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CISG CASE PRESENTATION

Russia 24 January 2000 Arbitration proceeding 54/1999 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000124r1.html]

Primary source(s) of information for case presentation: Case text

Case Table of Contents


Case identification

DATE OF DECISION: 20000124 (24 January 2000)

JURISDICTION: Arbitration ; Russian Federation

TRIBUNAL: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 54/1999

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russia (respondent)

BUYER'S COUNTRY: United States (claimant)

GOODS INVOLVED: Unavailable


Case headnote

Reproduced from Internationales Handelsrecht [3/2006] 114

"1. The fact that the parties agreed on the applicability of a certain national law to their sales contract does not preclude the applicability of the CISG if the commercial activities of the parties focus on different Contracting States of the CISG and if the parties did not explicitly exclude the application of the CISG. The law chosen by the parties then applies subsidiarily.

[...]

"4. The [Arbitration Tribunal] considered postponing the examination of the goods until their arrival at the port of destination as permissible per the CISG's general principle of fair dealings, even though the contract allowed for such examination only at the port of loading or during the loading of the ship.

"5. The contradictory character of the proceeding and the equal treatment of the parties provide that in a proceeding before the [Arbitral Tribunal] only such rules will be applied which correspond to the relief sought by the party. As the buyer requested the reduction of the contract price due to a defect of the goods, the [Arbitral Tribunal] did not find that the legal consequences of avoiding the contra t under the CISG were brought about.

"6. After finding that the claimant did not take the appropriate steps to mitigate the loss, the [Arbitral Tribunal] reduced the damages to be paid by the defendant in accordance with Art. 77 CISG.

"7. The rules contained in Art. 74 were applied to the loss of profit caused by the lower resale price of the second shipment of goods due to the goods' loss of reputation in the market, which in turn was triggered by the defects in the first shipment of the goods."

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Case abstract

RUSSIAN FEDERATION: Award in Case No. 54/1999 of 24 January 2000 of the
Arbitration Tribunal of Russian Federation Chamber of Commerce and Industry

Case law on UNCITRAL texts (CLOUT) abstract no. 474

Reproduced with permission of UNCITRAL

Abstract prepared by Alexander Komarov, National Correspondent

The action was brought by an American firm, the buyer, against a Russian company, the seller, in connection with a contract concluded by the parties in January 1998. The contract involved the delivery of two consignments on an FCA (free carrier) basis, in accordance with Incoterms under the contract. The seller was obliged to check the quality of the goods before dispatch and submit confirmatory documents with the cargo to the buyer. According to the statement by the seller, the check on the first consignment was conducted, for technical reasons, in the country of destination. The check revealed material deviations from the contract requirements, as a result of which the first consignment reached the end user substantially reduced in value. On the first consignment, the buyer sought a price reduction equal to the sum that remained unpaid by the end users. On the second consignment, the buyer sought damages for lost profit, on the grounds that the delivery of inferior goods under the first consignment had damaged its reputation on the market, with a consequent substantial slowdown in sales. The seller asserted that, firstly, the buyer had not proven that the goods were defective, and, second, that the buyer’s claim had been lodged after the deadline established by the contract.

The tribunal found that the buyer’s inspection of the first consignment had used methods not provided for by the contract. With regard to the breach by the buyer of the agreed claim period, the tribunal ruled that the buyer, by sending the seller a letter with an inquiry about replacing the defective goods, had acted in conformity with the provisions of article 46 CISG. The tribunal did not, however, agree with the buyer’s contention that the seller had wrongfully failed to indicate in the documentation accompanying the shipment the existence of defects, since it was impossible to draw such a conclusion from the nature and extent of the defects and the evaluation made by each side. The tribunal found that the inspection of the goods in the loading port had been economically and technically inadequate. The postponement of the quality check until its arrival in the port of destination was, therefore, considered reasonable by the tribunal.

With regard to the amount of the payment that should be made by the seller to the buyer, the court concluded that it was impossible to establish precisely from the documents submitted by the buyer whether all the defective goods checked had defects characterized as such under the terms of the contract. In addition, the tribunal concluded that claims relating to the consignment could be considered only in relation to the goods that were actually checked, since the method of checking by sampling was not in accordance with the provisions of the contract (despite the fact that such a method of checking is generally recognized in world trade). Furthermore, the tribunal noted that the buyer could not base its claim on articles 75 and 76 CISG, which applied to situations where a contract was avoided, whereas the buyer had exercised its right under article 50 CISG to claim a price reduction. The buyer could not, therefore, also claim compensation for loss and it had made no claim for including customs costs in the calculation of the price reduction. Moreover, the buyer had not proved that it could use the goods only for the purposes indicated by it (sale to specified users). The tribunal applied article 77 CISG, since the buyer had taken no action to mitigate the loss arising out of the breach of contract. With regard to the first consignment of goods, the tribunal determined that the price reduction should be fixed at 50 per cent of the difference between the price of the disputed goods under the contract and the price agreed between the buyer and the end consumers. With regard to the second consignment of goods, the tribunal determined that the buyer had not proven the damage caused to its reputation by the goods in question. The tribunal noted that seller’s breach of contract could not have resulted in serious harm to the reputation of the goods or difficulties in selling the second consignment.

