Case Study - Remedy of Damages

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Date: 2007.10.23

Court/Tribunal:  Arbitration tribunal, USA

Goods Involved:  Frozen chicken parts

Citatiion: American Arbitration Association, ICDR

Key Article(s):  Arts 7(1), 79 CISG

S, an American seller, contracted with B, a Romanian buyer, for the supply of frozen chicken parts by four separate deliveries.  The contract had set some flexibility in delivery time.  The price of chicken in the global market increased very substantially after contract conclusion.  When the Romanian government suddenly announced an import ban of all chicken products due to an outbreak of an avian flu, S had been in delay in his delivery performance.  S then told B the delivery of the remaining goods had to be cancelled because of the import ban.  B proposed S to ship the remaining goods to a port outside of Romania.  S refused B’s proposal and resold them to another buyer at a substantial profit.  B claimed damages for the loss suffered from S’s non-delivery of the remaining goods.  The key issue here was whether S could meet the requirements concerning the “causation” and ”avoidance” factors of Art 79  to qualify for an exemption of liability for paying damages to B.   

S exported food products to different parts of the world including Eastern Europe, supplying goods under exclusive or non-exclusive distribution agreements.  B had a non-exclusive relationship with S.  On 2006.04.14, S and B entered into a contract for the supply of frozen chicken parts by four separate deliveries with S enjoying a two-week ‘window’ time in each delivery.  The last delivery was due on 2006.05.15.  S was obliged to make it no later than 2006.05.29 (2006.05.15 + 14 days).  After contract conclusion, the world price of chicken increased substantially.  An avian flu outbreak prompted the Romanian government to ban all imports of chicken product if their loading were not certified as on or before 2006.06.07.  By then, S still had not effected the last delivery.

Unable to certify the import of the remaining goods within the Romanian Government’s deadline, S stopped the last delivery.  B told S that another supplier of his had successfully delivered goods to him by shipping to another port.  He then proposed S to ship the remaining goods to a location outside Romania, suggesting certain ports.  S refused the proposal stating that the unfilled portion of the contract was avoided by the ban, which constituted a force majeure event.  Thereafter S sold the undelivered goods to another buyer at a substantial profit.  B claimed damages for the loss suffered from S’s non-delivery of the remaining portion of goods under the contract.       

On the causation factor, the Tribunal considered that S’s delay in delivery itself did not amount to a fundamental breach.  However, S’s ultimate failure to deliver the remaining goods was a fundamental breach.  S would be liable for paying full damages to B unless he could claim exemption under Art 79.  To claim this exemption, S had to prove that there was a causality existing between the import ban and his non-performance.  The final delivery date was set for 2006.05.29.  Had S loaded the goods before that date, or even within week thereafter, the goods would have been accepted for import into Romania.  The Court cited the opinion of two legal scholars: first, the exempting event must necessarily be the exclusive cause of the failure to perform and secondly, it is a general rule that “a change of circumstances” will not be taken into account if it occurred during a delay in performance of the person claiming for Art 79 exemption due to the good faith requirements of the CISG.  Two arbitration results in 1996 advocated that the status of a defaulting party cannot be changed by a later force majeure event.  In the present case, S’s own act of tardiness also contributed towards the ultimate failure.  Accordingly, the Court ruled that the import ban was not an impediment in the sense of Art 79 because S had already been in a delay prior to the occurrence of the import ban.  

On the avoidance factor, the Tribunal referred to the CISG Secretariat Commentary which states that a party must do all in his power to carry out its contractual obligation and may not await events, which might later justify its non-performance.  Also referred to was a legal scholar’s comment: the efforts expected from the party concerned is customary or what a reasonable person in the same situation would be bound to do.  Finding both the Commentary and the scholar’s opinion unable to provide clear guidance, the Tribunal considered it could rightfully look beyond them into domestic law.  Sections 2-614(1) and 2-615 UCC provide that if without fault of either party the agreed contractual arrangement becomes unavailable but a “commercially reasonable substitute” is available, the substitute performance must be tendered and accepted. In light of the fact that another American supplier facing the same ban had succeeded in shipping to another port, B’s proposal could be regarded as a “commercially reasonable substitute” which S must accept when it was tendered by B.  S rejecting B’s proposal and preferring to pocket the profit available in a market experiencing a dramatic rise in price was a failure of his duty to overcome the ban in accordance with Art 79’s avoidance requirements.

