Date: August 24, 2009
Applicant: National Ethiopian Insurance Company (NEIC)
Respondents: Amhara National Regional State et al (8 Respondents)
The Cassation Bench convened to review the validity of an arbitration panel’s decision. The panel had ruled against the National Ethiopian Insurance Company (NEIC) (the applicant), which argued that the plaintiffs/respondents unilaterally extended the goods’ delivery time without NEIC’s consent, thereby absolving NEIC of responsibility. Additionally, the Cassation Bench was asked to examine NEIC’s contention that it is not liable for a 0.07% penalty until the debt has been paid.
Procedural Background
The second defendant (current applicant) appealed to the Regional Supreme Court, arguing that the arbitrators’ decision was flawed due to improper service of the court summons. The Regional Supreme Court, in Case No. 01-82566, dated July 11, 2004, reversed the arbitrators’ decision and remanded the case for further proceedings after considering arguments from both parties.
The current dispute stems from a decision by the Arbitration Panel on July 7, 2007, made after the case was referred to them. The panel examined arguments and evidence presented by the first defendant (seventh respondent) and the second defendant (applicant).
Factual Background
The dispute originates from a claim filed by the plaintiffs. They state that the first defendant (seventh respondent) was awarded a tender to supply various office equipment, and a contract for Birr 468,540 was signed on September 12, 1991. The plaintiffs assert that the full contract amount of Birr 468,540 was paid to the first defendant as an advance. The applicant (second defendant) provided an advance payment guarantee on October 19, 1994, to ensure repayment if the first defendant failed to supply the goods.
The plaintiffs claim the first defendant only delivered goods worth Birr 73,800, failing to supply the remaining Birr 394,740. They requested the arbitration panel to hold the defendants jointly and severally liable for this unpaid amount, including interest and contractual penalties.
The first defendant (seventh respondent) contended that the plaintiffs were responsible for the non-performance, alleging improper rejection of timely-delivered goods due to unsubstantiated quality issues. The first defendant also argued against liability for penalties.
The second defendant (applicant) asserted that the plaintiffs failed to provide prior notice regarding the first defendant’s non-delivery. The applicant claimed that had it been informed, it would have fulfilled the contract or arranged for performance. Additionally, the applicant argued that the plaintiffs hindered performance by improperly rejecting delivered goods and, without the applicant’s consent, extended the delivery period for the first defendant, thus absolving the applicant of liability.
Arbitration Panel’s Decision
After reviewing arguments and evidence, the arbitrators rejected the defenses of both the first defendant (seventh respondent) and the second defendant (applicant). They ordered the defendants to pay Birr 394,740 to the plaintiffs. Furthermore, the arbitrators imposed a daily penalty of 0.007%, as per the contract, from the date the case was filed until full payment. They also ruled that the defendants must pay nine percent interest on the principal amount from the filing date until the Birr 394,740 is fully paid.
Appeals and Cassation Petition
Dissatisfied with this decision, the applicant appealed to the Regional Supreme Court, which dismissed the appeal under Article 337 of the Civil Procedure Code.
In the Cassation petition filed on November 18, 2007, the applicant argued that the plaintiffs’ failure to provide notice to the defendant negated any legal basis for liability under the guarantee. The applicant further contended that the arbitrators’ decision to impose interest and a 0.007% daily penalty from the date the case was filed until the debt is paid constituted a fundamental legal error requiring Cassation Bench review.
In their written submission dated January 29, 2007, the respondents argued that the applicant’s claims lacked merit and were not legally grounded. The seventh respondent, summoned via the Addis Zemen newspaper, failed to appear and was deemed to have waived the right to respond. The applicant submitted a written counter-reply on March 4, 2007.
Cassation Bench Review
The Cassation Bench reviewed the background of the dispute, the written submissions, the applicant’s arguments, and the decisions of the Arbitration Panel and the Regional Supreme Court.
It is undisputed that the seventh respondent, as the first defendant, was awarded the tender to supply various office equipment, and a contract for Birr 468,540 was entered into, based on specified quality criteria.
The Arbitration Panel confirmed that the seventh respondent received the full contract amount of Birr 468,540 as an advance payment, secured by the applicant’s advance payment guarantee. The Arbitration Panel found that the seventh respondent delivered office equipment worth Birr 73,800 that met quality standards, but the remaining goods, valued at Birr 394,740, failed to meet specifications. Consequently, the seventh respondent was held liable for non-performance.
Determinations by the Cassation Bench
1. Liability of the Applicant: It has been established that the seventh respondent, who received the advance payment guarantee from the applicant, is not exempt from liability for contract non-performance and termination. The applicant’s argument of non-liability for the supplier’s failure is without legal merit, disregarding the legal consequences of the issued guarantee.
The applicant’s claim that the respondents (first to sixth) are liable due to their extension of the delivery period until July 25, 1993, is unfounded. The applicant renewed the guarantee on October 19, 1994, with knowledge of the extended original delivery period. Therefore, the Arbitration Panel’s finding that the applicant is jointly and severally liable for the contractual obligations under the guarantee is legally sound.
2. Joint Liability and Payment: The dispute concerns the amount the applicant must pay jointly and severally with the supplier (seventh respondent). The Arbitration Panel determined the supplier failed to deliver goods worth Birr 394,740 out of the advance payment. The applicant’s liability for this amount under the guarantee is upheld as consistent with legal principles.
3. Interest: While the plaintiffs had the right to initiate the lawsuit, the Regional Supreme Court reversed the March 13, 2003, Arbitration Panel decision on July 11, 2004, in Appeal File No. 01-82566. Consequently, the decision to impose nine percent interest from the date the case was filed in regular court is flawed. Instead, the applicant is liable for interest from July 11, 2004, the date of the Regional Supreme Court’s decision.
4. Penalty: Under Article 6 of the contract signed on July 12, 1991, the penalty for non-performance was limited to 0.07% per day for a maximum of seventy days. The Arbitration Panel’s decision to impose a penalty beyond seventy days, calculated from the date of filing until full payment, contravenes the contract terms and Civil Code provisions. Thus, the penalty is restricted to seventy days at the agreed rate of 0.07%.
Modifications to the Arbitration Panel’s Decision
Based on the above findings, the Cassation Bench partially modifies the Arbitration Panel’s decision as follows:
- a. The applicant is liable to pay Birr 394,740 to the plaintiffs for failing to deliver goods as per the contract.
- b. The applicant is liable to pay interest at nine percent on Birr 394,740 from July 11, 2004.
- c. The penalty of 0.07% per day is limited to seventy days, as stipulated in the contract.
Final Orders
The decision of the Arbitration Panel dated July 7, 2007, and the Regional Supreme Court’s decision in File No. 01-38894, dated October 25, 2007, are modified in accordance with the above findings.
The applicant, jointly and severally with the principal debtor (seventh respondent), is ordered to pay the amounts specified under paragraphs 6(a) to 6(c).