Russia 6 September 2002 Arbitration proceeding 217/2001 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/020906r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 217/2001
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Canada (respondent)
BUYER'S COUNTRY: Russian Federation (claimant)
GOODS INVOLVED: Equipment and materials
APPLICATION OF CISG: No. Excerpt from award:
"Although both the Russian Federation and Canada are CISG Contracting States, the provision in the contract concerning the application of the Russian Federation laws leads the Tribunal to a conclusion that the parties excluded its application as permitted by Article 6 CISG. Pursuant to Article 15(4) of the Russian Federation Constitution, the CISG, as an international treaty of Russia, is a component part of the Russian legal system. However, it is not a part of Russian laws. Therefore, when arbitrating the dispute, the Tribunal applied the provisions of the Russian Federation Civil Code governing the relationships under a delivery contract."
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=856&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 Moscow (2001-2002) No. 71 [429-433]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
Russian: Rozenberg, Bulletin of the Highest Arbitration Court of the Russian Federation (2002), No. 11Go to Case Table of Contents
Queen Mary Case Translation Programme
Translation [*] by Yelena Kalika [**]
Translation edited by Mykhaylo Danylko [***]
1. † SUMMARY† OF† RULING
1.1 Where the contract, which is made in two languages, sets forth that both its versions have the equal power but where there are discrepancies between the texts in different languages, the contents of a relevant term should be determined by means of interpretation.
1.2 Having established the discrepancy between the provision setting forth the procedure of dispute resolution in the Russian and English versions of the contract, the Tribunal of International Commercial Arbitration of the Russian Federation Chamber of Commerce and Industry [hereafter Tribunal] interpreted that provision based on Article 431 of the Russian Federation Civil Code taking into consideration that, pursuant to the agreement of the parties, disputes were to be resolved in accordance with the Russian Federation laws.
Although the States, where the parties have their main places of business are CISG Contracting States (Russian Federation and Canada), the partiesí agreement to apply Russian law precluded the application of the CISG in resolving the dispute, including the interpretation of the contractual terms.
1.3 The provision in the English version of the contract stating that all disputes must be submitted "to the Arbitration court of Russia" cannot be interpreted as meaning that disputes must be brought with a Russian state arbitration court because the English expression "Arbitration court" is equivalent to the Russian expression "treteiskiy sud" [i.e.,arbitration tribunal].
1.4 To establish the meaning of that provision, the Tribunal, based on the provisions of Article 431 of the Russian Federation Civil Code, applied the provision of the UNIDROIT Principles of International Commercial Contracts on the linguistic discrepancies. † [The UNIDROIT Principles] have become a trade usage and are being widely applied in international commercial transactions.
1.5 As a result of comparison of the term in the Russian and English texts of the contract based on Article 431 of the Russian Federation Civil Code and the UNIDROIT Principles of International Commercial Contracts, the Tribunal came to the following conclusions. First, it follows from both texts [of the contract] that the parties intended to bring disputes with an arbitral tribunal in Russia.† Second, the name of the arbitral tribunal stated in the Russian text was changed by law.† There are no grounds for finding the arbitration clause invalid where there is an arbitral tribunal that is a legal successor to the tribunal mentioned in the contractual provision.† Third, since it was established that the contract was originally drafted in Russian and then translated into English, where there are discrepancies between the texts in different languages, when interpreting the contract, the Russian text of the contract should be preferred.†† It follows [from such interpretation] that several words were clearly omitted in the English texts. [Those words referred to the arbitral tribunal in which the parties intended to arbitrate their disputes.]
1.6 When analyzing the contract and, thus, when determining the applicable rules of law, the Tribunal must take into account not only the plain meaning of the words used in the heading of the contract but also the results of analysis of the contents of the parties' relations that the contract set forth.
