Source: http://cisgw3.law.pace.edu/cisg/wais/db/cases2/895713i1.html
Timestamp: 2018-01-23 20:00:40
Document Index: 790484135

Matched Legal Cases: ['art. 38', 'art. 39', 'Art. 39', 'Art. 40', 'Art. 13', 'Art. 13', 'Art. 3', 'Art. 13', 'Art. 38', 'Art. 40', 'Art. 13', 'Art. 3', 'Art. 100']

[Cite as: http://cisgw3.law.pace.edu/cases/895713i1.html]
CASE NUMBER/DOCKET NUMBER: 5713 of 1989
SELLER'S COUNTRY: Turkey (complainant)
In a series of contracts for the sale of goods on f.o.b. terms, the buyer disputed, both prior to shipment and upon arrival, the conformity of goods covered under one of the contracts with certain contract specifications. The buyer treated the goods in order to make them more saleable and sold them at a loss. The seller demanded full payment and the buyer filed a counterclaim demanding compensation for direct losses, financing costs, lost profits and interest.
The arbitral tribunal held, pursuant to article 13(3) of the 1975 ICC arbitration rules, which allows the tribunal in the absense of a choice of law by the parties to determine the applicable law by applying the private international law rule that it deems appropriate, that the contract was governed by the law of the country where the seller had his place of business. In addition, pursuant to article 13(5) of the ICC arbitration rules, the tribunal decided to take into account CISG as a source of prevailing trade usages. As the applicable provisions of the law of the country where the seller had his place of business appeared to deviate from the generally accepted trade usages reflected in CISG in that it imposed extremely short and specific time requirements in respect of the buyer giving notice to the seller in case of defects, the tribunal applied CISG.
The tribunal found that the buyer had complied with the requirements of CISG to examine the goods properly (art. 38(1) CISG) and to notify the seller accordingly (art. 39(1) CISG). It was held that, according to article 40 CISG, at any rate the seller would not be entitled to rely on non-compliance by the buyer with article 38 and 39 of CISG for the reason that the seller knew of could not have been unaware of the non-conformity of the goods with contract specifications. The tribunal awarded the seller the full amount of its claim and set it off against part of the buyer's counterclaim.
APPLICATION OF CISG: Yes, as source of prevailing trade usages -- even though the CISG by its terms is not applicable to this transaction
Key CISG provisions at issue: Articles 9 ; 38(1) ; 39(1) and 39(2) ; 40
40B [Seller fails to disclose known non-conformity (sanction: seller loses right to rely on Articles 38 and 39)]
The contract was concluded in 1979, before the final text of the CISG was written; nine years before the CISG became the law of any country. The tribunal cited inspection and notice provisions of the CISG: Articles 38(1), 39(1), 39(2) and 40. The rules these provisions contain are: Article 40, a rule commonly encountered in domestic legal systems; Articles 38(1) and 39(1), rules more flexible than those of many civil law codes but in some respects tighter than those of the U.S. Uniform Commercial Code; and Article 39(2), a unique creation of the CISG. [This notice scheme also includes an Article 44, like Article 39(2) a compromise provision of the CISG that has no precise counterpart in any domestic law.]
Applicability/Trade usages, CISG as source of/Lex mercatoria. Article 9(1) states that the parties are bound by any usages to which they have agreed, either expressly or by implication. Article 9(2) provides that an agreement may be implied only when the usage is "widely known to, and regularly observed by parties to contracts of the type involved in the particular trade concerned." Referring to ICC Arbitration Rules which state that arbitrators will take into account "relevant trade usages", the tribunal stated that the CISG's notice provisions are "prevailing trade usages" and held that, as such, they apply to this case.
Examination of the goods/Notice of lack of conformity. Citing Article 38(1) which requires the buyer to "examine the goods . . . within as short a period of time as is practicable in the circumstances," Article 39(1) which requires notice of lack of conformity "within a reasonable time after [buyer] has discovered it", and Article 39(2) which provides that in no event can this time exceed two years unless the parties agree otherwise, the tribunal referred to these provisions as "generally accepted trade usages" that are "considerably more flexible" than the notice rules contained in the law of the country of the seller; held them applicable; and concluded that buyer had complied with them.
