Cisg Article 74

Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such 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 lights of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

Date: 00.00.2003 Count Arbitral Award ry: Numb 11849 er: Court: ICC International Court of Arbitration

Partie -s: Citati http://www.unilex.info/case.cfm? on: id=1160

SCOPE OF CISG - DISTRIBUTORSHIP AGREEMENT IN PRINCIPLE NOT COVERED BY CISG - CISG APPLICABLE ON THE BASIS OF PARTIES' CHOICE BREACH OF CONTRACT - DISTRIBUTOR'S REFUSAL TO OPEN A LETTER OF CREDIT - AMOUNTS TO FAILURE BY DISTRIBUTOR TO PERFORM ITS OBLIGATION UNDER AGREEMENT - MANUFACTURER ENTITLED TO TERMINATE THE AGREEMENT EX ART. 64(1)(B) CISG AGREEEMENT PROVIDING FOR ANY ADDITION OR MODIFICATION TO BE MADE IN WRITING - ACCEPTANCE ON ONE OCCASION BY MANUFACTURER OF PAYMENT BY WIRE TRANSFER CONSIDERED NOT TO BE SUFFICIENT TO INDUCE DISTRIBUTOR REASONABLY TO BELIEVE THAT OPENING OF LETTER OF CREDIT NO LONGER REQUIRED (ART. 29(2) CISG AND 2.18 UNIDROIT PRINCIPLES) NOTICE OF TERMINATION - EFFECTIVE EVEN IF WRITTEN IN ITALIAN AND NOT IN ENGLISH AS REQUIRED BY AGREEMENT IF ADDRESSEE KNEW ITALIAN (ART. 27

CISG) NOTICE OF TERMINATION GIVEN BY MANUFACTURER KNOWING THAT DISTRIBUTOR HAS PERFORMED ITS OBLIGATION - NOT EFFECTIVE (ART 64(2)(A) CISG) PREVENTION FROM TAKING UNDUE ADVANTAGE OF THE REMEDIES PROVIDED IN CASE OF BREACH OF THE OTHER PARTY'S OBLIGATIONS - PRINCIPLE OF GOOD FAITH (ART. 7 CISG) DAMAGES FOR WRONGFUL TERMINATION - LIMITED TO LOSS FORESEEABLE AT THE TIME OF CONTRACT CONCLUSION - LOSS OF PROFIT (ART. 74 CISG AND 7.4.2 UNIDROIT PRINCIPLES) INTEREST RATE NOT DETERMINED BY CISG (ART. 78 CISG) - LIBOR RATE SPREAD OF TWO POINTS AS APPROPRIATE RATE An Italian manufacturer of fashion products (Respondent) concluded an exclusive distributorship agreement with an U.S. distributor (Claimant). According to the contract, delivery was to be made in one or more instalments and payment by means of a letter of credit (L/C) within fifteen days of acceptance of order. A dispute arose when the seller requested higher prices for its products (an increase of 10-15% over those on the previous price list) and the buyer refused to open the L/C. In a letter dated 2 August the seller requested the opening of the L/C within twenty-days of receipt, stating that otherwise the agreement would be terminated. Then there was an exchange of communications between the parties (whereby, inter alia, Claimant tried to obtain the necessary information to open the L/C) and, finally on 12 September Claimant opened the L/C. Nonetheless, on 19 September Respondent terminated the agreement. Therefore Claimant initiated an ICC arbitration proceeding claiming direct losses, lost profits and harm to its reputation. The seller counterclaimed for payment of overdue invoices and other matters. Notwithstanding the fact that the agreement was a long-term contract for distribution of goods and, as such, was not in principle covered by CISG, the Arbitral Tribunal found that CISG was applicable in the case at hand by virtue of a clause in the agreement which read: The Arbitrator shall apply the 1980 UN Convention on the International sale of Goods for what is not expressly or implicitly provided for under the contract. As to the merits, the Arbitral Tribunal found that Claimant was in breach of its obligation to pay the price by failing to open the L/C even within the additional period of time granted by the seller under Art. 63(1) CISG. Consequently, Respondent was entitled to terminate the agreement in accordance with Art. 64(1)(b) CISG. In reaching such a conclusion the Arbitrator found, inter alia, that the twenty-day period granted by Respondent as additional time for performance was of a reasonable length considering that in the normal course of business a

