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CISG CASE PRESENTATION

Russia 6 August 2002 Arbitration Court [Appellate Court] for the Western Siberia Circuit (Harvesting combines case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020806r1.html]

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

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Case identification

DATE OF DECISION: 20020806 (6 August 2002)

JURISDICTION: Russian Federation

TRIBUNAL: Federal Arbitration Court for the Western Siberia Circuit

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: F04/2712-494/A03-2002

CASE NAME: O.I.L. Otto International Leasing Aktiengesellschaft v. Zernopererabatyvayuschiy kombinat Barnaulskaya melnitsa

CASE HISTORY: 1st instance Arbitration Court for the Altai District (A 03-33/01-06) 27 June 2001; 2d instance Federal Arbitration Court for Western Siberian Region 16 October 2001 (reversing and remanding); 3d instance Arbitration Court for the Altai District 1 April 2002; 5th instance High Arbitration Court for Presidium of Supreme Arbitration Court 28 January 2003 [reversing in part]

SELLER'S COUNTRY: Germany (plaintiff)

BUYER'S COUNTRY: Russian Federation (defendant)

GOODS INVOLVED: Harvesting combines


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 41 ; 66 ; 71(1)(b) ; 72 [Also cited: Article 30 ]

Classification of issues using UNCITRAL classification code numbers:

4A [Scope of Convention: issues covered (contract for sale of goods)];

41B [Buyer agrees to take goods subject to third-party right or claims];

66B [Loss or damage after risk has passed: buyer not relieved of obligation to pay unless damage due to seller's act or omission];

71A [Grounds for suspension of performance: apparent that a party will not perform substantial part of obligations];

72A [Avoidance prior to date for performance: when clear that other party will commit fundamental breach]

Descriptors: Scope of Convention ; Third party claims ; Passage of risk ; Suspension of performance ; Avoidance

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Federal Arbitration Court for the Western Siberia Circuit of the Russian Federation

Resolution of the cassation board
on the lawfulness and reasonableness
of decisions of arbitration courts

Case No. F04/2712-494/A03-2002 of 6 August 2002

Translation by Yelena Kalika [*]

The Arbitration Court has heard the complaint filed by the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" against the Altai Customs Department (Barnaul), a third party [in the case], in connection with the decision of the Arbitration Court for the Altai Region on case No. A03-33/01 of 1 April 2002. The [original] claim was brought by "O.I.L. Otto International Leasing Aktiengeselshaft" (Hamburg) against the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" (Barnaul).

The Arbitration Court has FOUND:

The German firm "O.I.L. Otto International Leasing Aktiengeselshaft" commenced an action with the Arbitration Court for the Altai Region. The action was brought against the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" to recover Deutsche Mark [DM] 1,838,860.78, including DM 1,614,326.00 of leasing payments and DM 224,534.78 in interest for the delay in making leasing payments.

The claim was based on the failure of the limited liability partnership "Melnitsa," whose successor the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" is, to fulfill its obligation to make leasing payments for the use of 10 combines "Dominator 204 Mega."

The claim was denied by the decision of the Arbitration Court for the Altai Region of 27 June 2001.

The lawfulness and reasonableness of the decision was not reviewed by the appellate instance.

By the resolution of the Cassation Board of 16 October 2001 the decision of the Arbitration Court for the Altai Region of 27 June 2001 was reversed and the case was remanded to the first instance of the same court.

At the new hearing the Respondent brought a counterclaim against the Claimant prior to the court's reaching its decision. The counterclaim was brought to find the sale contract No. 6449 of 12 February 1997 unenforceable as well as to find the contract of use No. 6449 of 12 February 1997 invalid.

The court allowed Respondent to bring the counterclaim.

In its decision of 1 April 2002, the Arbitration Court for the Altai Region denied the claim brought by the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" to recover DM 1,838,860.78 from the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"".

The sale contract No. 6449 of 12 February 1997 between the joint stock company "Otto International Leasing" (Rickbonverg 2, 22457 Hamburg) and the limited liability partnership "Melnitsa" was found unenforceable.

The private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" was relieved from its liability under the contract of use No. 6449 of 12 February 1997.

The state fee in the amount of Russian Rubles[RuR] 3,000.00 was recovered from the German firm "O.I.L. Otto International Leasing Aktiengeselshaft."

The lawfulness of the decision was not reviewed by the appellate instance.