1.7 It was established that in accordance with the contract, the Respondent [Seller] had no right to delay the shipment of goods.† The Claimant [Buyer] correctly interpreted the [Seller]'s actions as a substantial breach of contract giving the [Buyer] a right to unilaterally refuse to perform the contract pursuant to Article 523 of the Russian Federation Civil Code.
At the same time, it was noted that even if the [Seller] had had a right to delay the shipment, in such case he would have acted in violation of the principles of good faith and fair business practice widely applied in the international trade.† He would have also committed an abuse of law, which is expressly prohibited by Article 10 of the Russian Federation Civil Code, taking into consideration that he delayed the shipment of all of the goods by demanding an additional payment of a sum nine times lower than the price of the undelivered goods.
1.8 The provisions of Article 401(3) of the Russian Federation Civil Code concerning property liability in connection with a recovery of damages do not apply to the claim to recover an advance payment.† Therefore, the [Seller] cannot be relieved of [an obligation] to refund the advance payment as expressly set forth in the parties' contract even if there were circumstances relieving him from property liability for failure to fulfil his contractual obligations.
2. †† FACTS† AND† PLEADINGS
An action was brought by Claimant [Buyer], a Russian company, against Respondent [Seller], a Canadian company in connection with the [Seller]ís failure to fulfil obligations under the contract made by the parties on 1 October 1998.† The contract was for the delivery of equipment and materials.† Following the terms of the contract, the [Buyer] transferred to the [Seller] a 100% advance payment for the goods.† Under the terms of the contract, the [Seller] was to deliver the goods within 180 days after the date of payment.† In case of non-delivery, the [Seller] was to refund the advance payment within the same period of time. Within the period of time stated in the contract, the [Seller] delivered goods having a total value of less than 5% of the advance payment. The [Seller] did not refund the advance payment.† The [Seller] demanded an additional payment of approximately 10% of the amount already paid claiming that he incurred additional expenses.† The [Seller] stopped the shipment of goods, which were to be delivered FCA Calgary under INCOTERMS-90, until the [Buyer]'s making of the requested additional payment.
The [Seller] objected to the Tribunal's competence to arbitrate the present dispute. The [Seller] based his objections on the following reasoning.
The Russian and English texts of the arbitration clause are not identical.† Besides, the contract sets forth that both texts have an equal legal power.† The English text of the arbitration clause makes no mention of the Tribunal as the arbitral tribunal competent to arbitrate the present dispute.† The Russian text contains an incorrect name for the Tribunal. † Since it is not possible to reconcile the texts of the arbitration clause in different languages, the clause is not binding on the parties because it is not possible to establish the parties' intent.† Therefore, there is no agreement of the parties to arbitrate disputes at the Tribunal. † [Moreover,] the [Seller] had no intent whatsoever to arbitrate the present dispute as evidenced by the English text of the arbitration clause according to which the disputes shall be submitted "to the Arbitration court of Russia". English speaking business people and lawyers can only interpret such provision as an agreement to bring disputes to a State arbitration court in Russia.† In support of such an assertion, the [Seller] submitted an affidavit of the President of the [Seller]'s firm.† Had the parties intended to submit disputes to the Tribunal, they would have used the text of an arbitration clause recommended in the Tribunal's Rules.
The [Buyer]'s representative disagreed with the assertions made by the [Seller]'s representative. The [Buyer] argued that there was no ground to sustain the [Seller]'s motion.† In the [Buyer]'s opinion, certain words were omitted from the English text of the arbitration clause.† The Russian text contains such words: "at the Chamber of Commerce and Industry". † Discrepancies in the name of the arbitral tribunal have no legal meaning because the arbitration clause contained the name of the arbitral tribunal that was later changed. † The [Buyer] also pointed out that the affidavit of the President of the [Seller]'s firm, was the affidavit of a President who was hired by the firm in 2000 and was not present at the conclusion of the contract in dispute signed on 1 October 1998, therefore, this affidavit cannot be admitted in evidence.