On the basis of the above and of article 74 CISG, the tribunal concluded that the buyer’s claims with regard to the second consignment of goods should be dismissed. With regard to the first consignment, the tribunal ordered the seller to pay the buyer 50 per cent of the difference between the price of the goods under the contract and the price agreed between the respondent and the end users.

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Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(a): selection of law of Contracting State held to be selection of CISG law of that State]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7(2) ; 8 ; 9 ; 35 ; 38 ; 39 ; 40 ; 44 ; 46(2) ; 50 ; 74 ; 77 [Also cited: Articles 6 ; 45 ; 75 ; 76 ]

Classification of issues using UNCITRAL classification code numbers:

7C22 ; 7C23 [Recourse to general principles on which Convention based; Gap-filling by domestic law];

8A ; 8B ; 8C [Intent of party making statement or engaging in conduct; Interpretation based on objective standards; Interpretation in light of surrounding circumstances];

9C [Practices established by the parties];

35A [Conformity of goods to contract: quality, quantity and description required by contract];

38A [Buyer's obligation to examine goods];

39A [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

40B [Seller fails to disclose known non-conformity: seller loses right to rely on articles 38 and 39];

44A [Excuse by buyer for failure to notify pursuant to art. 39(1)];

46B [Buyer's right to compel performance: requiring delivery of substitute goods];

50A [Buyer's right to reduce price for non-conforming goods];

74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach (includes loss of profit); Outer limits of damages: foreseeability of loss as possible consequence of breach];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Conformity of goods ; General principles ; Gap-filling ; Reasonableness ; Intent ; Examination of goods ; Lack of conformity notice, timeliness ; Lack of conformity known to seller ; Excuse ; Specific performance ; Cure ; Substitute goods ; Reduction of price, remedy of ; Damages ; Foreseeability of damages ; Consequential damages ; Profits, loss of ; Burden of proof ; Mitigation of loss ; Cumulation or election of remedies

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Editorial remarks

Reasonableness / Examination of goods / Lack of conformity notice, timeliness / Excuse for late notice

"[T]he contract concluded between the parties provided that examination of the goods was to be performed at the port of shipment. Despite this provision, the Tribunal found that the inspection of the goods at the port of shipment was technically and economically unreasonable. Having recognised reasonableness as one of the general principles underlying the Convention and having evaluated the buyer's conduct on the basis of this principle, the ICAC held that postponement of the inspection of the goods until their arrival at the place of destination or at the consumers' places of business was reasonable. Finally, the Tribunal applied Article 38 CISG in order to approach this issue.

"The ICAC did not give effect to the parties' agreement. However, although Article 38 was ultimately relied upon, it was not the basis for the decision to override the agreement. It was the principle of reasonableness which was used as a justification for denying to give effect to the parties' agreement. Therefore, the reasons for referring to Article 38 are not entirely clear. It seems that since the parties' agreement was not given legal effect, Article 38 was applied by default.

"This decision raises several questions. Can reasonableness be regarded as a general principle underlying the Convention? If the answer is 'yes', can a general principle of the Convention override the parties' agreement? Would the answer be different if freedom of contract is also regarded as a general principle of the Convention? If a general principle can override the agreement, do the provisions of the Convention apply as if there were not agreement between the parties?

"In several decisions, the ICAC had to deal with Article 39 CISG which requires that '[t]he buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it'.

"In [this] case the ICAC considered whether the notification of the defects in the goods beyond the time limit provided for in the contract could lead to dismissal of the buyer's claim. The contract provided a time limit for commencing a claim ('pretenziya') with respect to the quality of the goods. The Tribunal made it clear that the claim ('pretenziya') referred to in the contract had to be distinguished from the notice of non-conformity within the meaning of Article 39(l).

"First, the ICAC stated that by contrast with Article 39 CISG, 'the term "pretenziya", under Russian law was applied as a synonym for a 'claim' which not. only contains information on the nature of the non-conformity but also determines the remedies chosen by the buyer from the ones provided for by the law and the contract'.The Tribunal found that, in this case, the notification sent by the buyer not only contained information on the nature of the defects, but also made it clear which remedy the buyer was going to choose.