In his cassation complaint the Claimant, the German firm "O.I.L. Otto International Leasing Aktiengeselshaft," stated that, when making its decision, the court fully made the findings of the factual circumstances, however, did not apply the applicable rules of substantive law and incorrectly interpreted the law. The Claimant argues that the court, while making a reference to Article 535 of the German Civil Code, failed to apply it. [It claims] the Respondent knew all the factual circumstances in connection with the whereabouts of the combines and accepted all the obligations in connection with his receiving a right to use them as a lessor and a future owner.

In the Claimant's opinion, the court unreasonably applied the CISG when it found its provisions binding on both parties. In his opinion, the relationships between the parties were in connection with a leasing agreement, and not a sale contract.

For the above reasons, the Claimants asks to reverse the decision of the court and to render a new decision sustaining the claims.

At the hearing, the representative of the German firm argued for sustaining his claims stated in the cassation complaint.

The Respondent contested the Claimant's claims. He pointed out that the Claimant, who entered into a contract of use, failed to fulfill his obligations to deliver the combines when they were in custody of third persons.

Besides, he stated that the sale contract was unenforceable.

After reviewing the materials of the case and the cassation complaint, and after hearing the arguments made by the parties' representatives, the Cassation Board finds that the decision of the court was made in violation of the rules of substantive law. Therefore, it should be reversed. A new decision should be rendered for the following reasons.

It follows from the materials of the case that there was a leasing agreement No. 6449 of 15 August 1995 between the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" and the private joint stock company "Terra." [Under that agreement] 20 new combines "Dominator 204 Mega" for the total amount of DM 4,540,000.00 were leased to the joint stock company.

In October 1995, the said combines were imported into the customs territory of the Russian Federation under the "temporary import" regime. There was a definite term for reexporting [the combines]. [They were to leave Russia] by 15 August 1997.

On 28 June 1996, the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" unilaterally terminated the leasing agreement with the private joint stock company "Terra."

On 24 July 1996, in accordance with state customs declaration No. 14100/24076/001193, 10 combines "Dominator 204 Mega" were transported to Kirgystan. The "temporary import" customs regime [in connection with the 10 combines] were closed. The remaining 10 combines stayed in the Altai Region under the "temporary import" regime.

On 12 February 1997, the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" and the limited liability partnership "Melnitsa" (now the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"") entered into a contract of use in connection with those 10 combines.

Due to the violation of the customs regime, on 25 August 1997 an act was made and criminal proceedings were brought against the private joint stock company "Terra" for violating the Customs Rules (See Article 271(1) of the Russian Federation Customs Code [setting liability for] failure to remove previously imported goods from the territory of the Russian Federation when such removal is mandatory). On 25 August 1998, pursuant to the resolution of the Altai Customs Department, the combines were confiscated and sold to the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" via the public joint stock company "Barnaulsky zavod mekhanicheskih pressov" in accordance with the contract No. 5 of 16 February 1999.

After reviewing the terms of the contract of use and sale contract and taking into consideration that one of the parties to the case was a foreign legal entity and that the terms in the contracts did not set the applicable law, the court decided that the relationship between the parties were governed by the rules of international law in accordance with Article 166 of the USSR Principles of Civil Law 1991. In particular, [they were governed by] the German Civil Code and the CISG.

The mentioned article of the Principles sets forth that, in the absence of a parties' agreement on the applicable law, the law of the State, where either 1) the Seller company under a sales contract or 2) the Lessor company in a leasing agreement was incorporated, resides or has its principal place of business, applies.

According to the extract from the trade register, the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" was incorporated in the German Federal Republic.

Pursuant to Article 1(1) CISG, this Convention apples to contracts of sale of goods between parties whose places of business are in different States.

It is established by the materials of the case that, upon the termination of a leasing agreement with the private joint stock company "Terra," on 12 February 1997 the German firm "O.I.L. Otto International Leasing Aktiengeselshaft" made a contract of use [amending] the leasing agreement No. 6449 with the limited liability partnership "Melnitsa" (now the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa""). In accordance with that agreement, [the German firm] transferred its right to claims in the 10 combines to the [joint stock] company.

The parties agreed that the lessee was to receive all the rights and obligations of the private joint stock company "Terra," which were securing the fulfillment of some still existing payment obligations under the contract No. 6449 in the total amount of DM 1,614,326.00. The parties set forth the dates and amounts of payments.

