of said Convention, a breach of contract is fundamental if it results in such a detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. In the instant case the breaching party not only could have foreseen the result, but in fact wanted it, as evidenced in the attitude it assumed once it took control of the goods. Additionally, Article 54 of said Convention establishes that one of the main obligations of a buyer is to pay the price for the goods and to comply with such formalities as may be required under the contract or any laws and regulations to enable payment to be made.

14. To solve the case at hand, this Commission considered it convenient to apply, in addition to the legal instrument that governs the international sale of goods, the generally accepted commercial uses and practices to further the requirements of justice and equity in the solution of this case.[4]

15. Based on the above and pursuant to the legal considerations and to Articles 2, section IV and [Article] 14 of the Law Creating a Commission for the Protection of the Foreign Commerce of Mexico, we issued the following:

Recommendation

First. This claim is derived from foreign trade transactions, and one of the parties in the dispute has its domicile in the Mexican Republic, meeting the requirements established in Article 2, section III of the Law Creating a Commission for the Protection of the Foreign Commerce of Mexico.

Second. From the preceding findings and legal reasons, it is evident that this matter could not be settled by means of conciliation, mostly because of the attitude exhibited by the [buyer] companies. Therefore, upon a petition by the [seller], this Commission has authority to issue a recommendation on this matter. [page 272]

Third. It is the opinion of this Commission that the [buyer] companies acted in bad faith, thus causing a grave injustice to the [seller], but most importantly acted against one of the basic principles in international trade, that companies participating in international commercial transactions must observe good faith, as well as the institutions and the various agents involved in this economic activity conducted by most nations.

Fourth. The rights of the parties are left intact so that they may pursue an action in the venue that better suits their interests.

Fifth. Notice to the parties shall be given.


[Case commentary]

Dulces Luisi v. Seoul International
Applying the CISG to parties from non-Contracting States and other unanswered enigmas

Alejandro Osuna González

Introduction
1. A summary of the facts
2. Application of the CISG when a non-Contracting State is involved
3. The mandate for a uniform interpretation of the CISG
4. The finding of bad faith: Fraud / mistake vs. the breach of contract analysis; Generally acceptable usages and practices
5. Compromex's finding of a fundamental breach, place of payment, and its omission to recommend payment of damages and interest
6. Settlement agreement could have excluded the application of the CISG
Conclusions

INTRODUCTION

On July 19, 1999, the Commission for the Protection of Foreign Commerce of Mexico (COMPROMEX), published in the Official Federal Daily its third recommendation [5] applying the United Nations Convention on Contracts for the International Sale of Goods [6] (CISG). Though its recommendations are non-binding unless the parties agree that it act as an arbitrator, it is important to analyze its resolutions since it can serve as a "legal thermometer" of sorts, on how the CISG is being applied in Mexico. To this date there has been no report concerning a CISG case brought before a Mexican court.

In this case, a Mexican seller of sweets requested COMPROMEX's intervention after it was unable to collect payment from two South Korean companies to which it had sold merchandise. Though the main issue for the seller was obtaining payment from its Asian buyers, COMPROMEX seems to struggle with the issue concerning its finding of bad faith. But what is probably the most intriguing aspect of this case, particularly because it was never raised, was how COMPROMEX determined that the CISG was applicable to parties whose businesses are domiciled in a non-Contracting State such as South Korea. [page 273]

1. A summary of the facts

In early 1997, Dulces Luisi, S.A. de C.V. (Luisi) a company domiciled in Mexico, sold various containers of sweets to two South Korean buyers, Seoul International, Co. Ltd., and Seoulia Confectionery Co. (jointly Seoul International). The sweets in the first order required a one-year expiration date on the packaging. Payment was effected through letters of credit without any complications. In February of that same year, Seoul International ordered more sweets, but on this occasion asked that Luisi place a two-year notice of expiration on the goods. However, the instructions on the letter of credit provided that the goods needed to state a one-year expiration period, an inconsistency that would make collecting on the letter of credit impossible.

When Luisi informed Seoul International of the inconsistency between the agreed terms and the terms in the letter of credit, Seoul International replied that it would accept the goods and would clear up the matter with the issuing bank. Luisi then arranged to have the sweets delivered to Seoul International, who never amended the terms in the letter of credit. Thus Luisi did not get paid, and sought COMPROMEX's intervention.

2. Application of the CISG when a non-Contracting State is involved

Mexico is a State signatory to the CISG; South Korea is not. But this did not seem to stop COMPROMEX from concluding that the CISG applied to the sales contract regardless, without any elaboration concerning how it reached this determination.

