A Yugoslav seller, plaintiff, sold cow hides (supplied by a Russian entity ("RE") as a payment to the seller for the reconstruction of a factory in Russia) to an Italian buyer, defendant. The buyer did not report to the seller defects discovered upon inspection, but instead requested a price reduction based on the depressed market for hides. The seller refused to reduce the price and the buyer withheld payment. The seller, the buyer and the RE met in Moscow and signed a protocol (the "Protocol") establishing the total amount of the buyer's outstanding debt and providing the buyer with a 30-day postponement of payment of the debt, during which time RE was to inspect the hides in Italy. When RE failed to inspect the hides, the buyer informed the seller that it no longer had any debt to it. Subsequently, the buyer sold the hides without specifying the amount obtained.
As the contract contained no choice of law provision, the arbitral tribunal held the CISG to be applicable to the contract according to article 13 (3) of the ICC Rules.
The arbitral tribunal found that the Protocol had not released the buyer of its obligations under its contract with the seller. Against the background of the CISG's silence on the issue of novation, the arbitral tribunal did not consider solely one national law, but it applied the common core requirements as a general legal standard derived from the three relevant national laws (Italy, France and former Yugoslavia). On the basis of article 8 CISG, the arbitral tribunal concluded that under the terms of the Protocol, the seller had not intended to release the buyer from its obligations and that the buyer had no reasonable basis upon which to assume that this had been the seller's intent.
The arbitral tribunal held that due to the buyer's failure to give notice to the seller of the lack of conformity of the goods according to article 39 (1) CISG, the buyer was not entitled to rely on lack of conformity. Furthermore, given the buyer's lack of a reasonable excuse for its failure to give the required notice, a price reduction according to articles 44, 50 CISG was not justifiable. The arbitral tribunal pointed out that, even if the buyer had timely given notice, it would have been in breach of its obligation to mitigate damages under article 77 CISG. In this respect the arbitral tribunal noted that the buyer had sold the hides without providing evidence that such hides were sold at a loss due to their alleged defects.
The arbitral tribunal also held that the seller was entitled to receive interest on the principal amount awarded according to article 78 CISG from the time of the filing of the request for arbitration. The interest was to be determined according to the law of the country in which the damage resulting from the delayed payment was suffered: in this case, the seller's country.
"In a 1994 ICC Award concerning the sale of cowhides, the Tribunal considered an agreed notice time-frame of one month after delivery, and pronounced that it would be upheld since it was reasonable. The Tribunal did not pronounce on why it considered one month reasonable, nor on its interpretation of Articles 38 and 39, nor did it mention any factors that may have influenced the assessment of reasonableness." Andersen, Pace Review of the Convention on Contracts for the International Sale of Goods (1998) 145.
"[I]t is peculiar that the Tribunal stated that it upheld the agreed notice time-frame since it considered it in accordance with Arts. 38 and 39. Surely, even if it had not been considered reasonable by the Tribunal, the agreed time-frame for notification would have had to be upheld in any event by way of Art. 6 of the CISG, which allows parties to derogate from the Convention, or by way of the general principle of pacta sunt servanda." Id. at n.303.
Seller, a Yugoslav firm building a factory for [R] in Russia, was being paid for it in cow hides (a product with which seller was not familiar). [R], which had a business relationship with a buyer from Italy, suggested that seller sell the hides to this buyer. Seller contracted with buyer: fixed prices were established: the hides were shipped to buyer in Italy. Buyer received an inspector's report that the hides were defective. Buyer did not send this report to seller. Buyer requested a price reduction based on the depressed market for hides. Seller was unwilling to reduce the price as it had sold the hides for virtually the same price it had paid to [R] for them. Buyer withheld payment due under the contracts.
Buyer, seller and [R] met in Moscow. [R] did not agree to a price reduction. Buyer specified that it had an $800,000 claim based on its inspector reports, which it did not submit to seller. Seller did not express any intent to release buyer from its obligations under the contracts. The parties signed a Protocol recognizing that the total amount of buyer's outstanding debt was $2,200,000. As set forth in the Protocol, buyer paid seller $1,400,000 and there was acceptance of a 30-day postponement of payment of the remaining $800,000. During these 30 days, [R] was to inspect the hides in Italy. [R] failed to inspect the hides. Buyer informed seller it no longer owed the contracts. Buyer sold the goods. Buyer did not specify the amount received by the sale of the allegedly defective hides.
Applicability. The contracting parties had their relevant places of business in countries in which the CISG was in effect when the contracts were concluded. Seller contended the applicable law is that of his country, which incorporates the CISG. Buyer contended that "no specific national law should apply to the dispute, but rather that general principles of international commercial law and accepted usages in international commercial practice, including the principle of good faith, should govern."
The tribunal stated: "[G]eneral principles of international commercial practice, including the principle of good faith, should govern the dispute. . . . [F]or the present dispute, such principles and accepted usages are most aptly contained in the [CISG]. . . . Applying the [CISG] to the present dispute is all the more appropriate since the [countries of the parties] are signatories to [this] convention. . . . [T]o the extent the [CISG] contains provisions relevant to the dispute, the tribunal shall consider [them]."