Knowledge of lack of conformity. Citing Article 40, the tribunal stated that "[i]n any case, the seller should be regarded as having forfeited its rights to invoke any non-compliance with the requirements of Articles 38 and 39" since these requirements do not apply where "the lack of conformity relates to facts of which [seller] could not have been unaware, and which he did not disclose".
English: ICC International Court of Arbitration Bulletin (December 1990) 24; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=16&step=Abstract>
French: Bulletin de la Cour Internationale d'Arbitrage de la CCI (December 1990) 24; Droit et pratique du commerce international (1994) 95-96
German: Schweizerische Zeitschrift für Internationales und Europäisches Recht (SZIER)/Revue suisse de droit international et de droit européen 1995, 281
Italian: Diritto del Commercio internazionale (1993) 652-653 No. 10
Polish: Hermanowski/Jastrzebski, Konwencja Narodow Zjednoczonych o umowach miedzynarodowej sprzedazy towarow (Konwencja wiedenska) - Komentarz (1997) 241-242
Original language (English): Collection of ICC Arbitral Awards/Recueil des Sentences Arbitrales de la CCI 1986-1990 (Kluwer) II, 223-226; Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods, Kritzer ed. (Kluwer 1994), vol. 2, suppl. 9; Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=16&step=FullText>; Yearbook Commercial Arbitration (1990) 70-73 [text presented below]
Translation (Spanish): Bueno Barrera, Quatro casos relacionados con la Convención de Viena sobre Compraventas Internacionales de 1980, Thesis, Universidad Panamericana (Mexico, D.F. 1996) 263-266
French: Witz, Les premières applications jurisprudentielles du droit uniforme de la vente internationale (L.G.D.J., Paris: 1995) 92
Spanish: Bueno Barrera, Quatro casos relacionados con la Convención de Viena sobre Compraventas Internacionales de 1980, Thesis, Universidad Panamericana (Mexico, D.F. 1996) 139-174
Yearbook Comm. Arb'n XV, Albert Jan van den Berg, ed. (Kluwer 1990), p. 70. Copyright owner: The International Council of Commercial Arbitration (ICCA). Reprinted with the permission of ICCA.
-	Applicability of CISG to cases outside its stated sphere of application.
Trade Usages, evidence of
-	CISG provisions on non-conformity as evidence of international trade usages.
Non-conformity of Goods, notice of
-	Time available for inspection and notice of non-conformity (Arts. 38, 39).
-	The two-year cutoff, proper interpretation of (Art. 39(2)).
-	Seller's knowledge, significance of (Art. 40).
Stating that "there is no better source to determine prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods", the arbitration tribunal in ICC Case No. 5713 of 1989 applied the CISG to a case outside the Convention's stated sphere of application. This is consistent with the reference to the provisions of the CISG in ICC Case No. 7153 of 1992 as "generally characteristic of [the law of] sales in all judicial systems" (see footnote *).
On the other hand, it is questionable whether the door to the application of the CISG ought to have been opened as wide as it was by the tribunal in ICC Case No. 5713 of 1989. This is the essence of the accompanying case commentary by Richard Hyland which argues that the arbitral tribunal, in this case, mistakenly applied the Convention to the matters at issue. Had the CISG applied, Hyland also questions the tribunal's application of its provisions on notice of non-conformity of the goods.
Parties:	Claimant/counterdefendant:	Seller
Defendant/counterdefendant:	Buyer
Place of Arbitration:	Paris, France
Published in:	Unpublished
-	applicable law
-	Art. 13(3) and (5) ICC Rules
-	Hague Convention of 1955 on the Law Applicable on the International Sale of Goods
-	Vienna Sales Convention of 1980
-	international trade usages
-	set-off
The seller initiated arbitration proceedings to recover the 10% balance remaining due under the contracts. The buyer filed a counterclaim alleging that the seller's claim should be set off against the amounts which the buyer estimates to be payable to the buyer, i.e., the direct losses, financing costs, lost profits and interest.