Article 1(1)(a) of the CISG [7] provides for its application when both buyer and seller have their places of business in Contracting States. But, when only one of the parties is from a Contracting State, the CISG can apply -- via Article 1(1)(b) -- "when the rules of private international law lead to the application of the law of a Contracting State."[8] From the facts, at least as stated in the recommendation, it seems that the commercial relationship began in Germany.[page 274] Whether a contract was actually formed in Germany is an issue not elaborated upon, but would have helped determine the applicability of the CISG.[9]

Had the parties agreed to arbitration under the auspices of COMPROMEX, and the arbitration rules of Mexico's Commerce Code been used, it is almost certain that CISG would have been found applicable to the sales contract. Article 1445 of the Commercial Code vests the arbitrator with the authority to determine the applicable law absent an agreement of the parties.[10] The international character of the case and the fact that most of the obligations under the sales contract were to be performed in Mexico would have been persuasive for an arbitral tribunal to utilize the CISG as the substantive law.[11]

However, COMPROMEX's unexplained conclusion that the CISG applied leaves only room for speculation.

3. The mandate for a uniform interpretation of the CISG

The CISG has a simple but ambitious objective: to be the uniform international sales law, a goal that is close to being achieved.[12] Article 7 mandates that when the CISG is applied, regard is to be had to its international character and the need to achieve its uniform interpretation.[13] Many commentators have suggested that this can only be achieved by taking into account "what others have already done [by looking at] the decisions rendered [page 275] by judicial bodies of other Contracting States, since it is possible that the same -- or analogous issues have already been examined by other States' Courts"[14] applying this Convention.[15] This requires that judges, arbitrators and practitioners view the CISG autonomously vis-à-vis domestic law. COMPROMEX seems to pay little more than lip service to this mandate. In its recommendation, COMPROMEX borrows language from the UNIDROIT Principles [16] and the Mexican Convention [17] -- a methodology unlikely to yield the much-sought result. Though the value of these instruments -- which went unquoted in the recommendation -- is not being questioned, COMPROMEX could have resorted to more direct sources, such as the numerous CISG decisions that have been rendered worldwide available in Spanish on the Internet,[18] and treatises, albeit few, in the Spanish language.[19] The CISG is not a legal island, and it is more than the sum of its articles.[20]

4. The finding of bad faith: Fraud/mistake vs. the breach of contract analysis; Generally accepted commercial usages and practices

COMPROMEX discusses how Seoul International acted in bad faith by inducing the seller Luisi to print a one-year expiration date on the goods; while at the same time Seoul International opened a letter of credit indicating a different two-year expiration date, thwarting Luisi's possibility of collecting on the letter of credit. But this finding of bad faith attaches no consequence [page 276] or implication to such conduct. The reason behind this failure to attach a consequence to the finding of bad faith is perhaps attributable to a conceptual misinterpretation of the facts by COMPROMEX.

COMPROMEX found that Seoul International induced Luisi to make certain mistakes --make the packaging non-conforming vis-à-vis the letter of credit -- so that it would not be able to collect.[21] This raises questions of validity and fraud. An "induction to commit certain mistakes" is a question outside of the CISG,[22] since "[t]he Convention does not interfere with the special rights and remedies that domestic law gives to persons who have been induced to enter into a contract [or to modify it] by fraud."[23]

A closer analysis of the facts might offer a distinct and more correct interpretation of the case. The changes to the packaging requested by Seoul International were not an inducement to make a mistake, but a valid modification of the original contract.[24] The buyer, acting in bad faith, did not adjust the terms of the letter of credit so that the seller could not collect. Though the result is apparently the same -- Luisi did not receive payment -- these conceptual differences may explain why COMPROMEX had such a hard time attaching any significance to its bad faith finding and why it searched for arguments beyond the CISG. The "induction to commit a mistake analysis" used by COMPROMEX seems more akin to a criminal law or a "theory of obligations"[25] approach, the rules of which, applicable to these particular facts, are found in criminal statutes or the Mexican Civil Code, not the CISG.[26]

A "modification of the contract analysis" would have allowed COMPROMEX to look for answers within the CISG itself or to derive them [page 277] from its principles.[27] COMPROMEX should have found that:

(i) There was a valid modification of the contract pursuant to Article 29 of the CISG [28] which consisted of the change in expiry date of the sweets;

(ii) Luisi, the seller, complied under the new amended terms by delivering the goods;

(iii) Seoul lntemational failed to amend the terms in the letter of credit to reflect the new expiry date on the sweets;

(iv) Because Seoul International knew of the new expiry date -- and apparently even provided some of the packaging film -- it could not be allowed to rely on an alleged non-conformity, to escape payment.[29]