The Tribunal held that S misappropriated a profit that should have been made available to B through an alternative shipment destination.  The law does not countenance such a result.  B therefore was entitled to damages as a remedy.     

1. Autonomous interpretation

According to the international character requirement in Art 7(1), autonomous interpretation is the method to be used to determine the meaning of CISG provisions independently from any domestic preconceptions.  The results developed under this autonomous interpretation method will then be acceptable in different legal systems.  However, using domestic case law to interpret the CISG is not prohibited as long as they have been interpreted in such a way that would help provide more clarity and guidance than the CISG provisions, the CISG Secretariat Commentary, as well as the relevant transnational legal instruments.

The question arises here is whether a reasonable person of the same kind as S would be bound in this situation to ship the goods to B via an alternative port.  The term “reasonableness” is not defined by the CISG, but its definition is given in several transnational legal instruments including PECL (Principles of European Contract Law), DCFR (Draft Common Frame of Reference), and CESL (Common European Sales Law).  Under these transnational instruments, reasonableness is to be objectively ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages and practices.  In international trade, either party is reasonably expected to bear any necessarily increased costs in order to discharge its contractual obligations under the contract.  Considering the circumstances of the present case, S had no excuse not to ship the remaining goods to another port even if additional transportation costs would be incurred.  The Tribunal was correct in refuting S’s arguments that he had made reasonable efforts to fulfil his delivery obligation.  

If the definition provided by the transnational legal instruments is able to give adequate guidance on what S was reasonably expected to do, it seemed to be unnecessary for the Tribunal to utilize the term “commercially reasonable substitute” in UCC to interpret Art 79.  When there is an analogous domestic provision to that of the Convention, some courts and tribunals tend to rely on domestic standards to interpret the CISG.  This kind of interpretation is not an autonomous interpretation, not in line with the parameters set forth in Art 7(1).    

2. Good faith behaviour standard

The Tribunal noted that the CISG and its case law fail to provide the necessary information or guidance to resolve the following situation: whether S having delayed in delivery beforehand was precluded from claiming an exemption of Art 79.  It therefore had to look beyond the CISG and to rely on domestic law.  Actually the Tribunal could resolve the situation by applying the gap-filling mechanism in Art 7(2).

Art 7(2)’s gap-filling mechanism provides that if there are matters governed by the  Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based.  Principle of good faith can be discerned as one of the underlying general principles of the CISG.   Under the good faith principle, a party may not derive an advantage from its own unlawful acts, the so-called “Clean Hands Theory”.  S had committed a breach of contract prior to the announcement of the ban by the Romanian Government.  According to this theory, the Tribunal could safely arrive at a decision that S should not be allowed to claim for Art 79 exemption on the ground that he had not come with clean hands.  This is an example to show that good faith requirements can be regarded as a supplement to interpretation of the standard of the parties’ behaviour in performance of their contractual obligations.         

Debate about the role of good faith principle in the CISG may continue, but there seems to be a consensus that although good faith is not a general guiding principle for interpretation of CISG contracts so that the parties to a CISG contract are not imposed upon a general duty to act in good faith, the standard of behaviour of the parties in performing their contractual obligations is expected to reach a good faith standard if Art 7(2)’s gap-filling mechanism is applied.  Another supplier to B had made a successful shipment to B after the ban.  It was reasonable for B to expect that S could do a similar shipment.  Although S did not have a general duty to act in good faith, his conduct towards B had not displayed a behavioural standard showing he had taken into account B’s reasonable expectation.  Accordingly, the Tribunal could reason that the denial of S’s claim for Art 79 exemption was justified because S’s behaviour was not up to a good faith standard.