Summary of Facts
Case 10-5 is one of the examples of international business court cases where a breaching party in a contract is obliged to bear the costs incurred due to the breach. In this case, the Austria Supreme Court was to determine if a German company, the buyer of propane gas, should be compensated the loss it incurred due to the delivery failure by an Austrian partnership, the seller of the propane gas (August, 2009). The initial agreement was that the buyer was to buy 700 to 800 metric tons of this gas from the Austrian partnership at a cost of $ 376 per ton. However, the buyer collaborated with a Dutch natural gas reseller to increase its order by 3000 tons, as was requested by the seller, at an increased cost of $381. The seller was then to ship the gas from the United States to Belgium for delivery to the buyer (August, 2009).
As the first shortcoming in this case, the buyer failed to secure a letter of credit from its bank due to the seller’s failure to specify the place where the gas was to be loaded in the United States. This information was one of the bank requirements to issue the letter of credit (August, 2009).
Despite this first failure, the seller decided to cut the communication link between them, only to reappear three weeks later after being faxed twice by the worried buyer. The real reason for this case was the seller’s final failure to deliver the gas, arguing that its United States’ supplier could not allow the gas to be exported to Belgium (August, 2009).
As a result, the buyer and its partner, the Dutch natural gas reseller, incurred a profit loss of $15000 in addition to an increased cost of $141131 incurred while making the substitute purchase. The buyer notified the seller about these consequent developments and asked it to take the responsibility of these incurred costs, a claim that the Austrian seller rejected (August, 2009).
Analysis of Risks
In this transaction, the seller is at risk of not receiving the payment for the goods, if they were to be exported to unfamiliar buyer, without the letter of credit. The buyer, on the other hand was at risk bearing the cost of a failed delivery and also paying the cost of lost profit incurred by the Dutch Natural gas reseller. Having entered into additional deal with this retailer, while relying on an unguaranteed delivery, the German buyer is solely responsible for the consequences of delayed or failed delivery, as was the case in this natural gas saga.
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Outcome of the Case
This case had very interested and insightful outcomes that are typical of international business cases. For better analysis of this case, the outcomes are addressed under distinct questions discussed below.
Had the Buyer Breached by not Obtaining the Letter of Credit?
According to Article 54 of the United Nations Convention on Contracts for the International Sale of Goods (CISG), the buyer was obliged obtain the letter of credit. However, in this case the buyer’s failure to obtain this letter was entirely caused by the seller’s failure to avail the information about the loading place of these goods in the United States. The buyer is therefore cleared of the breach by Article 80 of the CISG that clears a party of its failure, if that failure is caused by an act or omission by the first party, the seller in this case (August, 2009).
Had the Seller Breached?
Judging from Article 30 of the CISG, the seller breached the contract by failing to deliver the propane gas, which is a consequence of its previous failure to obtain appropriate clearances for the exportation of the said goods to Belgium. Additionally, the CISG do not oblige the buyer to ask a seller about the existence of any restrictions against the seller’s performance. The seller is therefore expected to assume that such restrictions do not exist, if it fails to notify the buyer about them (August, 2009).
Was the Contract Avoided?
Drawing from Article 49 sections 1 and 2, the decision to avoid this contract rested only with the buyer, and one can only know if the buyer avoided the contract if it notified the seller about the intention to avoid the contract. Since the buyer only passed the list of the incurred losses to the seller, without any notice of its intention to avoid the contract, then the contract was never avoided.
Was the Buyer Entitled to Lost Profits?
Having ascertained the seller to be the breaching party, the buyer is therefore entitled to be fully compensated for its losses, including the profits. Moreover, the seller knew about the expected resale of these goods. Articles 75 and 76 of the CISG stipulates that the buyer must be put in the position that it would have been had the seller honored their agreement (August, 2009).
Had the Buyer Failed to Mitigate?
Reasonably, the buyer failed to mitigate the consequences of this failed delivery. Given the nature of the contract and slyness of the seller, the only alternative that was available to the buyer was to notify the Dutch natural gas reseller about the failed delivery. However, this could not help much because the cost of substitute purchase remained to be the burden.
Minimizing These Risks
In order to minimize such risks, the seller should always try to know the restrictions surrounding its business in the major countries, in addition to having vast knowledge of international business laws that concerns its goods. On the part of the buyer, timely ordering of products should be the priority. When an order is made well in advance, then there is usually time allowance to exploit other options to safeguard business loss.