"Secondly, the time limit fixed by the contract was to be calculated not from the date when the non-conformity was discovered or ought to have been discovered as required by Article 39(l) CISG, but from the date of the delivery of the goods.

"Thus, on these grounds the Tribunal found that the contractual provision on commencing the claim ('pretenzii') was distinguishable from the notice on lack of conformity under Article 39(l). Even if these conclusions are correct, it is questionable whether further reference of the Tribunal to Article 44 CISG was admissible.

"The contract did not provide for the consequences of non-compliance with the time limit for the claim ('pretenzii'). The Tribunal, taking into account the factors mentioned above as well as Article 44 CISG, held that the buyer had a reasonable excuse for not having complied with the fixed time limit.

"This holding is questionable. Article 44 is an exception to the buyer's duty to give a notice provided for in Articles 39(1) and 43(l) CISG. However, as shown above, in the present case, the ICAC did not regard the notification in question ('pretenziya') as representing a notice of non-conformity of the goods within the meaning of Article 39(1). It does not follow from Article 44 that it can be applied to situations other than those stipulated in Articles 39(1) and 43(l). Therefore, it seems incorrect to apply Article 44 as the basis for the excuse from the buyer's failure to bring forward the claim within the time limit, to the buyer's actions which are not covered by Article 39(1)." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at pp. 28-30 (citations omitted).

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=841&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg, Praktika mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 1999-2000 gody, (Moscow, Statut), 2002, p.181; Rozenberg, Ezh-Yurist, No. 14 (April 2000) [case text (synopsis) and commentary]; Treteiskiy Sud [Arbitration Court] No. 2 2000 <http://arbitrage.spb.ru/2_art05.htm>

Translation (English): Text presented below; (German): Internationales Handelsrecht (3/2006) 114-118

CITATIONS TO COMMENTS ON DECISION

English: Saidov, Damages under the CISG, nn.108, 200, 252; Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at nn.29, 59-60, 88, 105, 126-128, 132-133, 152, 207, 211, 213, 222; Bernstein & Lookofsky, Understanding the CISG in Europe, 2d ed., Kluwer (2003) § 2-7 n.98; § 4-9 n.123; § 6-17 n.213; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 45 para. 23; Helmut Koziol, Reduction in Damages According to Article 77 CISG, 25 Journal of Law and Commerce (2005-2006) 385-391; Schwenzer & Fountoulakis ed., International Sales Law, Routledge-Cavendish (2007) at pp. 298, 343, 554

Russian: See Ezh-Yurist Rozenberg above

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Case text (synopsis) and commentary (English translation)

Queen Mary Case Translation Programme

International Court of Commercial Arbitration
Chamber of Commerce & Industry of the Russian Federation

Case No. 054/1999 (decision dated 24 January 2000)

Synopsis and commentary by M.G. Rozenberg [*]

Case text (synopsis) and commentary reported in Russian at: Ezh-Yurist, No. 14, April 2000; also Treteiskiy Sud ("Arbitration Court") No. 2-2000 (http://www.arbitrage.spb.ru/2_00/art05.htm)

Translation by Djakhongir Saidov [**]

Ruling of the Tribunal

  1. The parties' agreement on applicability of the law of a particular state to their contract of international sale of goods does not exclude the regulation of their relations by the UN Vienna Convention 1980 as the principal places of their activity are situated in different Contracting States, and inapplicability of the Convention has not been expressly agreed to. National law chosen by the parties is to be applied as a subsidiary statute.

  2. The terms of the contract which provide for the requirements with respect to the quality of the goods by means of a reference to a certain standard (technical conditions) and which contain instructions on the manner (methods) of examination of the quality of the goods mean that (in the absence of other instructions in the contract) the examination must be carried out in the seller's country as well as in the buyer's country, precisely in this manner (methods). The fact that a different practice of application of the manner (methods) of examination of the quality of the goods in question has been formed in the country of destination of the goods does not have legal significance in the relations between the buyer and the seller.

  3. Extrapolation of the results of a selective examination onto the entire instalment of the goods adopted in the practice of international trade, is admissible only when implementation of a selective examination does not conflict with the terms of the contract. Since, pursuant to the requirement of the standard, an examination must be carried out by means of a full inspection of all of the goods, the International Court of Commercial Arbitration (hereinafter referred to as "ICCA") granted the buyer's claim only in relation to the quantity of the goods which had been, in fact, examined and in which the defects had been discovered.

  4. Having applied one of the general principles of the Vienna Convention 1980 on observance of the rule of reasonableness in the evaluation of the conduct of the parties, the ICCA found the postponement of the inspection of the goods till their arrival at the port of destination admissible, for all that, according to the terms of the contract, such an inspection could only be carried out at the port of shipment or on loading on board a vessel.

