Source: http://cisgw3.law.pace.edu/cases/991220i1.html
Timestamp: 2019-04-18 10:33:36+00:00

Document:
"1. A unilateral modification of the discount rates in the sales contract by the manufacturer is a fundamental breach of contract entitling the buyer to declare the contract avoided.
"2. On the measurement of damages after a covering purchase by the buyer�s customer.
"3. According to the complementarily applicable Swiss law, the Arbitral Tribunal has jurisdiction for counterclaims raised by the defendant by way of set-off only if a corresponding intention of the parties can be determined." Internationales Handelsrecht (1/2004) 21.
During spring 1997, Plaintiff [Seller] and Defendant [Buyer] concluded their contract of sale no. 1. Both parties had already had a commercial relationship before that date (contracts of 1991 and 1993). However, they were forced to interrupt their relationship for almost four years following the economic embargo imposed by the United Nations and the European Community on the Republics of Serbia and Montenegro, and because of the fact that [Buyer] was sentenced to an imprisonment of two years and six months.
"All disputes arising out of the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules of Arbitration."
There is no agreement on the place of arbitration. The parties have also not made a choice of law.
According to the head of the contract document, [Seller] is acting "in its own name and on account of the manufacturer, Factory K (FK)." [Buyer] signed the contract in his own name and added a note "on account of the final customer Company M." Manufacturer FK also signed the contract as a declaration of its approval.
Pursuant to the information contained in the contract document, the contract was concluded in the city of M. on 7 February 1997. However, both parties' signatures were obviously actually exchanged via fax, to the effect that none of the parties can readily submit a three-page document containing all original signatures. The only document bearing an original signature contains [Buyer]'s signature plus copies of the signature and stamp of both [Seller] and FK. According to the caption of the fax, it was transmitted to [Buyer] by [Seller] on 24 April 1997 and re-transmitted via fax by [Buyer] on the same day. On 24 April 1997, [Seller] requested the Yugoslavian National Bank to grant an export allowance for goods of a total production value of Deutsche Mark [DM] 470,450. There are two versions of contract page no. 1: The version submitted by [Seller] indicates a total value of the goods of about DM 500,000, whereas the version submitted by [Buyer] indicates a total value of about DM 2,500,000. Further reference is made to this discrepancy in the subsequent reasoning.
Art. 5 of the contract provides that [Buyer] shall make an advance payment to [Seller] of about DM 170,000 in order to finance the acquisition of raw materials. This sum was supposed to cover the raw materials required for the first part of the goods, having a value of about DM 500,000. The financing process was mediated by [Seller]'s affiliate Company L. [Buyer] had to issue a bank guarantee for DM 170,000 to that company and make payments in commission.
The financial conditions for the 1997 cooperation were to be agreed on separately as provided by Art. 2 of the contract. Manufacturer FK confirmed the list prices directly to [Buyer] by fax of 21 February 1997. With respect to cable type NYCWY, a total turnover of DM 1,500,000 was confirmed as well as a discount of 68% off the list price. A turnover of DM 1,000,000 and discount of 64% off the list price was confirmed for cable type NYY.
Subsequently, [Buyer] ordered various goods from [Seller] at a total value of about DM 440,000. Between 10 May 1997 and 15 July 1997, [Buyer] received deliveries of goods which had a value of DM 274,386.88. These deliveries were usually performed with considerable delay in respect to the confirmed dates.
On 23 May 1997, [Buyer] ordered additional goods at a total value of DM 260,923. [Seller] did not confirm this order, but demanded that [Buyer] increase the guarantee from DM 170,000 to DM 210,000 on 3 June 1997. On 11 July 1997, [Seller] even demanded to have the guarantee increased to the amount of DM 250,000. In the meantime, Manufacturer FK had completely stopped the remaining deliveries to [Buyer].
