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CISG CASE PRESENTATION

Russia 6 June 2000 Arbitration proceeding 406/1998 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/000606r1.html]

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

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Case identification

DATE OF DECISION: 20000606 (6 June 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: 406/1998

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russian Federation (respondent)

BUYER'S COUNTRY: Great Britain (claimant)

GOODS INVOLVED: Goods


Case abstract

RUSSIAN FEDERATION: Award in Case No. 406/1998 of 6 June 2000 of the
Arbitration Tribunal of Russian Federation Chamber of Commerce and Industry

Case law on UNCITRAL texts (CLOUT) abstract no. 476

Reproduced with permission of UNCITRAL

Abstract prepared by Alexander Komarov, National Correspondent

An English firm, the buyer, sued a Russian company, the seller, in connection with the non-performance of a contract concluded by the parties on 25 April 1994 for the delivery during the course of the year beginning July 1995 of goods to a named port of destination on c.i.f. terms. In December 1995, the seller declared that it would not perform the contract owing to a rise in taxes, which, in its view, constituted force majeure. The buyer characterized the seller’s letter of 29 December 1995 as acknowledgement of the seller’s liability for non-performance of the contract and a request to be informed of the damages claimed by the buyer. The buyer claimed damages representing approximately 50 per cent of the value of the goods under the contract concluded between the buyer and the seller. The buyer also sought the payment of interest in an amount to be determined by the tribunal.

The tribunal noted that it was clear from the faxes from the seller to the buyer that the seller acknowledged its liability for non-performance of the contract and expressed its intention of compensating the buyer for its losses. No evidence regarding circumstances of force majeure was submitted by the seller. The tribunal, therefore, found the claim of force majeure unfounded. The buyer based its claim for losses incurred on a contract concluded by it with a third party, under which the price of the goods to be supplied was substantially higher than in the contract concluded between the buyer and the seller. The tribunal noted that, in accordance with article 74 CISG, the buyer was entitled to seek compensation for its loss of profit. The tribunal noted, however, that the buyer had not taken the necessary measures to mitigate its loss, as required by article 77 CISG, had not declared the contract avoided or concluded a substitute transaction, nor had it applied the provisions of article 76 CISG in making out its claim. Moreover, the seller had not been informed of the conditions agreed between the buyer and the third party. In view of the situation that had developed, the tribunal concluded that the seller had been under no obligation to foresee that the buyer’s loss of profit would amount to approximately 50 per cent of the disputed contract price.

The tribunal ruled, on the basis of Incoterms, that the loss of profit should be fixed at the amount of 10 per cent. The buyer’s claim for the payment of interest by the seller was dismissed, since the buyer had not submitted the interest rates obtaining in the place where the creditor was located or indicated a specific period for which interest should be charged.

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Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(b)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 6 ; 7 ; 9 ; 74 ; 76 ; 77 ; 78 ; 79

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention (issues excluded): statute of limitations];

6B [Choice of law (no choice of law clause): Convention applied as law of Contracting State];

7C [Gap-filling law applied to matter excluded from Convention: statute of limitations];

9B [Aspect of Incoterms provision applied as international usage];

74A1 ; 74B [General rules for measuring damages: includes loss of profit; Outer limits of damages: foreseeability of loss];

75A [Damages established by substitute transaction];

76B [Damages recoverable based on current price];

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

78A [Interest on sum in arrears: gap-filling law applied];

79B [Impediments excusing party from damages]

Descriptors: Choice of law ; Gap-filling ; Scope of Convention ; Statute of limitations ; Damages ; Foreseeability of damages ; Profits, loss of ; Cover transactions ; Mitigation of loss ; Burden of proof ; Reasonableness ; Exemptions or impediments ; Incoterms ; Usages and practices

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Editorial remarks

Article 1(1)(b). "On a number of occasions, the ICAC Tribunal has applied the Convention by virtue of Article 1(1)(b). For example, in [this] dispute between the parties which had their places of business in Russia and the United Kingdom, the CISG was found to be applicable. Having applied a conflict of law rule provided in Article 166 of the Fundamentals of Civil Legislation 1991, the Tribunal held that civil law of Russia (the seller's country) applied to the contract. At the same time, the ICAC took into account the fact that Russia was a party to the CISG, and ruled, therefore, that since the parties had not excluded the applicability of the Convention, it was applicable to the dispute on the basis of Article 1(1)(b)." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at pp. 5-6 (citations omitted).

