ICC Arbitration Case No.

5713 of 1989 [English text]

[Cite as: http://cisgw3.law.pace.edu/cases/895713i1.html]

Case identification

DATE OF DECISION: 19890000 (1989)

JURISDICTION: Arbitration ; ICC

TRIBUNAL: Court of Arbitration of the International Chamber of Commerce

JUDGE(S): Case report does not identify presiding arbitrator(s)

CASE NUMBER/DOCKET NUMBER: 5713 of 1989

CASE NAME: Case report does not identify parties to proceedings

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Turkey (complainant)

BUYER'S COUNTRY: Switzerland (defendant)

GOODS INVOLVED: Unavailable

Case abstract

ICC Arbitration Case No. 5713 of 1989

Case law on UNCITRAL texts (CLOUT) abstract no. 45

Reproduced with permission from UNCITRAL

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
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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.

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Classification of issues present

APPLICATION OF CISG: Yes, as source of prevailing trade usages -- even though

the CISG by its terms is not applicable to this transaction

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 9 ; 38(1) ; 39(1) and 39(2) ; 40

Classification of issues using UNCITRAL classification code numbers:

9B [Implied agreement on international usage; standards]

38A [Time for examining goods: buyer's obligation to examine goods]

39A ; 39B [Requirement to notify seller of lack of conformity: buyer must notify
seller within reasonable time; Cut-off period of two years]

40B [Seller fails to disclose known non-conformity (sanction: seller loses right to rely
on Articles 38 and 39)]

Descriptors: Applicability ; Usages and practices ; Lex mercatoria ; Examination of

the goods ; Lack of conformity notice, specificity ; Lack of conformity known to seller

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Editorial remarks

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EDITOR: Albert H. Kritzer

CISG issues ruled upon:

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".

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Case text

ICC Arbitration Case No. 5713 of 1989

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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.

Issues Present

Applicability of CISG

- 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).

Synopsis

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.

Data on the award

Parties: Claimant/counterdefendant: Seller

Defendant/counterdefendant: Buyer

Place of Arbitration: Paris, France

Published in: Unpublished

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Subject matter:

- 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

[...]

Facts

In 1979, the parties concluded three contracts for the sale of a product according to
certain contract specifications. The buyer paid 90% of the price payable under each of
the contracts upon presentation of the shipping documents, as contractually agreed.

The product delivered pursuant to the first and third contracts met the contract
specifications. The conformity of the second consignment was disputed prior to its
shipment. When the product was again inspected upon arrival, it was found that it did
not meet the contract specifications. The product was eventually sold by the buyer to
third parties at considerable loss, after having undergone a certain treatment to make it
more saleable.

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.

Excerpt

I. Applicable Law

[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

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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'."

II. Admissibility of the Counterclaim

(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

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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)).
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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.

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