On 30 July 1997, [Seller] informed [Buyer] that FK had reduced the discounts for future deliveries, namely to 65% for cable type NYCWY and to 61% for cable type NYY. The previous discounts could be applied only to the pending orders which had already been accepted. [Seller] reiterated its request that prior to any future delivery of goods or confirmation of orders, the guarantee be increased to DM 250,000.
On 14 August 1997, [Seller] confirmed a telephone call between [Buyer] and Mr. T. of [Seller] which had occurred on 12 August 1997. In the course of this telephone call, [Buyer] had complained about the drastic and inacceptable price increases adopted by cable manufacturer FK. [Buyer] had stated that this amounted to a breach of contract and had cancelled the two outstanding orders.
On 21 August 1997, [Buyer] contacted the Director-General of [Seller] via fax. The [Buyer] referred to several breaches of contract on the part of [Seller] and stated that the agreement of February was invalid. Moreover, [Buyer] announced that he would claim damages on various grounds and confirmed that he would retain the residual payment of about DM 100,000 until settlement of his own claims.
On 20 October 1997 [Seller] commenced arbitration proceedings before the International Chamber of Commerce in Paris and requested that [Buyer] be ordered to pay DM 101,630.26 plus 1% interest per month since 15 August 1997 and to pay all costs of the arbitration proceedings.
On 10 December 1997, [Buyer] requested that the [Seller]'s action be dismissed and that [Seller] should bear the costs. In his statement of defense, [Buyer] admitted [Seller]'s claim for DM 101,630.26, but relied on set-offs under a number of legal grounds. Although the alleged counterclaims, which were subject to the set-offs, by far exceeded the sum claimed by [Seller], the [Buyer] formally renounced the filing of a counter-action against [Seller].
On 9 January 1998, the Court of Arbitration of the ICC ruled that the dispute would be adjudicated by a sole arbitrator in accordance with the parties' request and determined that Paris would be the place of arbitration. On 4 February 1998, the Court of Arbitration appointed the sole arbitrator. On 12, 17 and 18 May 1998, the sole arbitrator and the two parties signed the order of arbitration pursuant to Art. 13 of the ICC Rules of Arbitration of 1 January 1988. This became valid on 17 September 1998 after each party had paid its advance on costs.
1. The parties have failed to make a choice of substantive law in respect to their contract. Art. 15 ICC Rules of Arbitration provides that the parties may choose the substantive rules governing their legal relationship. By virtue of the order of arbitration, which became effective on 17 September 1998, the parties agreed that Swiss law including the United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 (CISG) should apply.
2. The existence and extent of [Seller]'s claim is not in dispute. [Seller] delivered goods to [Buyer] of a total volume of DM 274,386.88, whereas [Buyer] has only paid DM 172,756.62. This results in a residual purchase price claim of DM 101,630.26.
3. [Buyer] primarily relies on a set-off with a claim for damages, based on the fact that his final customer M. had concluded cover purchases after there had been delays in the delivery. Following the cover purchases, M. GmbH (Gesellschaft mit beschränkter Haftung, limited liability corporation) invoiced DM 16,856.57 on 29 August 1997 and DM 7,605.88 on 8 October 1997 against [Buyer]. Since the cover purchases have not been concluded by [Buyer] himself but by his customer, Art. 75 CISG does not govern this situation. Instead, Art. 45(1)(b) CISG applies in conjunction with Art. 74 CISG. These provisions entitle the buyer to an independent claim for damages which exists regardless of negligence or fault and regardless of whether the breach of contract was fundamental in terms of the CISG. In the context of this strict liability, the seller has to cover all damages which have accrued as a consequence of a breach of contract for which it is responsible. The damage claimed by [Buyer] consists of his liability in respect to his final customer M. [Buyer] claims that [Seller] was in breach of contract because it delayed the delivery of goods. [Seller] disputes that assertion and alleges that [Buyer] accepted the delays because he had received confirmation of all dates of delivery and had not raised any objection thereto. However, it may remain undecided whether this has actually been the case. In any event, it is undisputed that the orders of 2/97, 3/97, 5/97 and 6/97 were subject to additional and considerable delays and [Buyer] has provided conclusive proof of his respective complaints (letters sent via fax on 5 May 1997 and 14 August 1997).