  5. Adversary character of the process and observance of the principle of equal treatment of the parties pre-determine, at consideration of the disputes in the ICCA, taking into account those normative provisions which have been established for the case of exercising the remedy chosen by the party. Accordingly, since the buyer claims the reduction of the price in connection with the discovered defects in the goods, the ICCA rejected the application of the consequences, provided for by the Vienna Convention 1980, for the case of avoidance of the contract.

  6. Having recognised that the claimant buyer had not taken reasonable measures to mitigate the loss, the ICCA reduced the amount of payment which was to be made by the respondent seller, on the basis of Article 77 of the Vienna Convention 1980.

  7. The rules stipulated by Article 74 of the Vienna Convention 1980, are fully applicable to the claim for loss of profit caused by the sale of the second instalment of the goods under lower prices due to infliction of damage upon the reputation of the goods in the market as a result of the non-conforming quality of the same goods in the first instalment.

The action has been brought by a firm, registered in the USA (the buyer), against a Russian company (the seller) on the basis of the contract, which was concluded in January 1998 and which provided for the delivery of two instalments of the goods under the FCA condition (according to Incoterms 1990); the railway station of dispatch - at the seller's place. The requirements with respect to the quality of the goods were fixed in the contract in the clause "Quality of the Goods" by means of a reference to concrete Technical Conditions (TC) which are in force in Russia. The goods were to be shipped to an overseas country by means of their dispatch to an exterior Russian port indicated in the contract. The seller bore an obligation to examine, before the shipment, whether the quality of the goods was in accordance with the requirements of the TC and to provide the buyer with verifying documents of title. Under the contract, the goods were considered to be of conforming quality if they were in accordance with the documents of title. Alongside with that, the buyer was given a right to inspect the goods by a recognised neutral control organisation, of the SGS type, or an analogous organisation at the port of shipment or on loading of the goods.

According to the buyer, since the inspection of the first instalment of the goods turned out to be impossible at the port of shipment due to technical reasons, this inspection was performed in the country of destination of the goods. Selective examination of the instalment of the goods revealed substantial deviations from the requirements of the contract. As a result, this instalment was accepted by the ultimate consumers with a considerable reduction of its price. With respect to the first instalment, the buyer, in his statement of claim, demanded compensation of the sum of the reduction of the price which was equal to the amount unpaid by the ultimate consumers. With regard to the second instalment, the buyer demanded from the seller the reimbursement of loss in the form of loss of profit caused by the fact that the delivery of the goods of non-conforming quality in the first instalment had led to the loss of reputation of the production of the given manufacturer in the market. This had caused substantial delay in its realisation and sale under considerably lower prices.

In addition to the statement of claim, the buyer demanded the reimbursement of the loss caused by transportation of the first instalment of the goods on the territory of Russia and its storage and unloading at the exterior Russian port.

The seller objected to the buyer's claims and asked for a dismissal of the claim. In the seller's opinion, the buyer having violated the rules of the inspection of the quality of the goods did not prove the fact of the goods' being of non-conforming quality. Moreover, the buyer did not bring forward the claim within the time limit fixed by the contract. The seller also contested the documents produced by the buyer as proof of the non-conformity of the first instalment of the goods and the admissibility of bringing forward the claim, taking into account the terms of the contract on franchise. The seller also relied on the buyer's having proved neither the fact that the delay in sale of the second instalment of the goods had been caused by non-conforming quality of the first instalment, nor the fact that market prices had changed for the period of sale of the second instalment. The buyer submitted explanations with respect to all points of objections of the seller. In the proceedings of the ICCA, the representatives of the seller contended that the buyer's explanations were not substantiated.

Commentary on the ICCA ruling

The decision taken by the ICCA contained the following provisions:

1. The competence of the ICCA to try this case flows directly from the contract and is not disputed by the parties.

2. The contract contains the parties' agreement on the applicable law. According to this agreement, the rights and obligations of the parties to the contract as well as other relations connected with its performance should be determined according to the law of the seller's country. As the seller, under the contract, is an organisation, established in Russia, and its principal place of activity is the Russian Federation, the applicable law, under the agreement of the parties, is Russian substantive law. As the buyer is a company set up in the USA, and Russia and the USA are parties to the UN Convention on Contracts for the International Sale of Goods 1980 (hereinafter referred to as the Convention, the Vienna Convention 1980), their relations under this contract are governed by this Convention. The ICCA has come to such a conclusion on the basis of paragraph (1)(a) of Article 1 of the Convention taking into consideration the fact that the parties had not availed themselves of the right to exclude its applicability, which is provided for by Article 6 of the Vienna Convention 1980, and in the statement of claim and in the reply to the claim, the parties referred to the Convention. Accordingly, in virtue of paragraph (2) of Article 7 of the Convention, Russian civil legislation (norms of the Civil Code of the Russian Federation) will be subject to a subsidiary application to the issues not expressly settled in the Convention with regard for the rules of the Convention on usage of general principles on which it is based. At subsidiary usage of norms of the Civil Code of the Russian Federation, it was taken into account that the contract that was concluded by the parties should be classified, in accordance with the provisions of the Russian law, as the contract of supply.

