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CISG CASE PRESENTATION

Serbia 9 December 2002 Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce (Aluminum case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/021209sb.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20021209 (9 December 2002)

JURISDICTION: Arbitration ; Serbia

TRIBUNAL: Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: T-2/00

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Ukraine (respondent)

BUYER'S COUNTRY: Yugoslavia/Serbia (claimant)

GOODS INVOLVED: Aluminum


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7 ; 45 ; 74 ; 78 ; 81

Classification of issues using UNCITRAL classification code numbers:

7C22 [Recourse to general principles on which Convention is based]

74A1 [Loss suffered as consequence of breach: includes loss of profit];

78A ; 78B [Interest on delay in receiving price or any other sum in arrears; Rate of interest];

81C Restitution by each party of benefits received (art. 81(2))

Descriptors: General Principles ; Penalty clauses ; Damages ; Interest ; Remedies

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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 (Serbian): Click here for Serbian text of case

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: [2010] Vladimir Pavic, Milena Djordjevic, Application of the CISG before the Foreign Trade Court of Arbitration at the Serbian Chamber of Commerce – Looking Back at the Latest 100 cases, 28 Journal of Law and Commerce 1, cited at pp. 10, 45, 60.

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Case text (English translation)

Queen Mary Case Translation Programme

Foreign Trade Court of Arbitration
Attached to the Yugoslav Chamber of Commerce in Belgrade

Award of 9 December 2002 [Proceedings No. T--2/00]

Translation by [*] Mina Sreckovic, Anja Tasic
Edited by Dr. Vladimir Pavic, Milena Djordjevic, LL.M. [**]

The Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce in Belgrade with the sole arbitrator […] in a dispute concerning the claim of  [Buyer] from Yugoslavia against  [Seller] from Ukraine for payment of DEM 454.253,00 (EUR 227.126,50) on 9 December 2002 makes the following:

PARTIAL AWARD

   -    [Seller]  is ordered to pay to [Buyer] EUR 49.701,50 on the grounds of unjust enrichment with 6% interest from 14 December1999 until 2 March 2001, and domiciliary interest from 2 March 2001 until payment, all that within 15 days.
 
   -    [Buyer]’s claim for interest on the amount of EUR 49.701,50 for the period of 4 November 1999 to 14 December1999 is denied.
 
   -    [Seller] is ordered to pay the amount of RSD 57.000 in the name of costs of proceedings within 15 days, subject to court enforcement.

Statement of reasons

Claimant [Buyer] established the jurisdiction of this Court of Arbitration on the basis of contract No. 11-06-1099 of 3 November1999.

The Court of Arbitration has come to the conclusion that in terms of Article 14.1 of the said contract, if parties cannot come to a mutual agreement by negotiations, the dispute shall be settled by the Court of Arbitration in Yugoslavia or Ukraine. Pursuant to the abovementioned Article, and given the fact that Claimant [Buyer] addressed this Court of Arbitration, which is the only one existing for solving international commercial disputes in Yugoslavia, its jurisdiction was established. Given that Respondent [Seller] did not contest the jurisdiction of the Court of Arbitration of Yugoslavia, the jurisdiction of the Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce in Belgrade was established on mutual agreement amongst the Parties.

Since the Parties failed to mutually appoint the arbitrator so the Sole Arbitrator was appointed by the President of The Foreign Trade Court of Arbitration pursuant to Article 27 para. 3 of The Rules of the Foreign Trade Court of Arbitration.

The Sole Arbitrator concluded that the issue at hand is a commercial one, originating from a foreign trade transaction between a Yugoslav company and a foreign entity, which enabled establishment of the jurisdiction of the Foreign Trade Court of Arbitration attached to the Yugoslav Chamber of Commerce in Belgrade.

The arbitral procedure has been carried out in the presence of the Claimant [Buyer]’s legal representative and in the absence of the Respondent [Seller]’s legal representative in the seat of the Court of Arbitration in Belgrade.

[Buyer] stated in his claim that the parties signed the contract No. 11-06-1099 on 3 November 1999 with annex of 14 December1999, in which the [Seller] agreed to sell to the [Buyer] aluminum Al-A-7 with ingots weighing 15-50 kg in the whole amount of 300 Mt plus-minus 5% of the price USD 1.700 per metric ton of aluminum which in total amounts to USD 510.000. [Buyer] claims that [Seller] was obliged to organize transport to P i.e. B [cities in Yugoslavia] at the usual route and in the usual manner and to bear the expenses of such transportation, to organize cargo insurance at his own expense, to bear the risk of loss or damage to the goods until the moment of delivery of the goods to the carrier, to pay for customs formalities when exporting, to inform the buyer in due time about handing the goods to the carrier so that the [Buyer] could take all the necessary measures for taking over the goods and to ensure at his own expense a clean bill of lading. [Buyer] pointed out that the Parties had agreed on payment by letter of credit and that [Buyer] emitted an order to the Bank in B [city in Yugoslavia] to open a letter of credit in favor of the [Seller] for the entire contracted amount to which the Bank complied. At the [Seller]’s request Advising bank  [X] paid the entire amount of the letter of credit to [Seller] without being presented adequate documents specified both by the letter of credit and in the contract, upon [Seller]’s promise that he would deliver the goods on 25 January 2000. However, [Seller] did not deliver the goods to [Buyer], and charged the amount of the letter of credit solely based on his own documents, arbitrarily and in violation of the contract terms. Upon [Buyer]’s request for returning the unjustly received amount, [Seller] returned to [Buyer] the said amount. However, [Seller] retained the amount of DEM 99.403.00 in the name of 10% of the contracted amount representing the amount of stipulated contractual penalty, without legal grounds.