The conceptual confusion -- fraud/mistake vs. breach of contract -- might explain why COMPROMEX searched for other sources of international sales law in an attempt to buttress its recommendation concerning the finding of bad faith. COMPROMEX proclaimed that "it considered it convenient to apply, in addition to the legal instrument that governs the international sale of goods, the generally accepted commercial usages and practices to further the requirements of justice and equity in the solution of [the] case;"[30] but it then fails to mention just what the usages and practices it claims to have applied were. Moreover, this statement was taken from article 10 of the Inter-American Convention on the Law Applicable to International Contracts, a statute that is not even applicable under its own article 6 when the CISG applies.[31]

Contracts are entered into for the mutual benefit of the parties, thus, acting in good faith requires conduct that will further the contractual purpose, where acting in bad faith would impede it.[32] It was not an inducement to make a mistake that did not allow Luisi to collect, but Seoul International's bad-faith failure to amend the letter of credit accordingly. This should have been the proper analysis to keep the matter within the CISG's scope. [page 278]

5. COMPROMEX's finding of a fundamental breach, place of payment, and its omission to recommend the payment of damages and interest

COMPROMEX found that a fundamental breach had occurred pursuant to Article 25 of the CISG, because Luisi -- the seller -- did not receive what he reasonably expected under the contract: payment. Article 53 of the CISG provides that a buyer is under the obligation to take delivery of the goods and make payment.[33] Consistent with this provision, the South Korean buyers should have complied with the formality of amending the letter of credit to effect payment to the Mexican seller. Article 54 of the CISG further provides that a buyer is under a duty to "compl[y] with such formalities as may be required under the contract … to enable payment to be made."[34] Payment is clearly a reasonable expectation and there is little doubt that a failure to make the required accommodations to effect it is fundamental.

COMPROMEX could have included, at least in a passing reference, the location where payment should have been made to Luisi. Absent an agreement, Article 57 of the CISG provides that payment must be effected "at the seller's place of business"[35] or whenever payment is made against the controlling documents, "at the place where the handing over takes place."[36] Seoul International and Luisi, who had transacted business on at least two occasions prior to the breach, established the practice of effecting payment via letter of credit, making this a binding practice.[37] Case law from other jurisdictions have found that payment via letter of credit is not a derogation from the rule providing payment at seller's place of business.[38] Though jurisdiction is a matter outside the CISG, it would have helped in establishing that the courts located in seller's place of business had jurisdiction to hear the case,[39] had it decided to pursue the matter in court.

COMPROMEX failed to recommend that Seoul International effect payment [40] or interest on the payment,[41] a right to which Luisi is clearly entitled [page 279] under the CISG. This is inconsistent with other recommendations that have been handed down by COMPROMEX applying the CISG. In one case it recommended that an American buyer pay the price for garlic it bought from a Mexican seller,[42] while in another it recommended that a Mexican buyer be reimbursed the purchase price after receiving non-conforming canned fruit from an Argentinean seller.[43] Why it omitted a recommendation for payment is uncertain but it is clearly inconsistent with Luisi's petition.[44]

6. Settlement agreement could have excluded the application of the CISG

From a reading of the case it appears that on July 11, 1997 all the parties involved in the dispute signed a settlement agreement in Mexico. Under the settlement, Luisi would discount $138,457.22 U.S.D. from Seoul International's debt, while Seoul International would pay $802,000.00 U.S.D. Though only a reading of this document's provisions would resolve this question, it could be that the settlement agreement superseded all prior dealings, and might have even excluded the application of the CISG. The Civil Code of the place where the agreement was signed would govern, a matter well outside the scope of the CISG.[45] If a valid settlement agreement exists, this would mean that a cause of action would have to be based not on the breach of the international sales contracts, but on the breach of the settlement agreement signed in Mexico. This issue was never brought up in the recommendation.

CONCLUSIONS

If COMPROMEX is interested in having parties submit cases to it so that it will act, not just as an advisory board but as an arbitrator, then it must [page 280] substantially improve the quality of its resolutions. Though most of them have been non-binding, COMPROMEX's recommendations applying the CISG have lacked substantial legal analysis and methodology. The Luisi vs. Seoul International recommendation is significantly deficient. It failed to discuss important issues such as: CISG application to a case where one of the parties is from a non-signatory State; the finding of bad faith and its consequences; application of supplementary rules; contract modification; possible exclusion of the CISG. COMPROMEX has left many questions of law and fact unanswered and has consistently shown disregard for the mandate under Article 7 of the CISG, which requires that judges, arbitrators, and even advisory boards keep in mind the CISG's international character and the need to promote uniformity in its application. Its disregard for foreign case law and scholarly writing is inconsistent with what courts elsewhere are beginning to do, develop a methodology that will apply the CISG uniformly. [page 281]


FOOTNOTES

* (Diario Oficial [D.O.] 29 de enero de 1999, 69-74 (primera sección) [hereinafter Recommendation]. All footnotes included in the translation have been provided by the translator, and all citations in the body of the text are the court's original citations. All translations should be verified by cross-checking against the original text.