At the proceeding, the Tribunal rendered a decision in which it recognized that the Tribunal had competence to arbitrate the present dispute.† The hearing of the case on the merits was adjourned and both parties received notice of the adjournment as evidenced by their signatures in the decision. † It was explained to the [Seller]'s representative that, pursuant to article 16(3) of the Russian Federation Law "On the Tribunal of International Commercial Arbitration", a [Seller] has a right to appeal such a decision in accordance with the set procedure. However, such appeal will not stay the Tribunal's proceeding.† The Tribunal suggested that the [Seller] submit his arguments on the merits of the case within the period of time set in the decision.
The parties were also timely notified of the date of the proceeding by written notices. † The notices were delivered to both the [Buyer] and [Seller] long before the date of the proceeding as evidenced by receipts of a courier postal service.
The [Seller] failed to appear at the next proceeding.† Nor did he submit any written motions.
The [Buyer]'s representative argued that the contract made by the parties on 1 October 1998 was a delivery contract.† He referred to the parties' established business practice, according to which the seller had to notify the buyer of the price of goods prior to making a shipment. † The [Buyer] is of the opinion that the FCA term of delivery means that the price of goods includes all expenses.
The [Buyer] argued that he reasonably terminated the contract due to the [Seller]'s substantial breach of its terms in connection with the date of delivery and the refund of the price of the undelivered goods.† The [Buyer] insisted that his claims be sustained in full.
3. TRIBUNALíS† REASONING
The Tribunal's award contained the following main points.
3.1 As to the Tribunal's competence, it made the following conclusions based on Clause 4.5 of the contract.
The parties' contract of 1 October 1998 made in Russian and English states that both versions have an equal legal power.† Clause 4.5 of the contract contains conflicting texts of the arbitration clause. The Russian version sets forth that disputes shall be arbitrated at the Arbitration Court at the Russian Federation Chamber of Commerce and Industry.† The English version sets forth that disputes shall be submitted "to the Arbitration court of Russia". The [Seller]'s position that it follows from the English version that disputes shall be brought with a Russian State arbitration court cannot be found reasonable. It is well known that the English expression "Arbitration court" is the equivalent to the Russian expression "treteiskiy sud". Such conclusion clearly follows both from the relevant international treaties, the rules of international arbitral tribunals and from other publications.† For example, the Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), to which both Russia and Canada are Contracting States, applies only to awards rendered by foreign arbitral tribunals ("arbitral awards"). It does not apply to decisions of foreign State courts (whose decisions are not arbitral). † The same approach is followed by the UNCITRAL Arbitration Rules (adopted by the UN General Assembly on 15 December 1976) and the UNCITRAL Model Law on International Commercial Arbitration (1985). The laws of many States on international commercial arbitration are based on the said Model Law. † Such States include English speaking States.† In particular, they include Canada (both on the federal level and in all the provinces and territories), Australia, four U.S. states (California, Connecticut, Oregon and Texas) and Scotland.† The relevant law in Russia (1993) is also based on the Model Law.
The English name for the arbitral tribunal at the International Chamber of Commerce in Paris is the "International Court of Arbitration of the ICC". The terminology used by the international arbitral court in London is similar.
The published English translation of the Civil Code of Russia, which was made by a U.S. lawyer Piter B. Maggs and a Russian lawyer A.N. Zhiltsov (M.: International Center of Financial Development, 1997, p. 150) uses an expression "Commercial court" in connection with a State arbitration court. It calls an arbitral tribunal the "court of private arbitration". A U.K. lawyer William A. Buttler made a different translation of the same text.† His translation uses the term "Arbitration court" in connection with arbitral tribunals. It uses the term "Arbitrazh court" in connection with state arbitration courts (Summonds and Hill Publishers Ltd, 1998. p. 6). William A. Buttler used the same terminology in the Russian-English Legal Dictionary he published (M., 1995, p. 260).† "Arbitration Alternatives with a Russian Party", the publication of Burke McDavid issued by the American Bar Association in 1998, clearly distinguishes between the dispute resolution by Russian State arbitration courts, which is called [in the publication] the "system of Russian Arbitrazh Courts" and the dispute resolution by international commercial arbitral tribunals. † In particular, [international commercial arbitral tribunals] include the International Commercial Arbitral Tribunal at the Russian Federation Chamber of Commerce and Industry, the Arbitration Institute at the Stockholm Chamber of Commerce, the International Commercial Arbitration Court at the International Chamber of Commerce.