Foreseeability of damages. The case "raises an interesting issue of whether the party in breach could be held liable for loss which the injured party did not in fact suffer, but which the party in breach ought to have foreseen. In this case, the claimant demanded compensation for loss of profit in the amount of the difference between the contract price and the price fixed in the contract concluded by the claimant with a third person. Namely, the claimant sought recovery of fifty percent of the contract price. The Tribunal stated that, in principle, the claimant was entitled to compensation for loss of profit. However, it found that the respondent did not know of the terms of the claimant's contract with a third party. Therefore, the respondent ought not to have foreseen that loss of profit would constitute as much as fifty percent from the contract price.

"Nevertheless, the Tribunal fixed loss of profit in the amount of ten percent from the contract price. Such a conclusion was based on the fact that the contract was concluded on the CIF terms. The Tribunal stated that under the CIF terms, insurance should cover the contact price plus ten percent (i.e. one hundred and ten percent). The Tribunal further noted that the said ten percent reflected an expected profit margin of the buyer and were a general profit margin in international trade. On these grounds, the respondent was held liable for compensating the claimant for loss of profit in the amount of ten percent from the contract pride." Id. at p. 49.

Mitigation of loss. "[T]he Tribunal stated that the buyer's mitigation measures ought to have been avoiding the contract and concluding a substitute transaction." Id. at 50.

Exemptions or impediments. "[T]he [seller] failed to prove presence of the causal connection between the alleged force majeure and its failure to [perform its obligations]. In addition to that, the [seller] failed to provide sufficient documentary evidence which, in this case ought to have been certificates of Chamber of Commerce either in the buyer's or seller's country." Id. at p. 55.

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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=842&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg, Practika of Mejdunarodnogo Commercheskogo Arbitrajnogo Syda: Haychno-Practicheskiy Commentariy [Practice of the International Commercial Arbitration Court: Scientific - Practical Comments] Moscow (1999-2000) No. 57 [276-281]; Yurist, No. 20, p.8 (May 2001)

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at n.765

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 406/1998 of 6 June 2000

Translation [*] by Mykhaylo Danylko [**]

Translation edited by Yelena Kalika [***]

1. SUMMARY OF RULING

     1.1 By virtue of the U.N. Convention on Contracts for the International sale of Goods (1980) [hereinafter CISG] Article 1(1)(b) with regard to a contract of sale of goods between [seller] and [buyer], the CISG has been recognized as the applicable law, because according to the Russian rules of conflict of laws, the relations of the parties under the contract should be governed by Russian civil law.

     1.2 [Seller]'s admission in principle of [seller]'s failure to perform the contract and [seller]'s expression of intention to compensate the [buyer] for losses suffered, the amount of which had not yet been established, was qualified as an assumption of debt by the [seller] that prevented the statute of limitations from expiring. The Tribunal of International Commercial Arbitration at the Chamber of Commerce & Industry of the Russian Federation (hereinafter Tribunal) mentioned that it does not follow from the Russian Federation Civil Code (Article 203) that the [seller]'s assumption of debt must be expressed in a specific amount.

     1.3 The Tribunal stated that due to [seller]'s failure to provide the contractually stipulated evidence of vis major [force majeure] circumstances to support the [seller]'s assertions, the Tribunal was unable to make a legal evaluation of those circumstances.

     1.4 Reaching the conclusion that in general the [buyer] has the right to be compensated by the [seller] for the [buyer]'s loss of profit, the Tribunal while evaluating the amount of such loss of profit concluded that, by virtue of Article 74 CISG, the amount of loss could not exceed the loss which the [seller] ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters the [seller] then knew or ought to have known, as a possible consequence of the breach of contract. As a guideline the Tribunal acknowledged the terms of Incoterms 1990, which, in the Tribunal's opinion, reflected the practices of international trade. It was also taken into account that the [buyer] had not taken any measures to mitigate its loss, as is required by Article 77 CISG.