3. At consideration of the issues, in relation to which there were differences in the positions of the parties, concerning the first instalment of the goods, the ICCA was basing itself upon the terms of the contract, which were in line with the provisions of the Vienna Convention 1980, and Russian civil legislation, which was to be applied subsidiarily, as well as was taking into account an understanding formed in doctrine and practice of disputes resolution.

3.1. The manner (methods) of examination of the goods by the buyer

The buyer justly points out that the clause of the contract "Conditions of Handing Over-Acceptance of the Goods" contains no instructions on the manner of examining the quality of the goods by the buyer. At the same time, the clause of the contract "Quality of the Goods" provides that the quality must be in accordance with the State Standards (GOST) and/or the TC, indicated in specifications, and must be verified by the documents of title issued by the seller. The specifications to the contract contain concrete references to the TC, which stipulate the manner (methods) of examination of the quality of the goods. The Vienna Convention 1980 does not contain any direct instructions on manner (methods) of examination of the quality of the goods by the buyer, whereas the Civil Code of the Russian Federation (paragraph 4 Article 474) provides that the manner as well as other conditions of examination of the quality of the goods, performed by both buyer and seller, must be the same. This provision of the Civil Code of the RF is in accordance with a long practice of the Arbitration Court at the Chamber of Commerce & Industry of the RF (Chamber of Commerce & Industry of the USSR), which is based upon the rule that the terms of the contract, according to which the quality of the goods must meet a certain standard, mean that examination of the quality, both in the country of the seller and in the country of the buyer, must be performed in pursuance with the instructions of this standard. At that, in the concrete decisions of the Arbitration Court, it has been particularly pointed out that operation of other instructions in the buyer's country does not matter, because the parties have directly agreed upon subjecting their relations concerning the issues of quality to the provisions of a particular standard which establishes a method of examining the quality (see, in particular, M.G, Rozenberg, "International Sale of Goods", Moscow: Juridical Literature (Yuridicheskaya literatura), 1995, pp. 94-95 and decisions of the Arbitration Court, to which the present work refers; see also Arbitration Practice of International Court of Commercial Arbitration at the Chamber of Commerce & Industry of the RF, 1998, Moscow: Statut, 1999, p. 57).

Accordingly, the fact that the parties could have agreed upon different terms with regard to the way of acceptance than those stipulated by the TC, cannot serve as a basis for recognising the buyer as being entitled, in the absence of the term on the manner of acceptance in the contract, to base himself on some other practice different from the requirements of the TC to which a direct reference has been made in the contract at determining the requirements for the quality of the goods.

As follows from the documents produced by the buyer, the buyer himself, contrary to his assertions, proceeded from the condition that the inspection of the quality of the goods, if the buyer wanted to perform it, had to be implemented by SGS methods established in the country of origin of the goods. In particular, such a term was directly provided for in a draft of the contract that the buyer presented to the ICCA and sent to a firm of a third country. At that, the ICCA notes that the complainant buyer had included such a term in the draft of the contract before the first instalment of the goods arrived at the destination port, the document on discovery of the defects was drawn up and the notification thereof was sent to the seller.

The same term is contained in two contracts, concluded by the buyer in April and June 1998 with contracting parties both from the same country to which the first instalment was delivered, and from another country. These contracts were presented to the ICCA by the buyer himself.

3.2. Is engagement of the company for inspecting the quality of the goods, the services of which were used by the buyer in the country of destination, in accordance with the requirements of the contract?

Basing itself upon the provisions of Article 8 of the Vienna Convention 1980, the ICCA holds that the said company meets the requirements provided for by the contract, as it has the state license on implementing an activity of the kind that it was instructed to perform in the present case. The contract has expressly stipulated for a possibility of authorising the performance of the inspection not only by the organisations of the SGS type, but also by analogous organisations. In the opinion of the ICCA, taking into consideration the criteria provided for by Article 8 of the Convention, the term "analogous" cannot be construed as meaning full concurrence of the levels of authority.

3.3. Admissibility of application of the method of extrapolation of the results of a selective examination onto the entire instalment

In the practice of international trade and in economic relations within a State, application of this method is generally recognised, but only in cases where a selective examination of the quality of the goods is admissible. Taking into account what has been said in the point 3.1. above, in the present case, the grounds for usage of this method are absent.