Therefore, both the Russian and English versions of the arbitration clause provide for the arbitration of disputes [by arbitral tribunals].
The [Seller] reasonably points out that the Russian text of the arbitration clause incorrectly states the name of the arbitral tribunal.† The arbitration clause mentions "the Arbitration Court at the Russian Federation Chamber of Commerce and Industry" which was later renamed "the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry" by Resolution of the Russian Federation Supreme Council of 7 July 1993 "On the Tribunal of International Commercial Arbitration".† In the Tribunal's opinion, this discrepancy cannot entail finding invalid the arbitration clause in the Russian text.† The Tribunal takes into account that the arbitration clause sets forth a certain arbitral tribunal, which, as stated above, was renamed in accordance with the resolution of the Russian Federation legislative authority. † As reflected in the Tribunal's published arbitral awards, the Tribunal based many of its awards on this consideration.
Taking into consideration the existing discrepancy between the Russian and English versions of the arbitration clause, when interpreting them, the Tribunal applied the provisions of Article 431 of the Russian Federation Civil Code (because Clause 4.5 of the contract sets forth that disputes shall be resolved based on the laws of the Russian Federation both in Russian and in English; the English version reads: "The dispute resolution is subject to the legislative acts of the Russian Federation").
As set forth in Article 431 of the Russian Federation Civil Code, when interpreting a contract, the court shall take into consideration the plain meaning of the words and expressions contained in it.† The plain meaning of a term in a contract, where it is not clear, shall be determined by its comparison with other terms and with the meaning of the contract as a whole.† As stated above in paragraph 1, there is no doubt that both the Russian and English texts of the contract provide for the arbitration of the dispute by an arbitral tribunal in Russia.
Article 431(2) of the Russian Federation Civil Code sets forth the procedure for establishing the meaning of a term in the contract where the plain meaning of the words contained in it does not allow to determine such meaning.† It states that, when determining the mutual intent of the parties, all the relevant circumstances shall be taken into account. Such circumstances include, in particular, trade usages.† Taking the above into consideration and since the English text does not provide for a certain arbitral tribunal, the Tribunal found it reasonable to use the rules of interpretation contained in the UNIDROIT Principles of International Commercial Contracts.† The UNIDROIT Principles are widely used in international commercial transactions and have become trade usages.† The application of this instrument in the international commercial practice is often discussed both in Russian and foreign legal publications. † It has also been reflected in some of the Tribunal's published awards.†
As a result of comparison of the texts, it was established that the original text of the contract was drafted in Russian.† (The [Seller]'s representative confirmed this fact during the proceeding).† [The contract] was later translated into English. style="mso-spacerun: yes">† The Tribunal then applied the provisions on the interpretation of linguistic discrepancies in the text of a contract made in two or more languages.
Pursuant to Article 4.7 of the said Principles, in such case the original version of the contract shall be preferred. It can be concluded that the words "at the Russian Federation Chamber of Commerce and Industry" were omitted from the English text. † Such words were present in the Russian version.
Assuming that the parties intentionally omitted those words from the English text, it would be necessary to conclude that the parties did not intend to include the arbitration clause in the text of the contract at all because the arbitration clause makes no sense without clarifying what particular arbitral tribunal is competent to arbitrate disputes between the parties.† The Tribunal has no reasons to make such an assumption.
Taking the above into consideration and based on Article 1(5) of the Tribunal's Rules, the Tribunal finds that it has competence to arbitrate the present dispute.