4. Art. 74 CISG also provides that damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. This requirement is fulfilled in the present case because [Seller] was aware of the final customer and because it constituted a long-standing commercial practice between the parties that the final customer would conduct cover purchases and that [Buyer] would pass on the claim against [Seller].
5. [Seller]'s objection, that the damage caused by the delay was already compensated due to a provision adopted from a previous contract (a so-called 'copper clause', Kupferklausel), is to no avail. According to this clause, the price for copper was to be invoiced separately. In case of a delayed delivery, the risk of an increase in the market price for raw copper would remain with the seller, because the copper price of the week prior to each confirmed date of delivery would be relevant. Such a clause is generally capable of covering a part of the damage caused by a delay. However, since the clause only refers to copper, it only covers a part of the damage caused by the delay. Namely, the part which relates to price fluctuations for copper as a raw material for the final product. Moreover, a corresponding clause is only commercially sensible as long as the buyer continues the cooperation with its final customer, because only in this case will any profit that has subsequently been achieved compensate for the losses from previous cover purchases. However, since M. GmbH stopped its cooperation with [Buyer] in the summer of 1997, the [Buyer] was left with the damage. Therefore, [Buyer] is entitled to rely on a set-off against [Seller]'s claim on the grounds of the damage which he has suffered due to the cover purchases carried out by M. GmbH.
6. [Buyer] declared avoidance of the contract on 21 August 1997 at the latest. In his letter, [Buyer] relied both on the delayed deliveries and the unilateral change in the discount on the part of Manufacturer FK. It may remain undecided whether the delayed deliveries in themselves would have justified an avoidance of the contract. In any case, [Seller] must accept that the unilateral change in the discount by FK constitutes a breach of contract, which will also be attributed to it. It is true that the original discount rates had not been agreed on between [Seller] and [Buyer] but had been directly notified to the latter by FK. Nevertheless, [Seller] has declared its approval to this separate price agreement in Art. 2 of the contract. Furthermore, [Seller] applied the corresponding discount rates to all processed orders. Finally, the unilateral discount rate change on the part of FK was notified to [Buyer] by [Seller] itself. This happened despite the fact that the discounts had been previously determined for the whole year of 1997 by way of fax dated 21 February 1997. This amounts to a fundamental breach of contract, which entitles the buyer to declare immediate avoidance under Arts. 49, 73 CISG.
7. [Buyer] further relies on a set-off against [Seller]'s claim on the grounds of a counterclaim for loss of profit. This is generally recoverable under Art. 74 CISG. Naturally, the judge has to be convinced that any alleged profit would have been actually achieved in the absence of the breach. [Buyer] calculates its loss of profit on the basis of the entire asserted value of contract of DM 2,500,000. In contrast, [Seller] seeks to rely on a total value of the contract of DM 500,000 and does not accept any additional claim for loss of profit on the part of [Buyer]. Irrespective of a final determination of the agreed value of the contract, it can be ascertained that [Buyer] was not as such entitled to receive deliveries worth DM 2,500,000. The pre-financing in the amount of DM 170,000 was merely sufficient to afford the first purchase of copper at a price of DM 500,000. This follows directly from Art. 5(2) of the contract. However, [Buyer] has not demonstrated that an extension of the submitted guarantee -- and thus a secured pre-financing for the time beyond 31 July 1997 -- had failed solely as a result of [Seller]'s breach of contract. [Buyer] has not submitted any evidence in order to prove that its bank would have been willing to extend the guarantee in July 1997. There is also no proof of a connection between the discount reductions and the cancellation of the commercial relationship with M. GmbH. The submitted documents merely demonstrate that [Buyer] became aware of the unilateral discount reduction by the end of July 1997 at the latest. At this point