3.4. Can the fact that the notification on the defects in the goods was sent to the seller beyond the time limit fixed by the contract serve as a basis for dismissal of buyer's claim?

A number of issues are to be considered for determining how this question should be approached.

- First, in contrast to the provisions of the Vienna Convention (Article 39) and the Civil Code of the Russian Federation (paragraph 1 Article 483 and paragraph 2 Article 513), the contract establishes the time limit not for notification on the discovered non-conformity of the goods, but for bringing forward a claim (pretenziya) with respect to the quality of the goods.

Under Russian law, the term "pretenziya" is applied as a synonym to the notion of a "claim", containing information on the nature of the non-conformity with determination of the consequences - chosen by the buyer from the ones provided for by the law and the contract - of a discovered non-conformity in the goods. The buyer's letter of 30 March 1998 contained information on the nature of the discovered non-conformity. It follows, from this letter, that the question of substitution of the defective goods was raised, since there was a request for determining the procedure of substitution. These actions of the buyer are in line with the provisions of paragraph (2) of Article 46 of the Vienna Convention 1980 as the buyer considered the seller as having committed a fundamental breach of the contract (Article 25 of the Convention).

- Secondly, according to the contract, a fifty-day period for bringing forward a claim (pretenziya) is to be calculated not from the date, when the non-conformity was discovered or ought to have been discovered, but from the date of the delivery of the goods, which is to be the date on the stamp on the last railway-bill of lading of the station of dispatch. At the same time, the contract provides for the buyer's right to inspect the goods for the purpose of examining their quality on their arrival at the port of shipment and/or at their loading on board a vessel. Taking into account the time of transportation of the goods from the station of dispatch to the port of shipment, an extremely short period for bringing forward a claim (pretenziya) has been knowingly fixed.

- Thirdly, the materials of the case confirm that, according to the requirements of the TC the inspection of the goods at the port of shipment (as well as on loading on board the vessel) was, evidently, technically and economically unreasonable. In the opinion of the ICCA, which took into consideration one of the general principles of the Vienna Convention 1980 on application of the rule of reasonableness at the evaluation of the conduct of the parties (see, in particular: The Vienna Convention on Contracts for the International Sale of Goods. Commentary. Moscow: Juridical Literature (Yuridicheskaya Literatura, 1994, p. 28)), the postponement of the inspection of the quality of the goods till their arrival at the port of destination or at the consumers' enterprises in the country of destination must be recognised as reasonable. Taking into consideration the fact that there were no concrete time limits for the inspection of the goods in the contract, the ICCA deemed it possible to apply the principles used in Article 38 of the Vienna Convention 1980, in order to approach this issue.

- Fourthly, the contract does not stipulate the consequences of the seller's breach of the time limit for bringing forward the claims (pretenzii). Considering this issue with regard for the above said and taking into account the provisions of the Vienna Convention 1980 (Article 44), the ICCA concluded that the buyer had a reasonable justification of why he had not notified the seller within the period fixed by the contract for bringing forward the claims (pretenzii). At the same time, the ICCA did not deem it possible to agree with the buyer in that Article 40 of the Vienna Convention 1980, which bars the seller's right to rely on Articles 38 and 39 of the Convention, when non-conformity of the goods is connected with the facts of which he knew or could not have been unaware and of which he did not inform the buyer, applied in the present case. As follows from the materials of the case and the results of their consideration by the ICCA, the fact of the presence of the defects in itself, the nature of the defects, the volume of the defective production and its evaluation, applied by the parties, cannot lead to the conclusion, suggested by the buyer, that the seller "deliberately did not indicate the presence of the defects in the documents of title."

3.5. Is the term of the contract on franchise applicable to the cases of discovery of the defects in the goods?

The stipulation on franchise in the amount of 0.3% of the net weight of the goods provided for by the contract, to which the seller refers with regard for the content of this stipulation and taking into account the provisions of Article 8 of the Vienna Convention 1980, covers, in the opinion of the Arbitration Court, only the cases of discovery of the non-conformity with respect to the quantity of the goods (shortage of the goods), but not with respect to their defects of quality.

