Read the case: The Natural Gas Case, in International Business Law. Address the following:
1) Summarize the facts of the case.
o What is at risk for the seller, for the buyer, and in general?
o What was the outcome?
2) Provide an explanation of the issues in the case using international law.
o Had the buyer breached by not obtaining the letter of credit?
o Had the seller breached?
o Was the contract avoided?
o Was the buyer entitled to lost profits?
o Had the buyer failed to mitigate?
o How may these risks be minimized?
Need few references and citations important.
Case: The Natural Gas Case
Austria, Supreme Court, 1996.
Case No. 518/95.
Österreichische Zeitschrift für Rechtsvergleichung, vol. 1996, p. 248 (1996).
In the fall of 1990, the plaintiff, a German company, negotiated to buy natural gas from the defendant, an Austrian partnership. After a series of proposals and counterproposals, the plaintiff faxed the defendant on December 18, 1990, offering to buy 700 to 800 metric tons of propane gas from the defendant. The defendant responded the next morning that it could ship the propane from the United States for delivery to the plaintiff in Belgium for $376 per ton, and the plaintiff agreed. Because the parties had not dealt with each other before, the plaintiff agreed to secure its purchase with a letter of credit. In the December 19 fax, the plaintiff asked the defendant to identify the place in the United States where the gas would be loaded aboard a tanker, because the plaintiff’s bank needed this information before it would issue a letter of credit. The defendant responded by fax, stating that it was waiting to get the information from the United States as to the place of loading.
While this exchange of faxes was taking place, the parties were talking to each other on the telephone. The defendant wanted the plaintiff to order a larger quantity of propane to make the transaction more worth its time. The plaintiff, in response to this request, contacted a Dutch natural gas reseller that agreed to buy 3,000 tons of propane at $381 per ton. The plaintiff then increased its order by 3,000 tons.
On January 2 and 3, 1991, [not having heard if the propane had been loaded for shipment as the parties had agreed,] the plaintiff sent two faxes to the defendant asking to be notified of the place where the propane would be loaded and stating that its bank would not process the letter of credit without this information. On January 7, 1991, the defendant informed the plaintiff by fax that its U.S. supplier would not agree to let the propane gas be exported to Belgium, and therefore that the defendant could not deliver the propane. The next day the plaintiff notified the defendant that, because of the defendant’s breach, the Dutch natural gas reseller had made a substitute purchase at a price above what the defendant had promised, and later the plaintiff forwarded the Dutch company’s claim for $141,131 for the increased costs. The defendant rejected this claim, and the Dutch gas reseller and the plaintiff sued the defendant to cover their increased costs and the plaintiff’s loss of profits of $15,000.
The trial court held in favor of the plaintiff, and the court of appeals affirmed its decision. The defendant then appealed to the Supreme Court.
Decision of the Court:
[The Breach]
[Following the making of the contract,] the plaintiff did not open a letter of credit and the plaintiff did not deliver the agreed goods (the natural gas).
The [United Nations Convention on Contracts for the International Sale of Goods (CISG),] Article 54, provides that “[t]he buyer’s obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made.” In light of this, a buyer in a sale of goods contract who has agreed to open a letter of credit must do so in a timely manner. In the case at hand, however, the plaintiff did not open the letter of credit because the defendant failed to notify it of the place where the natural gas would be loaded. And this was so, even though the defendant had expressly promised to do so in its fax of December 19, 1990. . . . The defendant cannot complain that the plaintiff did not fulfill its obligation [to open a letter of credit,] as the defendant’s own obligation to notify the plaintiff as to the place where the goods were to be loaded had to happen first. The defendant knew that the plaintiff had to know the place of loading in order to open the letter, and it was the defendant’s failure to notify the plaintiff of the place of loading that led to the plaintiff’s failure to open the letter of credit. . . . In other words, the failure of the plaintiff to open the letter of credit was caused by the defendant’s own failure to act. And, as stated in CISG, Article 80, “[a] party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party’s act or omission.”