     1.5 The Tribunal denied the [buyer]'s claim to recover annual interest based on Article 395 of the Russian Federation Civil Code because the Tribunal was unable to evaluate that claim as the claim does not correspond to the terms provided in the said Article.

2. FACTS AND PLEADINGS

The action was brought by the [buyer] against the [seller] regarding [seller]'s failure to perform its obligation under the contract concluded between the parties on 25 April 1995 to deliver during the year (commencing on June 1995) the goods on the trade term "C.I.F. – certain port". In July 1995, the [seller] notified the [buyer] that [seller] could not make the delivery of goods at the price stipulated in the contract; the [buyer] objected. During the meeting of the parties in December 1995, the [seller] stated that it would not perform the contract due to increased taxes, which, in [seller]'s opinion, was a vis major circumstance considering that the Customs Authorities did not allow [seller] to export goods at a price lower than the price in the domestic market.

     2.1 [Buyer's claim of damages for seller's breach of contract]

In the [buyer]'s opinion, the [seller], by letter of 29 December 1995, confirmed its liability for the failure to perform the contract and asked [buyer] to notify [seller] of the amount in [buyer]'s claim. The [buyer] calculated the amount of claim as the difference between the price of a contract with a third party to which the [buyer] had agreed to resell the goods and the price of the contract with the [seller] herein. The amount of [buyer]'s claim was revealed to be about 50% of the price of the goods in the contract between the [buyer] and the [seller]. Additionally, the [buyer], referring to Article 395 of the Russian Federation Civil Code, requested the payment of interest, leaving to the Tribunal's discretion both the interest rate and the period for which interest should be calculated.

     2.2 [Seller's response]

The [seller] in its statement of response denied [buyer]'s claim on the basis of laches of the statute of limitations (the action was brought to the Tribunal on 15 December 1998). [Seller] pleaded that [seller]'s failure to perform its obligations under the contract was due to vis major circumstances and that the amount of [buyer]'s claim had not been proven.

During the hearing at the Tribunal, the [buyer] insisted that its claim be allowed; the [seller] moved to dismiss [buyer]'s claim on the basis provided in the [seller]'s statement of response.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main reasons.

     3.1 [Jurisdiction competence of the Tribunal]

The jurisdiction competence of the Tribunal is based on the arbitration agreement contained in clause 8 of the standard terms and conditions of the sale contract concluded between the parties on 25 April 1995. The parties did not challenge the Tribunal's competence in any manner.

     3.2 [Applicable law; Arts. 1(1)(b), 6, 7(2) CISG]

The Tribunal found that the contract did not stipulate any provisions on applicable law. During the pretrial service and hearing on the statute of limitations the parties referred to provisions of the Russian Federation Civil Code, which might evidence that the parties had agreed to apply Russian law on the statute of limitations.

Under such circumstances and by virtue of Article 28 of the Russian Federation Law on the Tribunal of International Commercial Arbitration, the Tribunal ruled to resort to the relevant rules of conflict of laws. As to the applicable rules to this dispute, the Tribunal decided to apply the rules of Russian conflict of laws.

In accordance with Article 166 of the Fundamentals of Civil Law of USSR 1991, the law of obligations in an international sales contract should be provided by the law of the seller's State. Accordingly, Russian civil law is applicable to the contract in dispute.

Additionally, the Tribunal takes into account that the Russian Federation has been a Contracting State to the CISG since 1 September 1991. Under Article 1(1)(b) CISG, this Convention applies also when the rules of private international law lead to the application of the domestic law of a Contracting State. As the parties had not excluded the applicability of the CISG by exercising their right to do so under Article 6 CISG, the CISG is applicable to the parties' obligations under the contract in dispute. The provisions of the CISG should be applied as primary law, as follows from the priority of international treaties stipulated in Article 15 of the Russian Federation Constitution and Article 7 of the Russian Federation Civil Code. Other questions that are not settled or not settled entirely by the CISG should be settled by the subsidiary application of domestic law (Article 7 CISG) which, as mentioned above, is the Russian civil law.

By virtue of Article 159 of the Fundamentals of Civil Law 1991, Russian domestic law should govern issues arising from the statute of limitations.