** Translation and commentary by Alejandro Osuna-González, Licenciado en Derecho, Universidad Iberoamericana, Plantel Noroeste, Tijuana, Mexico, 1995; LL.M. University of Pittsburgh, 1998; Professor of Public International Law and International Sales Law at the Universidad Iberoamericana, Plantel Noroeste in Tijuana, Baja California, Mexico; practices law in Tijuana, State of Baja California, Mexico. I would like to thank Mexico's National Council for Science and Technology (CONACYT) as well as the ALCOA Foundation for allowing me the opportunity to attend the University of Pittsburgh's LLM Program. Special thanks to Professors Ronald Brand and Harry Flechtner (University of Pittsburgh), and Alejandro Garro (Columbia University) for their willingness to share in their knowledge and experience.

1. See "Ley que crea una Comisión para la Protección del Comercio Exterior de Mexico," D.O., 31 de diciembre de 1956 (creating a Commission for the Protection of the Foreign Commerce of Mexico).

2. See generally United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S. TREATY DOC. No. 98-9 (1983), 19 I.L.M. 668 (1980) (entered into force on Jan.1, 1988), also available in 15 U.S.C.A. app. at 49 (West Supp. 1996), 52 Fed. Reg. 6262-80, 7737 (1987), U.N. DOC. A/CONF. 97/18 (1980) [hereinafter CISG].

3. See Article 1.7 UNIDROIT -- INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW, PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS art. 1.7 (Rome 1994). This portion of the opinion was taken from this provision.

4. This part of the recommendation seems to trace the language of article 10 of the Inter-American Convention on the Law Applicable to International Contracts done at Mexico City. March 17, 1994 at the Fifth Inter-American Specialized Conference on Private International Law (CIDIP-V) [hereinafter 1994 Mexican Convention].

5. See infra notes 42-43.

6. See Diario Oficial de la Federación [D.O.] Mar. 17, 1988 (The CISG has been in effect in Mexico since January 1, 1989.).

7. See CISG, supra note 2, art. 1(1)(a).

8. See id. art. 1(1)(b). Mexico's rules of private international law can be found in articles 12 through 15 of the Federal Civil Code, and in the equivalent articles in the Civil Codes for the several States in the Mexican Republic. Federal Civil Code Article 13(V) provides that "legal acts shall be governed by the law of the location where these take place." Article 13(V) of the same statute provides that "the effects [consequences] of legal acts and contracts shall be governed by the law applicable in the location where they are to be performed, unless the parties have made a valid designation of another law."

9. COMPROMEX found that the commercial relationship began in Germany during an International Candy Fair. Whether there was an exchange of sales and purchase orders in that country, or if a contract was signed is not discussed but the CISG would have been applicable under Mexico's Conflict of Laws provisions described in footnote. See Recommendation, Legal reasoning 5(b).

10. See CÓD. COM. art. 1445 (1996) ("If the parties do not set forth the law that is to govern the substance of the controversy, the arbitration tribunal shall determine the applicable law, taking into account the characteristics and the nexus of the matter.").

11. Franco Ferrari is of the opinion that the CISG applies, provided the parties have not excluded the CISG; no electio iuris occurred, provided the Contracting State did not make an article 95 reservation; and that the seller is domiciled in the Contracting (non-reservatory) State. This, however, would seem to contradict the proposition that States (or in this case, private parties from non-Contracting States) are not bound to international agreements that they have not signed or ratified. A more just application, could be that of dépeçage. A practical consequence could be that courts in non-Contracting States might refuse to enforce judgments issued against its citizens if the CISG was applied to them, particularly if it contradicted a rule of ordré public.

12. More than fifty states have ratified the CISG, representing close to two-thirds of the world's transactions. For a status of signatory States see CISG: Table of Contracting States (visited Apr. 3, 2000), <http://www.cisg.law.pace.edu/cisg/countries/cntries.html>.