3.6. The quantity of the goods, in respect of which defects of quality have been established

Taking account of what has been said in paragraph 3.1. above, the ICCA concludes that the buyer's claims with respect to the first instalment of the goods can be considered only with regard to such quantity of the goods which was, in fact, examined and in which the defects were found. In this regard, the fact (to which the seller refers) that the expert selected the goods not from the entire instalment, but only from that part of the instalment which was delivered to the plant of one of the buyers in the country of destination, does not matter. As to the quantity indicated in the certificate of the SGS Company, it was not taken into account because it was only part of the goods, and besides selected from three plants (including also the two in the same paragraph that in the first case) which were the subject matter of the inspection. Accordingly, it is not ruled out that the same parts, the defects of which had been shown in the certificate issued earlier, may have been visually examined and found to be defective. At the same time, being guided by the general principle of the Vienna Convention 1980 on the need for observance of good faith in international trade, the ICCA cannot agree with the seller's opinion that the buyer did not prove at all that the goods from the first instalment delivered by the seller had been examined on the plants of the consumers.

3.7. The amount of the sum to be paid by seller to buyer with respect to first instalment of the goods

At determination of the amount, the Court proceeded from the following considerations.

- First, at calculation, the starting point is the cost of the goods of the first instalment.

- Secondly, it cannot be exactly established, from the documents produced by the buyer, whether there were non-conformities in the goods recognised as defects under the terms of the contract (in which there was a reference to concrete TC), in respect of the entire quantity of the goods examined and rejected as defective.

- Thirdly, the buyer did not avoid the contract and his claim is based on Article 50 of the Vienna Convention 1980, i.e., he claims the reduction of the price in the proportion in which the price that the goods actually had at the moment of delivery correlates with the price that the conforming goods would have had at that moment. At determining the amount of reduction of the price, the buyer based himself on the difference between the price of the goods conforming to the terms of the contract and the price under which he sold the first instalment to the consumers. At that, the buyer did not produce any proof that the goods could have been used only for those purposes which he indicates.

- Fourthly, having failed to examine the goods and to notify on the discovered non-conformity of the goods within the time limit fixed by the contract for bringing forward a claim (pretenziya) and having produced justification thereof recognised by the ICCA as substantiated, the buyer, in virtue of Article 44 of the Vienna Convention 1980, had the right to reduce the price in accordance with Article 50 of the Convention or to claim damages, except for loss of profit. Having demanded the reduction of the price, the buyer thereby waived his claim, formulated in his Supplement to the statement of claim, for compensation of expenses in accordance with Article 45, in excess of payment of the amount of reduction of the price. The buyer's reference in the Supplement to the statement of claim to Articles 75 and 76 of the Convention cannot be recognised as substantiated because these articles, as they clearly indicate, are applicable only in cases where the contract has been avoided.

With regard for the fact that the buyer did not demand, in his Supplement to the statement of claim, an increase of the amount of reduction of the price on transportation expenses incurred by him, the Arbitration Court, relying upon Article 18 of the Law of the RF dated 7 July 1993 "On International Commercial Arbitration", which provides for an equal treatment of the parties and proceeds from the principle of adversary character of the process, could not consider the issue of increase of the amount of reduction of the price on its own initiative.

- Fifthly, in the proceedings of the Arbitration Court, the seller has not expressed his opinion on the validity of the method of calculation for determining the amount of the claim in respect of the first instalment of the goods.

- Sixthly, in accordance with Article 77 of the Vienna Convention 1980, if the party relying on the breach of the contract does not take measures reasonable in the circumstances to mitigate the loss, the party in breach is entitled to demand the reduction of damages in the amount by which they could have been reduced. In his reply to the claim and in the proceedings of the ICCA, the seller alleged that the buyer had not taken such measures. In this regard, the seller asked the Court to dismiss the buyer's claim. As follows from the materials of the case, the buyer did not provide the seller with documents confirming the validity of the claims in time and, accordingly, did not receive necessary information from the seller which could be used at negotiations with the consumers of the goods and conduce to solving the issue of decreasing the amount of reduction of the price.

In particular, such a conclusion is also confirmed by the fact that, as has been pointed out in paragraph 3.1., the issue of incorrectness of the applied method of the inspection of the quality of the goods was of decisive importance. The position set forth by the seller gives the ICCA grounds to conclude that Article 77 of the Vienna Convention 1980 is applicable to the present case.

With regard for all the above said considerations, the ICCA has come to a conclusion that it would be fair to fix the reduction of the price with respect to the quantity of the goods which had been, in fact, examined in the amount of 50% of the difference between the price of the goods under the contract in dispute and the price agreed to in the relations between the buyer and his customers. Thus, the seller must pay the buyer the above indicated discount under the claim related to the first instalment of the goods.

4. The buyer's claim for recovery of loss of profit from the seller in relation to the goods in the second instalment of the goods is based on Article 74 of the Vienna Convention 1980. The buyer alleges that due to the delivery of the first instalment which did not conform to the terms of the contract, the market reputation of the goods produced by the seller, was seriously damaged, which impeded the sale of the second instalment and caused the buyer loss in the amount of the damages claimed.