     3.3 Statute of limitations

The present legal action was brought to the Tribunal on 15 December 1998.

The [seller] pleaded that time in the statute of limitations set in Article 196 of the Russian Federation Civil Code had expired before the date mentioned above, considering that it was on 12 July 1995 that [seller] had notified [buyer] of [seller]'s inability to perform its obligation to deliver the goods on the terms agreed in the contract.

The [buyer] in turn asserted that the final understanding that the contract would not be performed by the [seller] had arisen only on 18 December 1995 when the parties met in Moscow, Russia.

The Tribunal does not consider it necessary to make an evaluation of the parties' assertions because, as it follows from the case documents, the running of time in the statute of limitations was saved after 18 December 1995 under Article 203 of the Russian Federation Civil Code due to the [seller]'s actions which evidenced [seller]'s assumption of debt.

Thus, in the [seller]'s fax of 29 December 1995, while admitting liability for the failure to perform the contract and pointing to the possibility of arbitration of the dispute, the [seller] asked the [buyer] to notify [seller] of the amount of debt the [buyer] considered to be relevant. The [buyer] in its fax of 21 February 1996 provided the [seller] with the calculation of damages [buyer] suffered, which corresponds with the [buyer]'s claim in the documents of the present case. In [seller]'s fax reply on 26 February 1996, [seller] asked [buyer] to clarify some points in the [buyer]'s calculations, especially how could the calculation contain a figure approximately 1.5 times higher than the price stipulated in the parties' contract, and also the commission fees which, in [seller]'s opinion, had not been at all discussed and agreed by the parties.

On the basis of the exchange of fax letters provided by the parties, the Tribunal reached the conclusion that the [seller] in general had admitted liability for the failure to perform the contract and [seller] had expressed its intention to compensate the [buyer] for the losses, which the [seller] would consider to be reasonable, that the [buyer] had suffered.

In the Tribunal's opinion, the circumstance that subsequently the parties could have different calculations as to [buyer]'s damages, cannot detract from the fact of [seller]'s admission, on 29 December 1995 and 26 February 1996, of [seller]'s obligation to compensate the [buyer] for damages in the amount which would be evidenced and proven. In relation to that, the Tribunal mentions that it does not follow from the language of Article 203 of the Russian Federation Civil Code that an assumption of debt must be expressed in a specific amount.

Considering all the above and taking into account that by virtue of Article 203 of the Russian Federation Civil Code time in the statute of limitations starts to run again after it is suspended, the Tribunal concludes that the statute of limitations had not expired in the present dispute.

     3.4 The merits of the case

3.4.1 [Seller's plea of vis major circumstances]

As it follows from this case, the [seller] admits its failure to perform its obligations under the contract concluded between the parties. However, the [seller] pleads that vis major circumstances, such as increased taxes and prices, Custom Authorities' prohibition, etc., interfered with [seller]'s performance of the contract.

While evaluating the [seller]'s contention as to vis major circumstances, the Tribunal mentions that the [seller] did not provide any evidence to support its argument concerning the vis major circumstances, whereas the standard terms and conditions of the contract provide that the certificates of the Chamber of Commerce of seller's country would be sufficient evidence of such circumstances. In light of the lack of the necessary evidence, the Tribunal is unable to make a legal evaluation of the basis on which the [seller] relies, and [the Tribunal] does not consider the [seller]'s plea of vis major circumstances as reasonable.

3.4.2 [Buyer's claim of damages for loss of profit; Arts. 74, 76, 77 CISG]

The [buyer]'s damages are based on the contract concluded between [buyer] and a third party according to which the price of the goods to be delivered were essentially higher than [the price] in the contract concluded between the [buyer] and the [seller]. Thus, the [buyer] claims to recover its loss of profit [lucrum cessans].

In the Tribunal's opinion the [buyer] had proved the existence of the contract between the [buyer] and the third party and the connection of that contract to the contract made between the parties in the present case. The [buyer]'s contract with the third party is evidenced by the correspondence between the [buyer] and the third party (pilot lot order of 21 April 1995, [buyer]'s fax of 18 May 1995 to the third party regarding the issue of the documentary credit, the affidavit of the third party's CEO) on 17 March 2000, and does not contravene English law.

