Russia 25 January 2001 Arbitration proceeding 88/2000 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/010125r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 88/2000
CASE HISTORY: Unavailable
SELLER'S COUNTRY: United Kingdom (claimant)
BUYER'S COUNTRY: Russian Federation (respondent)
GOODS INVOLVED: Goods
APPLICATION OF CISG: Yes [Article 1(1)(b)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=673&step=Abstract>
CITATIONS TO TEXT OF DECISION
Original language (Russian): Rozenberg, Praktika of Mejdunarodnogo Commercheskogo Arbitrajnogo Syda: Haychno-Practicheskiy Commentariy [Practice of the International Commercial Arbitration Court: Scientific - Practical Comments] Moscow (2001-2002) No. 6 [45-50]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Queen Mary Case Translation Programme
Translation [*] by Yelena Kalika [**]
1. SUMMARY OF RULING
1.1 Provisions of Article 70 of the Federal Law No. 6-FZ of 8 January 1998 "On Insolvency (Bankruptcy)" ("the Bankruptcy Law") regarding the moratorium on the satisfaction of creditors do not apply to transactions with third parties made by an outside manager appointed in accordance with the procedure set forth in the Bankruptcy Law.
1.2 Limitations on authority of the outside manager to dispose of debtor's property are clearly stated in Article 76 of the Bankruptcy Law. To broaden the interpretation [of such limitations] would contradict the direct provisions of the Bankruptcy Law. Article 80 of the Bankruptcy Law, which sets forth the method of receiving by an outside manager an authority to make decisions increasing the debtor's expenses, can serve as a ground for contesting a transaction made by the outside manager but not for finding it void pursuant to Article 168 of the Russian Federation Civil Code.
1.3 When the debtor contests a transaction not set forth in Article 76 of the Bankruptcy Law based on the outside manager's lack of authority to make such transaction, it should be taken into account whether or not the creditor knew of such limitations on the outside manager's authority. Besides, where the creditor performed his obligations in accordance with the terms of the contract, the debtor's reference to such limitation of authority and lack of authority long time after the transaction was made can only be viewed as a clear abuse of law. Pursuant to Article 10 of the Russian Federation Civil Code, such abuse of law serves as a ground for denial of the right, even if the debtor can prove the existence of such right.
1.4 The facts that the debtor included into his assets the property received by him as a result of a transaction that he claims is void and that the debtor leased that property to another firm, that he incorporated, evidence that the creditor himself viewed the transaction made by the outside manager as lawful.
1.5 The Respondent [Buyer] (debtor) must pay the contract price for the property transferred to him by the Claimant [Seller] in accordance with the terms of the contract between them where such property has been used [by the Buyer] for a proper purpose for more than one year.
1.6 Taking into consideration certain reasons (including Article 333 of the Russian Federation Civil Code) and the UNIDROIT Principles of international commercial contracts (clause 2 of Article 7.4.13), the Tribunal established that the [Seller] had a right to claim damages for the delay in payment as well as interest for failure to make a payment and sustained the [Seller]'s claim only in the part of annual interest set forth in the contract.
1.7 The [Buyer] must fully reimburse arbitration fees to the [Seller], including arbitration fees paid in connection with the claim of damages.
2. FACTS AND PLEADINGS
[Seller], a U.K. firm, brought a claim against Respondent [Buyer], a Russian firm, in connection with its failure to pay for the goods delivered by the [Seller] to the [Buyer] under the contract made on 8 April 1999. The Contract was signed by an outside manager on behalf of the [Buyer]. The outside manager was appointed by the State Arbitration Court on 22 December 1998 in connection with the use of the outside management procedure at the [Buyer]'s enterprise. The [Seller]'s claims included the payment for the goods delivered including penalties for the delay in payment set forth in the contract and annual interest. The [Seller] presented evidence that the [Buyer] acknowledged the debt (see the balance protocol of 1 November 1999 and the letter of 3 November 1999). During the Tribunal's proceeding, the [Buyer] submitted an answer to the claim in which he argued that the contract was void based on Article 168 of the Russian Federation Civil Code for the following reasons. The goods delivered by the [Seller] were not necessary for the [Buyer]'s manufacture. Therefore, the goods should have been paid for from the funds set aside for payment of expenses. Article 80 of the Bankruptcy Law sets forth that decisions entailing any increase of debtor's expenses can be made by an outside manager only with the permission of the creditors meeting and the creditors committee. The outside manager did not receive such permission. Thus, his actions violated Article 20 of the said Law which imposes on the outside manager a duty to act reasonably and in good faith taking into consideration the interests of debtors and creditors. In the [Buyer]'s opinion, that the transaction was void should result in denying the [Seller]'s claim and in returning to the [Seller] the goods received by the [Buyer] in their current condition.
The [Seller] insisted that his claims be sustained in full. In particular, the [Seller] made the following objections to the [Buyer]'s arguments. First, the seller did not know and did not have to know from what funds the goods purchased by the [Buyer] would be paid for. Article 80 of the Bankruptcy Law governs the internal procedure of making decisions by the [Buyer]. Second, as the [Buyer] conceded during the proceeding, he is unable to return the goods in the condition in which they were received by him. The goods, which have been used for more than one year, have no commercial value.
3. TRIBUNAL'S REASONING
The Tribunal's award contained the following main points.
3.1 The Tribunal's competence to arbitrate the present dispute is directly set forth in the arbitration clause of the contract between the parties. The parties do not contest the Tribunal's competence.