[Buyer] requested to be reimbursed for the amount of DEM 99.403,00 from [Seller] , which is the amount he received out of the letter of credit and kept without legal grounds, that [Seller] pays to him DEM 94.350,00 on behalf of the contractual penalty - 10% of the total value of the goods, for non-performance of the contract by [Seller] and that [Seller] reimburses him for the expenses representing: los suffered as a consequence of [Buyer]’s incapability to fulfill the contracts  towards his buyers in the amount of DEM 6.000,00; lost profit and damages for loss due to the [Buyer]’s incapability to employ its capacities in the amount of DEM 150.000,00; non-material damages for [Buyer]’s loss of reputation at the market in the amount of DEM 30.000,00, expenses for opening the letter of credit in the amount of DEM 14.500,00, expenses for professional data processing of legal, economic and other questions, including the translation thereof in the amount of DEM 5.000,00.

[Seller] objected to [Buyer]’s claim. He cited that the Parties had modified the contract in [city in Ukraine] on 2 December1999, where [Buyer] was represented by [] and [Seller] by  [].  He cited that it was agreed that the [Buyer]’s representative undergoes the formalities of the contract modification upon return to Yugoslavia and provide [Seller] via mail with 3 documents:

  1. a report from the [Buyer] that he transfers his rights from the contract to a third party, i.e.  that the orderer and the recipient of goods are changed,

  2. certificate from the third party that it is in agreement to take part in such contract and

  3. to deliver the final version of the contract which will be signed by the Parties in the original form with recording all additions and alterations to the contract under the new terms.

[Seller] stated that [Buyer] did deliver the final modified version of the contract on 12 January 2000 and that [Buyer] did deliver an official statement of transfer of rights and obligations to the third party on 14 December1999. However, [Buyer] failed to deliver the consent of the third party [from Bosnia] regarding its  agreement to entering into this contract. [Seller] further cited that without the original and final contract and without the official statement of the third party [from Bosnia], he was not able to deliver the goods to [the Buyer] by the end of 1999.

[Seller] claimed that he suggested that the contract be modified into the contract for the delivery in year 2000, however [the Buyer] did not agree to that and demanded reimbursement of the amounts paid by the letter of credit without extending the duration of the contract. [Seller] cited that the amount of damages which it suffered is equivalent to the amount of USD 51.000,00, which is the amount [Seller] retained from the amount received under the letter of credit.

[Seller] made a counterclaim for the amount of damages he suffered as a consequence of non-performance of this transaction.

[Sole Arbitrator] had decided to issue a partial award because only a part of [Buyer]’s request amounting to DEM 49.701,50 matured for decision-making , given that[Buyer] did not pay the full amount of costs of the proceedings and given that he has, after the correspondence with the Court of Arbitration, in his last memorandum of 29 April 2002 announced to the Court of Arbitration that the expenses will be paid, but that he is not able to do so in the near future because of his unstable financial situation. [Seller] did not pay to the Court of Arbitration the expenses for the counterclaim.

When Parties pay the full amount of arbitral expenses, Arbitration will hold a hearing at which a final decision regarding the part of [Buyer]’s claim in the amount of EUR 154.154,89 and the counterclaim in the amount of USD 51.000,00 will be made.

During the proceedings, the following evidence has been taken into account: contract No. 11-06-1099 UA, with annex from 14 December1999 and all correspondence between the Parties with regard to this contract, expert’s report with regards to the amount of loss suffered, the witness testimony of [X] and all other written evidence from the case file. After evaluating all the evidence presented the arbitrator reached a decision as specified in the holding of an award  for the following reasons:

From the case file it follows:

   -    That the Parties signed the contract No. 11-06-1099UA on 3 November1999 in which Respondent is the seller and Claimant is the buyer of Aluminum A-7 with ingots weighing from 15-50 kg, quantity 300 Mt (plus-minus 5%);
 
   -    That the Parties had, pursuant to Article 10.1, agreed on payment by means of letter of credit which the buyer was obliged to open in his own bank, documented, confirmed, irrevocable, transferable, which was to be issued within 5 days from the date of signing of the contract with the deadline of 40 days for the whole value of goods;
 