However, the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" failed to fulfill its obligations. The German firm commenced an action with the court to recover the amount set forth in the contract.

The Arbitration Court reviewed the claims and denied them stating that, pursuant to Article 535 of the German Civil Code, under the terms of a leasing agreement the Lessor promises to transfer the thing [leased] to the Lessee for a temporary use. The court found that the firm failed to fulfill the said requirement set forth in the law and did not make such a transfer because, at the time when the contract was made, the combines were located in different places throughout the Region under the 1995 leasing agreement and sale contract with the private joint stock company "Terra."

Based on the terms of the contract of use [amending] the leasing agreement No. 6449 of 12 February 1997, the Cassation Board is of the opinion that the lower arbitration court failed to correctly interpret it.

Article 433 of the German Civil Code sets forth that under a contract of sale the Seller agrees to hand over a thing to the Buyer and to transfer the right to property [in the thing] to him. The Buyer must pay the price fixed and accept the thing purchased.

The analysis of the contract allows one to conclude that the contract constituted a contract of sale of the combines. Pursuant to clauses 1.1, 2.6 and 3.2 of the contract, the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" agreed to fulfill the payment obligations of the private joint stock company "Terra" within the following periods of time:

The parties agreed that, upon the payment of the said amounts within the stated period of time, the right to property in the combines was to be transferred to the private joint stock company.

The contract does not contain the terms of use of the combines.

It follows from clause 2.5 of the contract that, at the time of entering into the agreement, the Respondent knew that third parties had the combines since the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" agreed to make a contract with any firm to expropriate the combines. Besides, the parties set forth the amount of remuneration for any services in connection with the expropriation of the combines. In other words, the Respondent knew that the goods were not free from third parties' claims and he agreed to purchase the goods on such terms.

Pursuant to article 30 CISG, the seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods, as required by the contract and this Convention.

Besides, pursuant to Article 41 CISG, the seller must deliver goods which are free from any right or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim.

Since at the time, when the contract was made, the Buyer knew of the claims in connection with the fact that third parties had the combines, the Cassation Board finds that the Seller totally fulfilled his obligations to deliver the goods and that the Respondent received the right to property in the combines.

Pursuant to Article 71(1)(b) CISG, the court ignores the reference made by the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" to the fact that the [German] firm failed to hand over a copy of the letter of termination of the leasing agreement with the private joint stock company "Terra," the computation of amortization costs for each combine and the certificate of technical condition [of each combine], as was required by clause 2.1 and 3.1 of the said leasing contract with "Terra."

The said article states that a party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of his conduct in preparing to perform or in performing the contract.

When the Seller failed to hand over the documents, the Respondent had a right to declare the contract avoided pursuant to Article 72 CISG.

However, the private joint stock company "Zernopererabatyvayuschiy kombinat "Barnaulskaya melnitsa"" failed to either suspend the contract or declare it avoided.

Moreover, the Respondent was in correspondence with the Claimant concerning a postponement of the first payment.

As a result of the Respondent's failure to take the necessary steps in order to fulfill his obligations within the "temporary import" regime time limits -- by 15 August 1997 -- the Customs authorities confiscated the combines. [Thus,] they were lost for the Respondent.

Article 66 CISG sets forth that loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.

The Respondent has not claimed that there were any wrongful acts or omissions of the seller.

Pursuant to clause 4.1 of the contract, a party, who failed to fulfill his obligations under the contract or fulfilled such obligations in an unreasonable manner, is liable, unless he can prove that he could not duly fulfill his obligations due to some force majeure events.

The Cassation Board is of the opinion that, upon making a contract and accepting the combines subject to third parties' claims, the Respondent accepted the risk [of loss] of such goods.

The Respondent has not presented any evidence of force majeure events.

In such circumstances, the Cassation Board finds that the claims should be sustained. Pursuant to Article 288 of the German Civil Code, [the Board also awards] interest for the period of delay.

The conclusions of the court concerning the unenforceability of sale contract No. 6449 of 12 February 1997 should be found correct and the decision of the court in this part should be sustained.

Pursuant to Articles 175(2), 176(1) and 177 of the Russian Federation Arbitration Procedure Code, the Cassation Board

HOLDS:

The orders shall be issued. This resolution shall become binding at the time of its rendering and cannot be appealed.


FOOTNOTES

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

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

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Pace Law School Institute of International Commercial Law - Last updated March 23, 2004
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