3.2 The materials of the claim were timely sent to the [Seller].† He received the materials on 28 December 2001.† In accordance with Article 23(1) of the Tribunal's Rules, the [Buyer] and [Seller] were notified of the time and place of the oral hearings on the case.† That the parties received such notices is evidenced by the postal receipts.
Besides, the parties were notified of the date of the hearing on the merits at the arbitration proceeding held on 21 May 2002.† This fact is evidenced by the parties' signatures on the resolution made by the Tribunal on 21 May 2002.
The text of the award was sent to the parties on 31 May 2002.† The [Seller] has made no motions to adjourn the hearing for any good cause shown. † In such circumstances, the Tribunal concludes that, pursuant to Article 28 of the Tribunal's Rules, the absence of the [Seller] at the proceeding does not preclude the arbitration of the dispute and the rendering of an award on the merits.
3.3 Notwithstanding the Tribunal's suggestion that the [Seller] submit his arguments on the merits of the case both to the Tribunal and to the [Buyer] by 20 June 2002, the [Seller] had not submitted such arguments either by the date stated or by the date of the hearing.† (The suggestion was contained in the decision that was made known to the [Seller] at the proceeding of 21 May 2002 and then was mailed to the parties on 31 May 2002).† Taking the above into consideration, the Tribunal arbitrated the dispute on the merits based on the materials of the case and on the [Buyer]'s arguments.
3.4 As stated above, Clause 4.5 of the contract sets forth that the Russian Federation laws shall apply.
To determine what rules of the Russian Federation law apply to the dispute, the Tribunal first reviewed the nature of the contract between the parties.† The analysis of the text of the contract and of amendments to it based on Article 431 of the Russian Federation Civil Code leads the Tribunal to a conclusion that the parties made a delivery contract. The contract was for a delivery of certain equipment and materials.† Pursuant to Russian law, a delivery contract is one of the types of a sales contract.† This conclusion is based both on the plain meaning of the words contained in the heading of the contract and on the analysis of the relationships between the parties following from the contract.
Although both the Russian Federation and Canada are CISG Contracting States, the provision in the contract concerning the application of the Russian Federation laws leads the Tribunal to a conclusion that the parties excluded its application as permitted by Article 6 CISG.† Pursuant to Article 15(4) of the Russian Federation Constitution, the CISG, as an international treaty of Russia, is a component part of the Russian legal system.† However, it is not a part of Russia laws.
Therefore, when arbitrating the dispute, the Tribunal applied the provisions of the Russian Federation Civil Code governing the relationships under a delivery contract.
3.5 Since one of the most controversial issues in the parties' relationships is the issue of the [Seller]'s right not to fulfil his obligation to deliver goods due to the [Buyer]'s refusal to make an additional payment besides the 100% advance payment made pursuant to the [Seller]'s invoices, the Tribunal reviewed the relevant provisions of the parties' contract taking into consideration the modifications made to its text by additional agreements.
Clause 2.1 of the contract, which has not been modified, sets forth that the [Buyer] shall send a purchase order to the [Seller] and shall verify the price of goods in accordance with the parties' set procedure of making orders.† In the materials of the case there is no evidence as to the procedure set by the parties in writing. According to the [Buyer]'s representative, the parties have never made such a written instrument.† However, the parties established the following practice.† The [Seller] notified the [Buyer] of the cost of a lot of goods and issued invoices for a 100% advance payment that the [Buyer] then made.† Since in accordance with Clause 3 of Additional Agreement No. 2 of 16 October 2000, deliveries were made FCA Calgary (INCOTERMS-90), it was implied that the price of goods stated in the invoices for the advance payment included all of the [Seller]'s expenses.† In the materials of the case, there is no evidence conflicting with the [Buyer]'s explanations.