Although with respect to this instalment, the buyer produced certificates issued by the SGS company at the port of loading on the basis of a selective examination, he did not, however, bring forward concrete claims in relation to the quality of the goods delivered by the seller in this instalment. Had such claims been brought forward, then all main considerations, set forth above in respect of the first instalment of the goods, should have been taken into account.

Considering the claims for recovery of loss of profit, the ICCA took into account the conditions of application of Article 74 provided for therein.

4.1. Proof of the fact of seller's breach of contract which entailed the claim for damages under the second instalment of the goods

Although the ICCA established the fact of the seller's breach in respect of the first instalment of the goods, this fact, however, as follows from the materials of the case, was proven by the buyer only in minor part in comparison with the scope of the claims with respect to the first instalment of the goods. Accordingly, there are no sufficient grounds for recognising that the breach of the contract committed by the seller could lead to infliction of serious damage in the market on the reputation of the goods delivered by the seller. If, as the buyer asserts, the reputation of the goods had really been seriously damaged, this damage was the result of the application of incorrect methods of the inspection of the quality of the goods in the country of their destination.

These methods created an impression of a grave breach of the contract by the seller. Moreover, having proof of the defects in that part of the goods which was delivered in the second instalment, the buyer does not rely on the sale of the second instalment under lower prices than the first instalment as having taken place due to the defects in the goods. Therefore, the buyer's assertion that the goods lost their reputation in the market is refuted. In addition to that, the buyer's actions on fixing express requirements in respect of the methods of the inspection of the quality in subsequent contracts are evidence of the fact that he, himself, as has been noted above in relation to the first instalment of the goods, realised that the claims brought forward by the consumers had been wrong.

4.2. Was there a causal link between the losses claimed by seller, and the breach of contract committed by seller?

In paragraphs 3 and 4.1., the ICCA has stated that the seller's breach of the contract proven by the buyer, in relation to the first instalment of the goods could not lead to infliction of serious damage upon the reputation of the goods and created difficulties in the sale of the second instalment at all. Thus, it could not cause the damage the reimbursement of which is claimed by the buyer. At the same time, the ICCA deems it necessary to point out that the buyer did not produce evidence that he had taken due measures for eliminating (as he asserts) negative impression in relation to the seller's production in the market. In essence, he agreed with unsubstantiated allegations of his consumers, and an additional examination of the goods was again performed by a selective method, i.e., with the same deviations from the requirements of the TC, to which there was a reference in the contract.

4.3. The amount claimed

Article 74 of the Convention provides that damages for breach of contract consist of a sum equal to the loss, which was suffered by the other party as a consequence of the breach of the contract. As follows from the above said, the buyer did not prove that his claim was commensurate to the breach committed. Even if he had proved that reputation of the goods had been, in fact, seriously damaged as a consequence of the discovered defects, which led to the impossibility of the sale of the goods within a short period of time, he would have been entitled to claim compensation of loss only in such a part which was actually brought about by the seller's breach of the contract.

Article 74 of the Convention expressly indicates that the loss compensated may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract as a possible consequence of his breach of the contract, taking into consideration the circumstances of which he then knew or ought to have known.

It follows, from the materials of the case, that the seller did not foresee and ought not to have foreseen at the time of the conclusion of the contract, with regard for the circumstances of which he then knew or ought to have known, that the inspection of the goods would be performed abroad and, moreover, by means of methods non-conforming to the TC, to which there was a reference in the contract, and that this would lead to the loss of reputation by the goods which brought about the buyer's loss.

Taking into consideration the above said, the ICCA has come to a conclusion that the buyer's claim brought forward with respect to the second instalment of the goods, should be dismissed.

5. Basing itself on Paragraph 9 of the Regulation on Arbitral Expenses and Fees which is a Supplement to the Rules of Procedure of the ICCA, and taking into account the results of the hearing of the present case, the ICCA has found it reasonable and fair to make the seller bear the buyer's expenses connected with protection of its interests through legal representatives in the amount commensurate to the claim granted.

6. In accordance with point 2 of Paragraph 6 of the Regulation on Arbitral Expenses and Fees, the seller will bear the buyer's expenses on paying an arbitral fee in proportion to the amount of the claim granted.


FOOTNOTES

* M.G. Rozenberg, Doctor of Legal Sciences, Professor, Arbitrator and Member of the Presidium of the International Court of Commercial Arbitration at the Chamber of Commerce & Industry of the Russian Federation.

All translations should be verified by cross-checking against the original text.

** Djakhongir Saidov (Republic of Uzbekistan), Bachelor (University of World Economy and Diplomacy, Uzbekistan), LL.M. (University of East Anglia, UK).

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Pace Law School Institute of International Commercial Law - Last updated February 16, 2007
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