More significantly, the failure of the plaintiff to open a letter of credit was not the reason for the breach of this contract. As the lower courts have held, it was the defendant’s failure to obtain the appropriate clearances . . . needed to export the propane gas to Belgium that was the cause of the breach. According to CISG, Article 30, “[t]he seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract. . . .” The defendant’s argument (first made in this appeal) that it was the buyer that was obliged to obtain the appropriate authorization for the goods to be imported into Belgium is without merit. . . . A buyer is not obliged to ask a seller if there are any unusual restrictions that may keep the seller from performing. If the seller does not inform the buyer of such restrictions, the seller may reasonably assume that such circumstances do not exist. CISG, Article 41 says that “[t]he seller must deliver goods which are free from any right or claim of a third party” unless the buyer had agreed to accept such goods. If the seller’s supplier will not allow the goods to be exported, then the goods are subject to a restriction. The buyer, of course, may agree to accept the goods anyway, but it doesn’t have to. And, if the buyer doesn’t agree to accept the goods, and the seller is then unable to deliver them because of the restriction, it is the seller that has breached the contract.
Because the seller breached the contract, the buyer is entitled to be fully indemnified for its losses. In other words, the non-breaching party is to be put in the position that it would have been had the breaching party performed as promised. The breaching party, moreover, does not have to be at fault or to have acted illegally to be liable in such a case.
[The parties sought to apply CISG, Articles 75 and 76 in ascertaining the damages due the plaintiff.]
The provisions in the CISG, Articles 75 and 76, deal with the awarding of damages when one party avoids the contract because of a breach by the other party. However, because there has been a breach, does not necessarily mean that there will be an avoidance. The CISG does not provide for avoidance as a matter of law, even if the non-breaching party is deprived of what it expected to receive.124 Avoidance, under the CISG, can only come about by a unilateral declaration of the non-breaching party. Such a declaration, however, does not have to be in any particular form, nor (with the exception of certain cases set out in CISG, Article 49(2) which are inapplicable here) is it subject to any time limit.
The parties to this case argued over whether the declaration of avoidance described in CISG, Article 49(1), had to be made expressly or whether it could be implied from the non-breaching party’s conduct. This argument, however, is irrelevant, because it is not the mere giving of notice that constitutes avoidance, but the non-breaching party’s intention not to adhere to the contract that is important. This intention, moreover, must be clear to the breach party.
The findings of fact in the lower courts suggest that the plaintiff never actually notified the defendant that it was avoiding the contract. Indeed, the plaintiff never claimed that it had given such notice. Nor can one imply that such notice was given merely from the fact that the plaintiff gave the defendant a list of the losses suffered by its customer [the Dutch natural gas reseller].
Because the contract was not avoided, the damages [are not to be determined in accordance with CISG, Articles 75 and 76, but rather] are to be determined in accordance with CISG, Article 74. Article 74 applies to those cases when the damages come about because of delay in delivery or because of some defect in the goods.
[Loss of Profits]
When, as the case here, the non-breaching party is claiming a loss of profits from an expected resale of the goods to a third party, the loss of profits will only be considered if the breaching party had reason to know of this expected resale. Of course, when merchantable goods are sold to a merchant, the expected resale can be presumed. The defendant does not challenge this. Indeed, it has conceded that it knew that the plaintiff intended to resell the goods. [The plaintiff, accordingly, is entitled to the $15,000 claimed in lost profits.]
[Duty to Mitigate]
A non-breaching party may not claim damages, including a loss of profits, if it fails to make reasonable efforts to mitigate its losses. Such efforts are reasonable if a reasonable person in the position of the non-breaching party would have undertaken them in good faith.
The defendant argues that the plaintiff breached this obligation. However, the burden of proving such a breach is on the defendant, and the defendant has failed to meet its burden. . . . It has not shown what the plaintiff did to breach this obligation, it has not shown that the plaintiff had other alternatives to what it did, nor has it shown how much the damages would have been lessened if the plaintiff had engaged in some alternative conduct. [In addition to lost profits, therefore, the plaintiff is entitled to recoup the $141,131 due the Dutch natural gas reseller.]
The decision of the Court of Appeals is affirmed.
CASEPOINT:In this case, the court considered whether a seller of propane gas had breached its contractual duties by failing to deliver the gas as promised, and if so, what damages were appropriate. First, the court looked at each party’s duties under the CISG and found that the buyer was supposed to open a letter of credit. But here, the buyer could not do so because the seller never supplied the necessary information for the letter. Also, the breach was really due to the seller’s failure to make proper arrangements to ship the gas, not because of the letter of credit. So, the court concluded that the seller had breached the contract and the buyer was entitled to damages.