[1]	"The contract contains no provisions regarding the substantive law. Accordingly that law has to be determined by the Arbitrators in accordance with Art. 13(3) of the ICC Rules (see footnote 1). Under that article, the Arbitrators will 'apply the law designated as the proper law by the rule of conflicts which they deem appropriate'.
[2]	"The contract is between the Seller and a Buyer [of different nationalities] for delivery [in a third country]. The sale was f.o.b. so that the transfer of risks to the Buyer took place in the [country of the Seller]. [The country of the Seller] accordingly appears as being the jurisdiction to which the sale is most closely related.
[3]	"The Hague Convention on the law applicable to international sales of goods dated 15 June 1955 (Art. 3) regarding sales contracts, refers as governing law to the law of the Seller's current residence . . . (see footnote 2). [The country of the Buyer] has adhered to the Hague Convention, not [the country of the Seller]. However, the general trend in conflicts of law is to apply the domestic law of the current residence of the debtor of the essential undertaking arising under the contract. That debtor in a sales contract is the Seller. Based on those combined findings, [the law of the country of the Seller] appears to be the proper law governing the Contract between the Seller and the Buyer.
[4]	"As regards the applicable rules of [the law of the country of the Seller], the Arbitrators have relied on the Parties' respective statements and on the information obtained by the Arbitrators from an independent consultant. . . . The Arbitrators, in accordance with the last paragraph of Art. 13 of the ICC Rules, will also take into account the 'relevant trade usages'."
(a)	Under [the law of the country of the Seller] [. . .]
(b)	Under the international trade usages prevailing in the international sale of goods
[5]	"The tribunal finds that there is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods of 11 April 1980, usually called he Vienna Convention'. This is so even though neither [the country of the Buyer] nor [the country of the Seller] are parties to that Convention. If they were, the Convention might be applicable to this case as a matter of law and not only as reflecting the trade usages.
[6]	The Vienna Convention, which has been given effect to in 17 countries [a 1997 update of this statement would report 48 countries], may be fairly taken to reflect the generally recognized usages regarding the matter of non-conformity of goods in international sales. Art. 38(1) of the Convention puts the onus on the Buyer to ["examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances" (see footnote 3)]. The Buyer should then notify Seller if the non-conformity of the goods within a reasonable period of the moment he noticed or should have noticed th e defect; otherwise he forfeits his right to raise a claim based on the said non-conformity. Art. [39(2) (see footnote 4) specifies in this respect that:
["In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee." (see footnote 5)]
[7]	"In the circumstances, the Buyer had the shipment examined within a reasonable time-span since [an expert] was requested to inspect the shipment even before the goods, had arrived. The Buyer should also be deemed to have given notice of the defects within a reasonable period, that is eight days after the expert's report had been published.
[8]	"The Tribunal finds that, in the circumstances of the case, the Buyer has complied with the above-mentioned requirements of the Vienna Convention. These requirements are considerably more flexible than those provided under [the law of the country of the Seller]. This law by imposing extremely short and specific time requirements in respect of the giving of the notices of defects by the Buyer to the Seller appears to be an exception on this point to the generally accepted trade usages.
[9]	"In any case, the Seller should be regarded as having forfeited its right to invoke any non-compliance with the requirements of Arts. 38 and 39 of the Vienna Convention since Art. 40 states that the Seller cannot rely on Arts. 38 and 39, if the lack of conformity relates to facts of which he could not have been unaware, and which he did not disclose'. Indeed, this appears to be the case, since it clearly transpires from the file and the evidence that the Seller knew and could not be unaware [of the non-conformity of the consignment to] contract specifications.
[11]	"The Tribunal awarded the Seller the full amount of its claim and set it off against part of the counterclaim filed by the Buyer."