13. See CISG, supra note 2, 7(1) ("In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application …").

14. See Franco Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15. J.L. & COM. 1, 11-12 (1995). See also Harry M. Flechtner, Another CISG Case in the U.S. Courts: Pitfalls for the Practitioner and the Potential for Regionalized !nterpretations, 15 J.L. & COM. 127, 138 (1995) (suggesting that the courts in States part of a trading block may give the CISG a regionalized interpretation).

15. See John O. Honnold, The Sales Convention: From Idea to Practice, 17 J.L. & COM. 181, 185 (1998) (mentioning a proposal for the creation of an international body to review CISG decisions).

16. See 1994 Mexican Convention, supra note 4.

17. See supra notes 42-43.

18. See CISG webpage of the Universidad Carlos III (visited Apr. 3, 2000), <http://www.uc3m.es/cisg>.

19. This author is aware of one Mexican treatise on the CISG. See generally JORGE ADAME GODDARD, EL CONTRATO DE COMPRA VENTA INTERNACIONAL (1994).

20. COMPROMEX seems to confuse "autonomous interpretation" with "independent interpretation." Autonomous does not mean that other cases or the CISG literature should be ignored, as is the case with COMPROMEX. Independent interpretation would look to find the all the answers within the statute, as if the CISG were a legal island. Autonomous interpretation looks at the CISG as a body of law distinct from traditional domestic rules, but within the framework of an international body of law, comprised not only of the CISG's articles, but also of international case law and treatises regarding the CISG.

21. See Recommendation, Legal reasoning 11-12.

22. See CISG, supra note 2, art. 4 ("This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) The validity of the contract or of any of its provisions or of any usage; (b) The effect which the contract may have on the property in the goods sold.").

23. See JOHN O. HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES 66 (1999).

24. See CISG, supra note 2, art. 29(1) ("A contract may be modified or terminated by the mere agreement of the parties.").

25. Part of Civil Law that concerns itself with how a person can "become obligated" by contract, quasi delicts, unilateral statements, strict liability, etc. See ERNESTO GUTIERREZO Y GONZÁLEZ, DERECHO DE LAS OBLIGACIONES, Editorial Porrúa. S.A., Mexico, (1995), See also MANUEL BEJARANO SÁNCHEZ, OBLIGACIONES CIVILES, Harla, S.A. de C.V. Tercera Edición, México (1984).

26. This theory is further reinforced by the language in II(2) of the Translation's Procedural History when the Recommendation states "[t]hat the individuals mentioned above conspired to commit the fraud which they later perpetrated to the detriment of the [seller]. ..." (emphasis added).

27. See CISG, supra note 2, art. 7(2) ("Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based. …").

28. Article 29 of the CISG provides that "[a] contract may be modified or terminated by the mere agreement of th2e parties."

29. Article 35(3) of the CISG provides that "the seller is not liable ... if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity." See CISG, supra note 2, art. 35(3).

30. See Recommendation, Legal reasoning 14.

31. See 1994 Mexican Convention, supra note 4, art. 6.

32. See Jorge Adame Goddard, Estudia Camparativa del capítula primera de las principios Unidroit sobre las Contratos Comerciales Internacionales, REVISTA DE DERECHO PRIVADO, Año 8, Num. 24 U.N.A.M., 20, 21 (1997).

33. See CISG, supra note 2, art. 53.

34. See id. art. 54.

35. See id. art. 57(1)(a).

36. See id, art. 51(1)(b).

37. See id. art.9(1).

38. See Oberlandesgericht München [7 U 2246/97], from Pace University's CISG Database, <http://cisgw3.law.pace.edu/cases/970709g2.html>.

39. The Mexican Commercial Code's article 1104(II) provides that a Court has jurisdiction over a party if within its jurisdiction a contractual duty must be performed.

40. See CISG, supra note 2, art. 53.

41. See id. art. 78. According to Dr. Volker Behr this article concerning interest rates has been the source of many disputes due to the broad language which does not specify what country's interest rate applies: that of the domicile of the buyer or that of the seller. See generally Professor Dr. Volker Behr, The Sales Convention in Europe: From Problems in Drafting to Problems in Practice, 17 J.L. & COM. 263 (1998).

42. See generally Dictamen de la Comisión Para la Protección del Comercio Exterior de Mexico: Morales y/o Son Export S.A. de C.v. v. Nez Marketing, 16 J.L. & COM. 363 (1997).

43. See generally Dictamen Emitido por la Comisión para la Protección del Comercio Exterior a Peticion de Conservas la Costeña, S.A. de C..V. with Commentary. 17 J.L. & COM. 427 (1998).

44. See Recommendation. Procedural history I.

45. "A transaction is a contract through which parties, by making reciprocal concessions, terminate or prevent their current or future disputes" See C.C.D.F. art. 2944.

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