Source: http://cisgw3.law.pace.edu/cases/968740i1.html
Timestamp: 2019-04-22 18:22:54+00:00

Document:
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).
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.
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].
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.
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.
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 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).
"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.
* 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.

References: Art. 76
 Art. 73
 Art. 76
 Art. 76
 Art. 76
 Art. 12
 Art. 76
 Art. 75
 Art. 74