We recently represented our Finnish client in an international arbitration. This experience provides valuable lessons and perspectives that are particularly relevant in the areas of international trade and contract law.
Background: A simple debt claim escalated
The dispute began when our client’s foreign distribution partner refused to pay due to a delayed delivery. This involved a significant receivable, and our client was forced to take the matter to arbitration to secure their claim.
In the arbitration, a simple debt claim became more complicated when the distributor changed their demands from termination of an order to a price reduction and damages claim. The distributor also made claims about product defects and a counterclaim for unjustified termination.
Due to the numerous claims and counterclaims, what was originally a fairly simple debt claim turned into a wide contractual dispute that took over a year to process in the Arbitral Tribunal.
Key legal issues
The supplier’s claim was fundamentally undisputed, and little evidence was presented other than invoices. The main part of the process focused on the distributor’s claims, the most important of which were the right to dissolve the trade due to delay and the right to compensation or price reduction. Additionally, the distributor made claims about product defects and a counterclaim for unjustified termination of the contract.
The first lesson related to the assessment of the agreed delivery date. There was disagreement between the parties about what had been agreed upon regarding the delivery of goods. According to the distributor, it was agreed that delivery would take place by a certain day in one delivery. According to the supplier, the agreed delivery date was about a week later, and the delivery could be made in several shipments. The conflict in views arose because, in the order and order confirmation, the parties had added their own reservations, but neither party had accepted the other’s reservations. As the supplier had sent the products ordered by the distributor despite these unaccepted reservations and the distributor had not cancelled the order, the distributor, according to the Arbitral Tribunal’s interpretation, took the risk that its ordered products would not be delivered under the conditions required by the distributor. This quite obvious point is good to keep in mind in situations where an order is created by using the offer-counteroffer mechanism.
The next lesson was related to the parties’ actions regarding the notice of termination of the trade. About a few weeks after the last delivery had arrived, the distributor notified the supplier of its desire to terminate the trade, and in this situation, the supplier refused to terminate the trade. Because the distributor, in this situation, did not take specific actions to terminate the trade, the Arbitral Tribunal found that it had lost its right to terminate the trade. This shows quite well the kind of active obligations placed on contracting parties in contractual relationships.
The process also dealt with the distributor’s demands for a price reduction and compensation. As termination of the order was no longer possible because the distributor had already managed to sell at least part of the products, the distributor ended up demanding a price reduction or, alternatively, compensation for the harm caused by the late delivery. The claim was a certain percentage of the value of the delivery, which the distributor considered reasonable to cover the damage incurred to the distributor from the late delivery. However, the distributor did not provide any other evidence of this damage. Since a price reduction was not agreed upon in the distribution agreement and it is not a consequence of the late delivery of goods under CISG or the Sale of Goods Act, the Arbitral Tribunal dismissed the price reduction claim as unproven without further investigation or the compensation claim. The situation would have been quite different if, for example, liquidated damages, like price reductions for delivery delays, had been agreed upon in the distribution agreement. This type of contractual term could be very justified in situations where timely delivery is particularly important to the buyer. Without such a contractual term, the buyer’s only legal protection is to terminate the order and/or claim for damages, and proving the proof of damage required for compensation can be very difficult in certain situations.
The last lesson was related to the form requirements of the contract. Partly simultaneously with the aforementioned delivery dispute, the supplier terminated the distribution agreement as part of a change in the terms of the distribution agreement. The termination was delivered by email, applying the notice period according to the distribution agreement. However, according to the distributor, the distributor had not understood that a notice sent by email could be interpreted as a notice of termination, as it was not, in the distributor’s view, delivered in the form required by the contract. The distribution agreement fundamentally required that the notice of termination be delivered in writing. In addition, the contract contained a “notices” section, which stated that contractual notices must be delivered in writing and addressed to the parties at the addresses stated in the contract. The contract did not contain any specific definition that notices could be delivered by email. Nonetheless, the Arbitral Tribunal found that the contract was terminated in accordance with the contractual terms, as the evidence showed that the distributor had actually received the email about the termination of the contract. This view of the Arbitral Tribunal further confirmed that the purposes of the formal requirements for contract notices are mainly evidential. If no specific consequence is defined for the form of notice in the contract (or in legislation), it loses its significance if it can be shown that the message has reached the recipient despite being in a form contrary to the required form. In addition, this reinforced the already generally accepted view that email corresponds to written form.
This case offers a reminder of the complexity of international trade and the importance of contractual terms. It highlights how critical it is to draft clear and unambiguous contracts, especially in an international context.
The distributor’s experiences clearly show how important it is to include contract terms that are in one’s own interest in the contract and, in the event of a dispute, to also pay attention to what can be proven and not to get stuck on just ‘facts’.”