L/C may be opened within a few hours of request. With respect to buyers argument that, since on a previous occasion the seller had accepted payment by ordinary wire transfer, the parties had agreed to modify the provision of the Agreement imposing payment by L/C, the Arbitral Tribunal recalled that the Agreement expressly provided that any addition to or modification of it must be made in writing. The mere fact that on one occasion the seller had exceptionally accepted payment by wire transfer was not sufficient to induce the buyer reasonably to believe that the L/C requirement would be irrevocably abandoned, all the more so as during negotiations Respondent had heavily insisted on the importance of the opening of a L/C and that, according to Art. 8(3) CISG, due consideration should be given to pre-contractual negotiations when drawing legal consequences from the conduct of a party. As to the other argument put forward by Claimant that its refusal to open the L/C was justified by Respondents request for a price increase of 10-15%, the Arbitral Tribunal found that Claimant could have opened a L/C on the basis of the previous price list while the refusal to open any L/C was tantamount to a total refusal to pay the price which was an excessive and disproportionate reaction to a disagreement related to only 10% or 15% of the prices. Further, disagreement as to the price could be not per se legitimate reliance by Claimant on Art. 71 CISG (since disagreement regarded the claimants own obligation to pay the price and not one of the Respondents obligations) and Claimant failed to notify Respondent forthwith of its intention to suspend performance under Art. 71(3) CISG. Again, Claimant failed to give evidence that no issuance of the L/C was to due to an impediment caused by the Respondent entitling it to rely on Art. 80 CISG. The Arbitral Tribunal also rejected the objection that Respondents notice requesting the opening of the L/C within 20 days of receipt was ineffective as it was written in Italian notwithstanding a clause in the Agreement providing that all notices to Claimant had to be made in English. The Arbitror invoked Art. 27 CISG which, in its view, sets a general principle of effectiveness of notification that prevented the buyer from availing itself of a mishap in the communication of the summons such as its drafting in the Italian language. However, notwithstanding the foregoing the Arbitral Tribunal ultimately decided that Respondent had wrongfully terminated the Agreement. Indeed, when Respondent notified Claimant its intention to terminate according to Art. 64(2)(a) it was no longer entitled to do so since at that time it knew that Claimant had within the additional period of time granted performed its obligation to open the L/C; moreover, in reviewing the contacts between the parties during that period the Arbitral Tribunal found that there are a number of indications that Respondent did not act in good faith and that its real intention was to use termination to renegotiate the terms of the Agreement to its advantage, thus violating the general principle of good faith, also recalled in Art. 7 CISG, which

prevents a party from taking undue advantage of the remedies provided in case of breach of the other partys obligation. The Arbitral Tribunal also held that, as a consequence of the wrongful termination by Respondent, Claimant was entitled to damages for lost profits under Art. 74 CISG. As to the interest on amounts due by Respondent, after pointing out that the neither the agreement nor CISG contain any indication for its determination, the Arbitrator decided to apply the London Inter Bank Offered Rate (LIBOR), increased of a spread of two points, being a generally accepted rate, applied on the international financial markets to the currency in which damages shall be paid.

Unidroit 7.4.2 (Full compensation)

(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress. Date: 00.00.2001 Count Arbitral Award ry: Numb 10422 er: Court: ICC International Court of

Arbitration Partie s: Citati http://www.unilex.info/case.cfm? on: id=957

DISTRIBUTORSHIP AGREEMENT BETWEEN EUROPEAN COMPANY AND LATIN AMERICAN COMPANY - CHOICE OF LAW CLAUSE INEFFECTIVE BUT INDICATING PARTIES' DESIRE FOR A NEUTRAL SOLUTION - APPLICATION BY ARBITRAL TRIBUNAL OF THE LEX MERCATORIA (ARTICLE 17.1 ICC RULES OF ARBITRATION) REFERENCE TO UNIDROIT PRINCIPLES - LIMITS CONTRACT FORMATION - ACCEPTANCE CONTAINING MODIFIED TERMS AMOUNTS TO ACCEPTANCE IF MODIFICATIONS ARE NOT MATERIAL (ARTICLE 2.11 [ART. 2.1.11 OF THE 2004 EDITION] UNIDROIT PRINCIPLES) CONTRACT FORMATION - CONCLUSION OF CONTRACT DEPENDENT ON AGREEMENT ON SPECIFIC MATTERS (ARTICLE 2.13 [ART. 2.1.13 OF THE 2004 EDITION] UNIDROIT PRINCIPLES) CONTRACT INTERPRETATION - TERMS TO BE GIVEN EFFECT (ARTICLE 4.5 UNIDROIT PRINCIPLES) TERMINATION OF CONTRACT - FUNDAMENTAL BREACH REQUIRED (ARTICLE 7.3.1(1) UNIDROIT PRINCIPLES) - NOTICE OF TERMINATION WITHOUT FUNDAMENTAL BREACH - TERMINATION NEVERTHELESS EFFECTIVE (ARTICLE 7.3.2 UNIDROIT PRINCIPLES) - NOTIFYING PARTY LIABLE FOR DAMAGES DAMAGES - LOSS OF PROFIT - CALCULATION (ARTICLE 7.4.2 UNIDROIT PRINCIPLES) DAMAGES - DISCRETIONARY ASSESSMENT BY COURT (ARTICLE 7.4.3(2)
Defendant, a European manufacturer, and Plaintiff, a Latin-American distributor, entered into an agreement (hereinafter the Agreement) for the exclusive distribution of Defendants products in Plaintiffs country. Although the Agreement provided that payment of the price of the goods was due 120 days after delivery, Defendant, after receiving from Plaintiff an order for a larger than usual quantity of goods, requested advance payment. Plaintiff refused, and the parties entered into negotiations with a view to finding a mutually acceptable solution. Ultimately it was agreed that Plaintiff would pay the price in advance, but Defendant in turn would grant Plaintiff a discount corresponding to the additional costs thereby incurred by Plaintiff. While the parties still argued as to whether the new terms of payment concerned only future orders or applied also to the order already placed, Defendant all of a sudden terminated the Agreement alleging Plaintiffs failure to meet the contractually agreed sales figures over the last two years. Plaintiff objected that the termination was ineffective, first, because Defendant did not formally put Plaintiff into breach (mise en demeure) and in any case notice of termination was not given timely; second, because