in time, however, [Buyer] would have already had to take the necessary steps in order to have the guarantee extended or increased. This is due to the fact that the order by M. GmbH of a total volume of DM 260,923 -- which had not been fully covered by the initial advance payment - had already been placed on 23 May 1997. Therefore, [Buyer] has failed to prove that it would have actually been in a position to conclude the transactions which form part of its calculation of lost profit. [Buyer] also fails to submit any evidence to show that its main customer M. GmbH was either obliged or willing to continue the existing cooperation. The mere reference to an alleged commercial cooperation throughout the past twenty years is not sufficient evidence, given the two-year interruption during [Buyer]'s imprisonment. The commercial circumstances apparently changed after the embargo against Serbia and Montenegro had been removed. [Buyer]'s customers were able to procure the goods from other sources and were less dependent on [Buyer] than before. This meant that [Buyer]'s commercial situation has become uncertain, which apparently led to some financial difficulties. Under these circumstances, a mere calculation of a profit of about DM 138,000 for the year 1997, which is not supported by any factual evidence, is pure speculation and consequently an insufficient basis for a damages claim against [Seller] based on loss of profit. If, accordingly, only transactions up to a total volume of DM 500,000 were covered by the pre-financing and corresponding orders by the final customer M. GmbH, the amount of damages to be possibly claimed as loss of profit must be limited to this amount. Therefore, consideration may be given to the correctly cancelled orders 3/97 and 6/97 over DM 170,269 for cable type NYY, where the profit margin was 7.39% as demonstrated by [Buyer] and not disputed by [Seller]. This leads to a loss of profit of DM 12,582.88. Moreover, consideration may be given to the unconfirmed order by [Seller] of 23 May 1997 as far as it adds up to the total contractual volume of DM 500,000, which leads to a sum of DM 55,344.12. The undisputed profit margin for the relevant cable type NYWCY is 5.7%, which leads to a loss of profit of DM 3,154.61. As a conclusion to this, [Buyer] may rely on a set-off on the grounds of recoverable loss of profit in the amount of DM 15,737.49.
8. Finally, [Buyer]'s other alleged counterclaim for DM 246,043.57 follows from an earlier contractual relationship between the parties which does not contain an arbitration clause. The request to introduce this claim into the present proceedings was dismissed by order of the arbitrator of 22 March 1999. In his first submission of 10 December 1997, [Buyer] had only generally declared his reservation to rely on this claim arising out of the previous contract but it has not been made part of the present dispute by way of the order of arbitration. In the course of the hearing of 27 October 1998, [Buyer] requested an extension of the order of arbitration for the first time. The arbitrator set a time limit to make a reasoned submission in favor of this request and, in particular, to establish the competence of the Court of Arbitration to adjudicate this counterclaim arising out of the earlier contract which does not contain an ICC arbitration clause. By way of his submission of 4 December 1999, [Buyer] merely stated that it was "not disputed that a court of arbitration will also be competent to decide on counterclaims which have been raised by a defendant in order to achieve a set-off, even if the very court would not be competent if the counterclaim had been submitted separately." [Buyer] did not make any further submissions.
The order of 22 March 1999 explains in detail that, according to the leading doctrine in Switzerland, the competence of a court of arbitration to adjudicate counterclaims arising out of different contracts without an express arbitration clause is established only if a corresponding intent by both parties can be demonstrated (cf. W. Wenger, in: H. Honsell / N. P. Vogt / A. K. Schnyder (eds.), Kommentar zum Schweizerischen Privatrecht, Internationales Privatrecht, Basel/Frankfurt a.M. 1996, Art. 186 IPRG margin number. 25 et seq.; F. Vischer, IPRG-Kommentar, Art. 182 margin number 13; BGE [*] 85 II 103 et seq., 108 et seq.).
In the present case, [Buyer] has not proved the existence of such common intent. The procedural order of 22 March 1999 will therefore become part of the present arbitral award.