Buyer: The Moscow Protocol was a novation between seller and buyer. It rendered the contracts invalid. Pursuant to the Protocol, [R]'s failure to inspect the hides release buyer from any and all obligations to seller.
Seller: The Protocol did not release buyer from its obligations under the contracts.
The tribunal introduced its analysis by stating: "Regarding the issue of novation . . . the [CISG] is silent. Despite the Convention's silence on this issue, the Tribunal does not find it necessary to look solely to one national law. . . . [A]ll three national laws related to the parties and this dispute (Italy [buyer's national law], France [presumably the site of the arbitration] and former Yugoslavia [seller's national law]) contain similar provisions relating to those requirements which must be met to bring about a novation releasing the original debtor. [O]n the issue of novation, the Tribunal shall apply these common core requirements as a general legal standard derived from the three national law[s] noted above."
The tribunal acknowledged that in international law "a contract may be modified or terminated by the mere agreement of the parties", pointing out that "[t]his principle is reflected in Article 29 of the [CISG], which is intended to override the rule applied in many common law jurisdictions that a modification to an agreement is not binding as a contract unless the promise for whose benefit the agreement is made furnishes new consideration."
Pointing out that the doctrine of novation is to be distinguished from mere prior contract and applying the three national laws noted above, the tribunal stated that a "novation cannot be presumed and requires proof by the party alleging the existence of a novation that the original parties to the contract shared an animus novandi.
"[W]as the reference to the inspection and possible payment from [R] merely a collateral promise on the part of [R] to pay a debt or an assumption of [buyer's] debt by [R] releasing [buyer] from its obligations in the Moscow Protocol"?
The tribunal concluded that the parties did not intend to release the buyer from its obligations to the seller under the contract. This conclusion was based on: (1) the language of the Moscow Protocol itself; and (2) surrounding circumstances, including the parties' intent.
On (1), the tribunal found that "a close reading of the Moscow Protocol supports [seller's] position."
Intent. "In interpreting statements of parties and provisions in contracts, it is generally accepted in international commercial law that the meaning of such statements and provisions are to be assessed on an objective basis, unless it can be shown that the parties had a contrary subject understanding. The Vienna Convention reflects these general international commercial principles and sets forth in Article 8 general rules with respect to interpreting statements of parties and provisions of contracts.
"Although this article applies literally to a situation where one party is expressing an intent, it can equally be applied to situations where negotiations are followed by the parties nearly simultaneously putting their signatures to document. . . .
"Paragraph 1 of Article 8 contains a subjective test. To show that the [seller] understood the Moscow Protocol to result in a release of [buyer] under this test, [buyer] would have to demonstrate that [seller] knew or could have been aware of this interpretation.
"Under paragraph 2 of Article 8 of the Vienna Convention, that interpretation which is the more reasonable in light of the kind of parties involved and their circumstances will prevail. The test of paragraph 2 is the same kind as the parties involved with respect, for example, to such matters as linguistic background and technical skill. All relevant circumstances, as noted in paragraph 3 of Article 8 . . . are to be considered.
"Based on the evidence presented, [seller] did not intend to release [buyer] from its obligations, and [buyer] had no reasonable basis upon which to assume that this was the [seller's] or parties' intent.
Buyer did not do so, even though "[buyer] indicates that . . . the Technical Survey Bureau . . . ascertained damages to the goods" at an early date.
"Under Article 39(1) of the Vienna Convention, a buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after the non-conformity is discovered or should have been discovered.
"Since the defective nature of the goods can be readily ascertained and, as alleged by [buyer], were ascertained, it is reasonable to uphold the one month notice period set forth in the Contracts, to which [buyer] expressly agreed.
"Article 44 of the Vienna Convention provides that notwithstanding the provisions of Article 39(1), the buyer may reduce the price in accordance with Article 50, or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice. [Buyer] was not able to present any such excuse."
"While admitting that it sold the allegedly defective goods, [buyer] never presented any evidence of the amount obtained for such goods. The [buyer's] failure to do so presents a breach of its obligation to mitigate damages under Article 77 . . . Moreover, the lack of evidence that the goods were indeed sold at a loss due to their defective nature is an indication that the goods were not defective in the first instance."
"It is knowledged in international law that claimants prevailing on the merits are entitled to receive interest on the principal amount awarded. The Tribunal finds the application of this principle particularly appropriate in this case since [seller] has suffered damages due to delayed payment, which must be compensated by the granting of interest.
"It is also generally acknowledged that interest does not begin to accrue until proper notice of the claim has been given. In this case, there is no indication that proper notice was given before the filing of the Request for Arbitration.
"Regarding the precise rate of interest to be applied, there is no single internationally accepted rate of interest. This is reflected in the Vienna Convention, which only generally provides that parties are entitled to interest without specifying any particular rate of interest. It is, however, acknowledged in international law that where the parties are silent as to choice of law with respect to the payment of interest, the law of the State applies in which the damage resulting from the delayed payment is suffered. It is furthermore acknowledged in international law that such damage is suffered at the place of the creditor and in the creditor's market [citing ICC arbitration cases 2375 of 1975 and 5460 of 1987]. Therefore, this Tribunal shall apply the rate of interest effective for commercial matter in the country of the creditor, the [seller]."