the sales figures indicated in the Agreement were not binding commitments; and third, because its failure to meet the figures was due to Defendants refusal to deliver the goods according to the originally agreed terms. Since Defendant insisted on the termination of the agreement, Plaintiff commenced arbitration proceedings, requesting the arbitral tribunal to declare the termination of the Agreement ineffective and to compel Defendant properly to perform the Agreement until its expiry. The first question addressed by the arbitral tribunal was whether it had jurisdiction in the case at hand. In deciding in the affirmative, the arbitral tribunal, while conceding that the language of the clause of the Agreement entitled Fuero Competente was rather ambiguous, pointed out that the drafters of that clause were not lawyers and could therefore not be expected to use proper legal terminology; what was important was what reasonable persons in the same situation as the parties would have understood by such language, and that the clause was being given a meaning which did not deprive it of any effect, and in this respect the arbitral tribunal expressly referred to Articles 4.1 and 4.5 of the UNIDROIT Principles, respectively. As to the law applicable to the substance of the dispute, the arbitral tribunal held that, notwithstanding that the Agreement provided El presente contrato [...] se regir [...] por la CAMARA DE COMERCIO INTERNACIONAL o en su defecto por una legislacin neutral definida en comun acuerdo por las partes, the parties had not made any valid choice of the applicable law, since there is no ICC legislation nor did the parties agree on the application of any other neutral legislation. As a consequence the arbitral tribunal, in view of the fact that the parties apparently wanted a neutral solution, decided to apply general principles and rules of international contracts, i.e. the so-called lex mercatoria, and to refer in this context to the UNIDROIT Principles representing - with some exceptions such as the provisions on hardship a restatement of the rules which business persons engaged in international trade consider to be meet their needs and expectations. Concerning the merits of the case, the arbitral tribunal, invoking the principle of pacta sunt servanda laid down in Article 1.3 of the UNIDROIT Principles, first of all held that Defendants refusal to deliver the goods on the originally agreed terms of payment constituted a breach of the Agreement, but that this breach was no longer relevant because the parties had reached a settlement agreement. Indeed, the valid conclusion of this agreement was not prevented by the fact that Defendants letter of acceptance of Plaintiffs proposed terms of settlement contained some minor modifications, and that another issue of minor importance had been left open by the parties, and in support to its findings the arbitral tribunal referred to Articles 2.11 and 2.13 [Arts. 2.1.11 and 2.1.13 of the 2004 edition] of the UNIDROIT Principles, respectively. Turning to the question as to whether the subsequent termination of the Agreement by Defendant was effective, the arbitral tribunal, referring to Article 7.3.2(1) of the UNIDROIT Principles according to which the right to terminate the contract is exercised by notice without any further formality, rejected Plaintiffs argument that Defendant before terminating the Agreement should have put Plaintiff formally into breach. At the same time, however, the arbitral tribunal held that Defendants notice of termination had not been given timely and, more importantly, that it was not justified since in view of the non binding nature of the sales figures laid down in the Agreement Plaintiffs failure to meet the figures could not be considered a fundamental breach of the Agreement, and in support of its findings it referred to Articles 7.3.2(2) and 7.3.1(1) of the UNIDROIT Principles, respectively. Yet this did not mean that, as asserted by Plaintiff, the Agreement was still in force: according to a rule widely accepted in international trade and in the view of the arbitral tribunal also confirmed by the UNIDROIT Principles (see in particular Articles 7.3.2(1) and 7.3.5(1)), a notice of termination is effective even if unjustified with the result that the other party may not require specific performance of the contract but can only claim damages for the unjustified termination. In the case at hand, Defendant, having terminated the Agreement without justification, has to compensate the loss thereby caused to Plaintiff. As to Plaintiff's lost profit, the arbitral tribunal held that it should be calculated not on the basis of the gross margin of the forecast sales volumes but on the basis of the net margin, i.e. the difference between the gross margin and the avoided

costs or harm, and in this respect referred to Article 7.4.2 of the UNIDROIT Principles. However, since Plaintiff has not provided any information for the calculation of the net margin, in the case at hand the arbitral tribunal made an equitable quantification of the lost profit in accordance with Article 7.4.3(3) of the UNIDROIT Principles.