The Tribunal considers that under the provisions of Article 74 CISG, the [buyer] in principle has the right to recover damages for loss of profit. Nonetheless, the Tribunal pays attention to the fact that under Article 74 CISG damages, including loss of profit, "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, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

The Tribunal states that the [seller] had no knowledge of the terms and conditions (including the price) of the agreement between the [buyer] and the third party. The [buyer] did not produce any evidence of such knowledge of [seller]. Lack of such information on the side of the [seller] is revealed from [seller]'s fax to [buyer] on 26 February 1996, asking [buyer] to explain why the calculations contained a figure essentially higher than the contract price and adding an exclamation mark to that question.

The Tribunal also paid attention to the fact that the [buyer] had not taken any measures to mitigate the amount of its loss, as is required by Article 77 CISG. The [buyer] did not cancel the contract with the third party, did not conclude any substitute transaction and did not resort to Article 76 CISG when calculating the damages.

Under these circumstances and also taking into account the provisions of the above-mentioned Article 74 CISG, the Tribunal considers that the [seller] neither knew nor ought to have foreseen that the [buyer]'s loss of profit would be as much as approximately half the price of contract in dispute.

Based on this conclusion and also considering the [buyer]'s conduct, the Tribunal considers that the [buyer]'s loss of profit to be compensated should be measured in the amount of 10%. Reaching this conclusion the Tribunal took into account that the contract had been concluded on C.I.F. terms. Although the contract does not refer to Incoterms, the Tribunal considers it is reasonable and allowed relying on the Incoterms guidelines which reflect the practices of international trade. Regarding the basis of the term C.I.F., Incoterms 1990 provides that the insurance should cover the price stipulated in the contract plus 10%, i.e., a total of 110%. It is commonly known that the mentioned 10% covers the expected profit of the buyer and is the ordinary amount of profit in the practice of international trade. In connection with the aforesaid, in the Tribunal's opinion there is no merit in the fact that the contract in the present dispute provides in its standard provisions that the value of insurance is equal to the sum of the invoice, i.e., 100% of the price of goods.

According to the aforesaid, the Tribunal holds that the compensation of [buyer]'s loss of profit in the amount of 10% of the price of the undelivered goods in the contract to be recovered from the [seller] is a reasonable amount.

3.4.3 [Buyer's claim in relation to the recovery of commission fees]

The [buyer] did not provide any legal basis and evidence of the contract's connection to the sums that [buyer] had allegedly paid in cash as an advance payment of commission fees and which were included in [buyer's] statement of claim. Therefore, the [buyer's] claim in relation to the recovery commission fees has to be denied.

3.4.4 [Interest]

Concerning the [buyer]'s claim for annual interest based on Article 395 of the Russian Federation Civil Code, the Tribunal holds that the [buyer] did not satisfy the requirements of that Article, inter alia, the [buyer] did not provide to the Tribunal the rates of annual interest at the creditor's place of business and the period for which the interest should be calculated that would have allowed the Tribunal to evaluate the [buyer]'s claim. Accordingly, the [buyer]'s claim for interest has to be denied.

     3.5 [Arbitration fees]

According to the Annex to the Rules of the Tribunal on Arbitration Expenses and Fees, if the claim is allowed in part the arbitration fees are to be paid by both parties proportionally to the amount of the claim that is allowed and the amount of the claim that is denied.


FOOTNOTES

* This is a translation of data on Proceeding 406/1998, dated 6 June 2000, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in: Rozenberg ed. Arb Praktika 1999-2000, No. 57 [276-281]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Great Britain is referred to as [buyer]; Respondent of the Russian Federation is referred to as [seller].

** Mykhaylo Danylko is a Partner with the law firm Danylko, Kushnir, Soltys & Yakymyak, Attorneys & Counselors at Law, Kiev, Ukraine <http://www.dksylaw.com>. He holds a Masters of Laws (European Studies Program) from the Law School of International Science and Technology University, Kiev, Ukraine (July 2000); a Master of Management in Business of the Business School of International Science and Technology University (June 2002); and has received his LL.M. in International and Comparative Law at the Pace University School of Law. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

*** Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Mascow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.

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