FOOTNOTES [the footnotes are editor's additions to the text of the award]
* [G]énéralement caractéristiques de la vente dans tous les systèmes juridiques" (ICC Arbitration Case No. 7153 of 1992, Chambre de Commerce Internationale, Sentences Arbitrales J.D.I.4 (1992), p. 1008). Brand & Flechtner go so far as to state "ICC Award No. 5713 has dual lessons in regards to the Sales Convention. First, where a contract providing for arbitration fails to contain a substantive choice of law clause, the international nature of a transaction may be enough in itself to lead arbitrators to the rules of the Convention, even if CISG technically does not apply to the contract. Second, where the choice of law rules applied by arbitrators to determine the applicable substantive rules include reference to sages of trade', the provisions of the Convention may be applied, not as controlling substantive law, but rather as the best available evidence of international usages of trade in sale of goods transactions. Either lesson is a natural and logical conclusion for arbitrators faced with a transnational transaction gone bad. The two taken together indicate possibilities for dramatic expansion of the Convention's rules beyond its own Article 1 scope provision" (Arbitration and Contract Formation in International Trade: First Interpretations of the UN Sales Convention", 12 Journal of Law & Commerce 258-59 (1993)).
1. Art. 13 of the ICC Rules of 1975 (not amended by the 1988 amendments) reads in relevant part: "3. The parties shall be free to determine the law to be applied by the arbitrators to the merits 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. [. . .] 5. In all cases the arbitrator shall take account of the provision of the contracts and the relevant trade usages."
2. Art. 3 of the Hague Convention on the Law Applicable to the International Sale of Goods reads in pertinent 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 received the order. . . ."
3. Corrected text of Article 38(1) substituted for translation provided in quoted rendition of the award.
4. Corrected reference to cited article.
5. Corrected text of Article 39(2) substituted for translation provided in quoted rendition of the award.
The second problem is that commercial usages are not typically created of whole cloth by the lawgiver. Modern legal systems tend to respect as a usage only what can be considered to be an actual industry practice. In American law, for example, the test of a usage is its regularity of observance, as demonstrated either by repeated application or by industry-wide recognition and acceptance (see footnote 14). As far as the question of the time for inspection and notice is concerned, American courts permit delay only when the buyer establishes a uniform industry practice (see footnote 15). Before a German court may find that a particular practice has become a legally enforceable usage, there must be "a binding rule that reflects a continuous, uniform and voluntary practice in the trades concerned over an appropriate period of time" (see footnote 16). Under French law. "[a] usage presupposes a collective practice, a practice of the masses. It is born of the repetition of the same acts, from a similar attitude. The case law emphasizes the requirement of generality" (see footnote 17). As is well known, the source of CISG's conformity provisions was not a uniform commercial practice, as found, for example, in standard terms frequently employed in international commercial contracts (see footnote 18). Rather, those provisions represent a careful political compromise between those States that demanded much shorter periods for inspection and notice of defects and those States that had hoped that the CISG would permit even longer periods (see footnote 19). In other words, there is no reason to believe that the CISG rules on this question rest on generalized trade practice. As a result, they do not fit into the category of trade usage.
The contract at issue in this case was concluded in 1979, before the CISG took final shape in Vienna and almost a decade before the Convention became binding law anywhere. It therefore goes without saying that the CISG could not possibly govern this contract. There are at least two reasons for this. First, by its own terms, the CISG applies only to contracts concluded after it enters into force as applicable law (Art. 100(2)) (see footnote 23). The second point is more general. Developed legal systems generally apply to a contract the law that was in force at the time the contract was concluded. As the United States Supreme Court explained long ago and has constantly repeated, `the laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as if they were expressly referred to or incorporated in its terms.'' This principal presumes that contracting parties adopt the terms of their bargain in reliance on the law in effect at the time the agreement is reached (see footnote 24). French law too prohibits retroactive legislation (see footnote 25). In the field of contractual obligation, the law in force at the moment the contract is concluded generally continues to govern the contract throughout its life, except when subsequent legislation specifies that it is to be effective immediately or when there is a compelling need for uniformity (see footnote 26). The German courts take the matter of non-retroactivity so seriously that they have decided to apply the former law to govern the continuing effects of contracts concluded between East German firms under the previous regime (see footnote 27).