3.2 As to the issue of the law governing the relationships between the parties in this case, the Tribunal found that the parties did not agree upon the law applicable to their relationships in the contract. However, at the proceeding held on 26 December 2000 the parties agreed that the Russian Federation law should be the law governing the contracts between them.
Pursuant to Article 7 of the Russian Federation Civil Code, international treaties of the Russian Federation are a component part of the Russian substantive law. They supersede the provisions of domestic civil laws. Therefore, the relationships between the parties arising in connection with the present contract should be governed by the CISG since the Russian Federation is a CISG Contracting State (Article 1(1)(b) CISG). The provisions of the Russian Federation Civil Code should govern issues not settled in or only partially settled in the CISG (Article 7(2) CISG).
3.3 Turning to the merits of the [Seller]'s claims, the Tribunal found that, in accordance with the contract, in July 1999 the [Seller] delivered the goods agreed upon to the [Buyer]. The [Buyer] does not deny the fact of delivery. The [Buyer]'s representatives also conceded that the property delivered by the [Seller] was included into assets of the [Buyer]'s firm. In such circumstances, the Tribunal is of the opinion that the fact of the [Seller]'s full performance of his obligations under the contract is established.
3.4 The Tribunal did not find reasonable the [Buyer]'s arguments that the contract was void pursuant to Article 168 of the Russian Federation Civil Code. The contract was signed by the outside manager of the [Buyer]'s firm. The outside manager was appointed following the procedure set forth in the Bankruptcy Law. Article 76 of the said Law clearly sets forth the limitations on the outside manager's authority to dispose of the debtor's property. Article 80 of the said Law, to which the [Buyer] refers, sets forth the procedure of giving the outside manager an authority to make certain decisions.
The contract made by the parties does not fall within the range of transactions regulated by Article 76 of the said Law. The [Buyer] has presented no proper evidence that the outside manager violated the provisions of Article 80 of the Bankruptcy Law. Besides, the Tribunal points out that, even if, as the [Buyer] claims, the outside manager did make the decision to make the present contract without having any authority to do so, the [Seller] did not and could not know about that fact. In addition, prior to the proceeding held on 26 December 2000 (i.e., for more than a year and a half), the [Buyer] did not notify [the [Seller]] of such [lack of authority]. Therefore, the [Buyer] clearly abused the law. Such abuse of law is prohibited by the provisions of Article 10 of the Russian Federation Civil Code. Therefore, the [Buyer]'s protection of his right can be denied (Article 10(2) of the Russian Federation Civil Code). Besides, as follows from the explanations made by the [Buyer]'s representatives, the [Buyer] disposed of the property received under the present contract by transferring it to another firm of which the [Buyer] is one of the co-founders.
3.5 In his answer to the [Seller]'s claim of 3 November 1999 as well as in the balance protocol signed by the parties on 1 November 1999, the [Buyer] fully acknowledged his debt for the goods delivered.
In such circumstances, the Tribunal finds that the [Seller]'s claim to recover the price of the goods delivered is just and reasonable pursuant to Articles 53, 61 and 62 CISG. For the same reason, the [Seller]'s claim to recover the cost of the goods delivered should be sustained in full.
3.6 As to the [Seller]'s claims to recover from the [Buyer] penalties for the delay in payment as well as annual interest for the use of another's funds, the Tribunal found that the [Buyer] committed a breach which gives the [Seller] a right to claim such recovery in accordance with the contract. At the same time, when resolving this issue, the Tribunal took into consideration the following.
|-||First, the contract of the parties sets forth two penalties imposed on the buyer for one breach of contract (the delay in payment).
|-||Second, the [Seller]'s claim to recover annual interest is based on Article 78 CISG. The rate of annual interest corresponds with the LIBOR rate for the short-term loans in hard currency in US dollars. [The LIBOR rate] represents a median rate applied by the leading U.K. banks (i.e., the banks in the place of the creditor).
|-||Third, pursuant to Article 333 of the Russian Federation Civil Code, if the penalty is clearly disproportionate to the consequences of a breach, the court has discretion to reduce such penalty. The UNIDROIT Principles of International Commercial Contracts follow the same rule. Pursuant to Clause 2 of Article 7.4.13 of the UNIDROIT Principles, notwithstanding any agreement to the contrary, the set amount of the penalties in case of a breach can be reduced to a reasonable amount, if it is substantially greater than the damages resulted from the breach or from other circumstances.
|-||Fourth, Clause 6 of Resolution No. 13/14 of 8 October 1998 "On the case law applying the provisions of the Russian Federation Civil Code regarding annual interest for the use of another's funds" issued by the Plenum of the Russian Federation Supreme Court and the Russian Federation Higher Arbitration Court states that in cases, in which a creditor has a right to recover damages and interest for a breach of a monetary obligation, the creditor can use only one of these remedies.|
Taking the above into consideration, the Tribunal came to the conclusion that the [Seller] could recover only annual interest provided for in the contract. [Such annual interest can be recovered] in the amount stated in the claim.
3.7 Pursuant to Article 6(1) of the Regulations on Arbitration Fees and Expenses, the [Buyer] must reimburse arbitration fees to the [Seller].
* This is a translation of the award in proceeding 88/2000, dated 25 January 2001, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry reported in: Rozenberg ed., Arb. Praktika 2001-2002, No. 6 [45-50]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the United Kingdom is referred to as [Seller] and Respondent of the Russian Federation is referred to as [Buyer].
** Yelena Kalika, JD Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Moscow law firm, and is an Associate at the Pace Institute of International Commercial Law.Go to Case Table of Contents