9. [Seller]'s claim of DM 101,630.26 will thus be reduced by the two counterclaims on the part of [Buyer] of DM 24,462.45 and DM 15,737.49 and leads to a residual claim of DM 61,430.32. According to Art. 2(2) of the contract, this sum had to be paid on day 15 of the month after receipt of the delivery. In this respect, [Seller] relies on an interest rate of 1% per month since 15 August 1997. Under Art. 78 CISG, a party is entitled to interest if the other party fails to pay the price or any other sum that is in arrears. The CISG is silent on the applicable rate of interest. According to the leading doctrine, the interest rate is governed by the applicable domestic law. In this case, the parties have designated Swiss law in their order of arbitration. Arts. 73 and 104 of the Swiss Law of Obligations provide that claims are subject to an annual interest rate of 5%, unless a different interest rate has been designated by contract, statute or common practice. Since [Seller] has not demonstrated the application of a different interest rate, its claim will be subject to an annual interest of 5%.
10. Art. 20 of the ICC Rules of Arbitration (version of 1 January 1988) states that the arbitral award includes a determination of costs of the arbitration and a decision as to which of the parties shall bear them. Costs of the arbitration include the arbitrator's fees, the administrative costs of the ICC as well as the expenses and "normal legal costs incurred by the parties" (Art. 20(2) ICC Rules of Arbitration). While the arbitrator's fees and administrative costs of the ICC are determined by the International Court of Arbitration, the arbitrator is competent to decide upon the amount of recoverable expenses incurred by the parties and their apportionment between the parties. It is at the arbitrator's own equitable discretion to decide under consideration of all circumstances of the individual case which expenses are "usual" (W.L. Craig / W. W. Park / J. Paulsson, International Chamber of Commerce Arbitration, 2nd ed., Paris 1990, Part III � 19.07).
It has to be taken into account in the present case that [Seller] succeeds only with a part of its action, that it has been in breach of contract, that it was not represented by an independent attorney and that [Buyer] is in a difficult commercial situation, which was aggravated by the embargo of 1992 and the subsequent changes in the cooperation with [Seller]. Consideration is also given to French procedural law because of the corresponding seat of arbitration, although the arbitrator is not bound by this law (Craig / Park / Paulsson, cited above). Under Art. 699 Nouveau Code de Procédure Civile (NCPC, French law on civil procedure), the attorney may, in cases of mandatory legal representation, claim that the losing party bear the necessary advance on costs. This provision only applies to independent attorneys. However, legal representation has not been mandatory in the present dispute. In these cases, the judge may grant recovery of the costs for legal representation merely under the head of "reported costs", Art. 700 NCPC. The rules on equity have to be considered in this respect, as well (Code Dalloz 1999, chiffre 18).
In the present case, both parties have submitted their debit note. By order of 3 August 1999, the arbitrator dismissed [Seller]'s request to grant an "attorneys"' honorarium due to the aforementioned reasons. The expenses which have been demonstrated by [Seller] and allowed by the Court of Arbitration amount to DM 7,337.14. The expenses which have been demonstrated by [Buyer] and allowed by the Court of Arbitration amount to DM 11,616.78. This sum consists of DM 8,304.44 as attorneys' fees and DM 3,312.34 as other expenses. Given the fact that [Seller]'s claim has succeeded to a greater extent than [Buyer]'s claim and that [Buyer] has accepted the existence of [Seller]'s claim, while on the other hand [Seller] has also accepted a part of [Buyer]'s counterclaims, [Buyer] has to bear three quarters of the costs and [Seller] has to bear one quarter.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff of Germany is referred to as [Seller] and Defendant of Yugoslavia is referred to as [Buyer]. Amounts in the former currency of Germany (Deutsche Mark) are indicated as [DM].
Translator's note on other abbreviations: BGE = Bundesgerichtsentscheidung [Reported decisions of the Swiss Federal Supreme Court].

References: Art. 5
 Art. 2
 Art. 13
 Art. 15
 Art. 75
 Art. 45
 Art. 74
 Art. 74
 Art. 2
 Art. 74
 Art. 5
 Art. 186
 Art. 182
 Art. 2
 Art. 78
 Art. 20
 Art. 699
 Art. 700