(Case No. 180)
Signed 13 July 19843
AWARD NO. 144-180-3
The following is the text as issued by the Tribunal:
On 18 December 1981, the Claimant, Harnischfeger Corporation (" Harnco" or "Claimant"), filed a Statement of Claim against the Ministry of Roads and Transportation ("MORT"), the Industrial Development and Renovation Organization of Iran ("IDRO") and Machine Sazi Arak ("MSA"). The claim against MORT was for damages arising from alleged breaches of executory contracts for the purchase of machinery. The claim against MSA was for amounts allegedly due on date drafts for machinery delivered to and accepted by MSA, for licence fees and consultant and training charges allegedly owed pursuant to a Technical Service Agreement, and for damages for alleged breach of an executory contract for the purchase of machinery. IDRO was named as a Respondent on the basis of its alleged control over MSA. Harnco also sought interest and costs of arbitration.
On 18 January 1982, Harnco filed a First Amendment to Statement of Claim adding an additional claim against Machine Sazi Pars ("MSP") for recovery of amounts allegedly due on two promissory notes for machinery previously delivered and accepted.
On 11 June 1982, a Statement of Defence and Counterclaim was filed by MSA on behalf of itself and IDRO. The Counterclaim sought damages for alleged defects in the machinery purchased; for alleged delays in shipment, lost profits, social security premiums and taxes. On the same date, MORT filed its Statement of Defence. MSP filed its Statement of Defence on 30 August 1982.
On 21 September 1982, Harnco filed Responses to the Defences and Statement of Defence to the Counterclaims, and additional evidence.92
Although not a Respondent, the Iranian Ministry of Commerce, which the Claimant had alleged controlled IDRO, filed a Statement of Defence and Counterclaim for costs on 7 December 1982. Harnco responded to that Statement of Defence on 5 January 1983, noting that the Ministry of Commerce had never been named as a Respondent. That Ministry has not filed anything further nor appeared in any proceeding in this case.
On 24 March 1983, Harnco filed additional evidence regarding its nationality.
Following a pre-hearing conference held on 15 April 1983 and as a result of a Tribunal order, Harnco filed a document entitled Second Amendment to Statement of Claim on 2 May 1983. On 15 July 1983, Harnco filed additional evidentiary submissions.
Additional evidence was filed by MORT on 4 August and 21 September 1983.
On 3 October 1983, Harnco filed a Hearing Memorial and additional exhibits and MSA filed a Memorial. Additional evidence was filed by MSA on 14 October 1983.
The Hearing was originally scheduled for 21 October 1983 but was postponed until 28 November 1983. The Hearing took place on 28 and 29 November 1983. In the course of the Hearing, on 28 November 1983, Harnco filed a corrected affidavit rectifying non-substantive typographical errors in a previously submitted affidavit. The Tribunal accepted that filing, together with a new version of the affidavit showing revised damage calculations.
Pursuant to the Tribunal Order of 5 December 1983, MSA and MORT filed additional material on 15 December 1983. Claimant filed a response on 30 January 1984.
Pursuant to Article 13, paragraph 5, of the Tribunal Rules, a member who had resigned after the Hearing on the merits of this claim participated in this Award.
On 11 November 1977, MSA and Harnco entered into an agreement pursuant to which MSA agreed to purchase component parts for ten Model T300A truck cranes. Under the agreement, delivery of the equipment was FOB Harnco's plant in Iowa. MSA was therefore obligated to arrange insurance for the shipment, designate the freight forwarder and ocean carrier and arrange any other transportation to its facility. Payment of the total purchase price of U.S. $1,251,757.65 was originally to be by letter of credit, but the parties subsequently agreed that payment would be effected by 180-day date drafts.
The component parts were manufactured by Harnco and delivered FOB its factory. Included in the documents forwarded to the shipper was a Certificate of Good Quality dated 19 January 1978 covering the purchased equipment and certifying that it was of "first-class material and workmanship".
In accordance with instructions from MSA, Harnco forwarded the component parts to Jan C. Uiterwick Corp., agent to Iran Express 99 Lines, for transportation to the Port of Khorramshahr, Iran. The Export Forwarding Instructions issued by Harnco and covering the purchased equipment stated "on-deck loading not permitted without special authority".
The component parts were shipped from the Port of Baltimore on 15 February 1978. Despite Harnco's specific instructions to the contrary and without authorization, the cranes were loaded and transported on-deck from at. least Baltimore to New Orleans. The cargo ship carrying the equipment arrived at Khorramshahr by May 1978. For several months the ship sat in port without being unloaded. After the equipment was unloaded, it remained at dockside for several additional months.
Originally four 180-day date drafts due on 15 September 1978 were issued and sent to MSA; however, because of typographical errors, three new 180-day date drafts due on 15 April 1979 were prepared and transmitted to MSA in September 1978. MSA accepted four drafts totalling U. S. $1,251,757.65; however, despite requests for payment by Harnco, the date drafts have not been honoured.