In this connection, the Tribunal reviewed the provision contained in Clause 2 of Additional Agreement of 30 August 2000 according to which the following provision was added to Clause 2.3 of the contract: "the price of the goods ready for shipment shall be final and cannot be altered." According to the clarifications made by the [Buyer]'s representative, this provision means only that the contract of the parties does not preclude the issue of changing the price of goods.† However, the price may be modified no later than the date when the goods are ready for shipment. Such modification is possible only if both parties agree and cannot be done unilaterally.
The parties' contract (Clause 2.2 of Additional Agreement of 30 August 2000) sets forth that the [Seller] must give the [Buyer] a report regarding purchases made in connection with each lot of goods.† In particular, the report must state the cost of the lot of goods.† The contract does not state the period of time within which such report must be given.† According to the [Buyer]'s representative, he does not have information whether or not the [Seller] has ever given such reports.
In analyzing the said provisions of the contract, the Tribunal ascertained that Clause 3 of the contract setting forth the payment procedure has not been modified.† According to Clause 3.1, the [Buyer] was to make a 100% advance payment for each separate lot of goods based on the [Seller]'s invoice stating the price of goods.† In the absence of evidence to the contrary, it implies that by transferring a payment from the [Buyer] to the [Seller], the parties verify the final price of goods that is due.† Such conclusion is also supported by Clause 3.2 of the contract setting forth the date of shipment of a lot of goods or the date of a refund of the advance payment.
Therefore, the Tribunal concluded that, pursuant to the contract, the [Seller] had no right to delay the shipment of goods.† Moreover, the Tribunal noted that, even if the [Seller] had had a right to delay the shipment, his actions would have contradicted the principles of good faith and fair business practice recognized in international trade (see Articles 1.7 and 5.2 of the UNIDROIT Principles of International Commercial Contracts). Such actions would have also constituted an abuse of law that is expressly prohibited in Article 10 of the Russian Federation Civil Code.† The [Seller] did not make delivery of goods for the total value exceeding nine times the amount of an additional payment he demanded.
3.6 Clause 3.2 of the parties' contract clearly sets forth the dates of shipment of relevant lots of goods.† It also sets forth the consequences of a failure to make timely shipments. In the materials of the case, there is evidence that the [Buyer] made an advance payment for the relevant lots of goods in accordance with the [Seller]'s invoices.† There is also evidence that the [Seller] failed to fulfil his contractual obligations either to ship the goods or to make a refund of the advance payment received.
In such circumstances, pursuant to Article 523 of the Russian Federation Civil Code, the [Seller]'s actions were correctly interpreted by the [Buyer] as a substantial breach of contract.† [Such breach] gives the [Buyer] a right to unilaterally refuse to perform the contract.† For this reason, the Tribunal holds that the parties' contract of 1 October 1998 to deliver equipment and materials is terminated in accordance with notice sent to the [Seller] by the [Buyer] on 22 August 2001.
3.7 Since the parties' contract is terminated, the [Seller] must refund the advance payment to the [Buyer].
Taking into consideration that a claim of a refund of an advance payment is not one of the claims to which principles of property liability (set forth in Article 401(3) of the Russian Federation Civil Code) apply, it does not matter for the purposes of the present dispute whether or not there are circumstances relieving the [Seller] from property liability for his failure to fulfil contractual obligations.† At the same time, the [Seller]'s failure to participate in the arbitration of the dispute on the merits and to submit his arguments on the merits of the claims precludes the Tribunal from evaluating the circumstances that caused the [Seller] not to fulfil his contractual obligations.
3.8 Pursuant to Article 6(1) of the Rules of the Tribunal on Arbitration Fees and Expenses, the [Seller] must reimburse the arbitration fees paid by the [Buyer].
* This is a translation of data on Proceeding 217/2001, dated 6 September 2002, 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. 68 [408-420]
All translations should be verified by cross-checking against the original text. For purposes of this translation, [Claimant] of Russia is referred to as [Buyer] and [Respondent] of Canada is referred to as [Seller].
** 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.
*** 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.Go to Case Table of Contents