The agreement between MSA and Harnco makes no reference to governing law; however, under general choice of law principles, the law of the United States, the jurisdiction with the most significant connection with the transaction and the parties, must be taken to govern in this specific case.1Not only was the agreement accepted in the United States by Harnco, a Delaware Corporation, but the component parts were manufactured in the United States, and Harnco completed its performance by delivering the equipment FOB its Iowa plant. See Economy Forms Corporation v. The Government of the Islamic Republic of Iran, et al. , Award No. 55-165-1 (14 June 1983).2
The United States law applicable to this commercial transaction is the Uniform Commercial Code ("UCC") which, with minor variations, has been adopted by 49 of the 50 states, including each of the United States jurisdictions with contacts with this transaction.
Harnco has argued that under UCC §3-302 it is a "holder in due course" of the accepted drafts3 and as such is entitled to payment of them, irrespective of any defence based on the underlying transaction which gave rise to the drafts. While under the UCC a payee, such as Harnco, may be a holder in due course, under UCC º3-305(2) such a 100 holder does not take the drafts free from the defences of a party to the instrument with whom the holder has dealt.1
MSA has alleged that it is under no obligation to honour the drafts because the crane parts which it received were rusted. Under the agreement with MSA, Harnco was required to deliver the component parts FOB its Iowa plant. Harnco has produced evidence, in the form of a Certificate of Good Quality covering the equipment, shipping documents and affidavits, that immediately prior to the time the component parts were loaded on the rail carrier they were inspected, coated with protective oil, placed in export packing and certified to be in good condition. Special precautions to protect against rust and corrosion were taken. MSA has produced no evidence to rebut this.
Under the UCC, the contractual delivery term of FOB Harnco's plant obligated Harnco to make reasonable arrangements for the shipment of the goods at MSA's expense and to bear the risk and expense of putting them into possession of the rail carrier.2 Once Harnco had placed the components in the rail carrier's possession at its Iowa plant in good condition, it had completely performed its obligations under the agreement and under UCC º2-509 the risk of damage or delay passed to MSA.3
Harnco has also produced evidence showing that any damage to the crane parts occurred after the equipment had left Harnco's plant. Letters from the agent of Iran Express Line, the carrier chosen by MSA, contain admissions of misloading the equipment and above-deck transportation of the goods at least from Baltimore to New 101 Orleans. Several affidavits submitted by Harnco attest to the lengthy delays in unloading the equipment from the ship and in the lengthy portside warehouse storage following unloading. Despite the above-deck shipment and the delay in unloading, the cranes were still in substantially good condition when unloaded in Iran. According to a June 1978 report of the Ports and Navigation Organization of Khorramshahr submitted by MSA, only parts of the cranes were rusted. There was no indication that the rust rendered the cranes unusable or that the rust condition could not be remedied.
However, even after the crane parts were unloaded at Khorramshahr, MSA allowed the equipment to remain at dockside for several months, and then to remain in its portside warehouses for approximately a year. It was only after this time, as evidenced by two MSA internal memoranda of June 1979, that MSA noted any substantial rust. A further report was prepared by two members of MSA's quality control staff, but not until 2 7 September 1983 .
Finally, as MSA provided Harnco's main office .and local Iranian representatives with no notice of any complaint regarding the cranes and never disputed its liability for payment until it filed its response in this proceeding before the Tribunal - nearly four years after the delivery of the equipment in Iran - MSA is precluded from asserting the defence that the cranes were rendered unusable by rust. Under the UCC, MSA was obligated to notify Harnco within a reasonable time after discovering the alleged breach or else it was barred from asserting defects in the equipment as a defence.1
The Tribunal, therefore, finds that Harnco is entitled to receive the face value of the accepted drafts in an amount totalling U. S. $1,251,757.65 and interest for the period of non-payment of the drafts. The Tribunal finds that Claimant should be awarded interest at the rate of 10 % from the date of maturity of each date draft to the date on which the Escrow Agent instructs the Depositary Bank to pay the Award.
1The signature of Mr. Mosk is accompanied by the word "Concurring".
2The signature of Mr. Ansari is accompanied by the words "Dissenting in Part. Concurring in Part".
3Filed 13 July 1984.
1Restatement (Second) of Conflict of Laws §188 (1971); see also Dicey and Morris, The Conflict of Laws, p. 219 (1980 2d ed.)
23 IRAN-U.S. C.T.R. 42.
3UCC §3-302(2) provides as follows: A payee may be a holder in due course.
1UCC $3-305(2) provides as follows: To the extent that a holder is a holder in due course he takes the instrument free from . . . (2) all defenses of any party to the instrument with whom the holder has not dealt . . .
2UCC §2-319(1)(a) provides as follows: (1) Unless otherwise agreed the term F.O.B. (which means "free on board") at a named place, even though used only in connection with the stated price, is a delivery term under which (a) when the term is F. O. B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; . . . UCC §2-504 provides, in part, as follows: Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must (a) put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; . . .
3UCC §2-509(1)(a) provides as follows: (1) Where the contract requires or authorizes the seller to ship the goods by carrier (a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-505); . . .
1UCC §2-602(1) provides as follows: (1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.