   -    That the Parties agreed that the payment of the goods will be performed by enabling transfer of the funds from the issued documented letter of credit in favor of the Seller within 3 days from the day of delivering the following documents: Seller’s invoice,  bill of lading, certificate of quality with notification of data on control of the radioactivity level and a certificate of origin of the goods;
 
   -    That [Seller] solicited alterations to conditions of the letter of credit in its notice of 3 December 1999, with respect to the documents needed for charging the letter of credit. Seller proposed the following documents to be presented to the bank: Seller’s invoice, guarantee (without mentioning what kind of guarantee) and certificate of origin of the goods. Seller also requested the following to be erased from the letter of credit: document “record of the qualitative and quantitative reception of the goods issued by the freight forwarded of the applicant of the letter of credit, that is [Buyer];
 
   -    That the [Buyer] via fax from 14  December 1999 accepted the alterations to the contract with regards to the stipulated documents in the letter of credit by accepting that the document “record of quantitative and qualitative reception of goods issued by the freight forwarded” be erased from the letter of credit and that he accepted the forth document relating to the goods to be “certificate of origin”;
 
   -    That the Parties had agreed that if the Buyer does not meet the deadlines for issuing the letter of credit he will be obligated to pay 0.3% of the amount of the contract for every day of the delay, but up to 10% maximum of the whole value of the contract, and that  if the seller does not meet the contractual deadlines for delivery, he will be obliged to pay 10% maximum from the whole value of the goods; (Article 13 Annex 2 of the contract);
 
   -    That [Buyer] gave an order to the Bank in [city in Serbia] to issue a letter of credit in favor of [Seller] and that the Bank did so on 14 December1999 via bank [in Russia], as verifying, notifying and executing bank;
 
   -    That bank [in Russia] confirmed and notified the mentioned letter of credit on 17 December 1999 which follows from [Seller]’s fax from 31 January 2000;
 
   -    That [Seller] even without completing delivery, charged the entire amount of the letter of credit i.e. DEM 943.500,00 and that he returned a partial amount of the charged letter of credit on 3 March 2000 and retained DEM 99.403,00 from this sum;
 
   -    That there are two contracts in the case file numbered 11-06-1009 with different contents. One of the contracts, supplied by the [Buyer] has every page certified by both parties with signatures and seals, and the contract which [Seller] supplied does not have certified pages of the contract but only the following sentence written on the last page “CEO of [Buyer] (name and last name)” with an illegible signature of some person and without a seal.

The issues at stake amongst the Parties:

   -    Which of the abovementioned contracts represents the agreement of the Parties? Is it the contract supplied by the [Buyer] with all pages signed and sealed by the Parties, or the contract supplied by the [Seller]?;
 
   -    Was the contract modified on 2 December 1999 by X, acting as a representative of the [Buyer] and the [Seller], and does such alteration represent the will of the Parties and if so is it, as such, legally binding?;
 
   -    Did [Buyer] fully and timely perform all of his obligations under the Contract with regards to the timely opening of the letter of credit?;
 
   -    Did [Seller] perform his contractual obligations?;
 
   -    Was [Seller] entitled to retain a part of the amount charged under the letter of credit in the amount of DEM 99.403,00?

In reference to the issue of the authenticity of the contract, this Court of Arbitration finds that the valid and legally binding contract is the one with seals and signatures from both parties not only at the end of the contract, but also on every page of the contract.

Although the Parties did not stipulate a legally binding form of the contract, they have in fact certified the contract by signatures and a seals of both Parties at the end of the text of the contract, and also on every page of the contract. However, to answer the question which contract is legally valid and binding it is important to examine the purpose of the form of this contract. Namely, when parties fail to explicitly agree on a certain form for conclusion of the contract, while at the same time respecting the strict written form with the appropriate attestation of every page of the contract while concluding it, then it is evident that the purpose of the such verification is in the will of parties to give to such certified  contract a complete evidentiary value and that only those terms of the contract which are found on pages so verified should produce legal effect, i.e. that those contract terms are the will of the parties and that they cannot in any other way be disputed. Will of the parties expressed by attestation on every page of the contract is entirely clear, because it refers to a contract with a foreign element (concluded between two parties from different countries), thus preventing alterations or additions of contract terms.

When a contract is concluded and certified in this manner, parties may agree on contract modification, but only in the manner and in form in which it was done in the original contract.

Therefore, the contract that was signed and verified with a stamp at the end of the text and on all pages, has an evidentiary value and represents the true will of the Parties.

Consequently, the will of the parties, as expressed in Article 3.1 and Article 7.2, was that all installments of goods must be accompanied with a certificate of the National Laboratory issued on the standard form and Certificate of origin of the goods, and not the certificate of [Seller]’s own laboratory.

The will of the parties, as expressed in Article 10.1 of the Contract, required the Buyer to open in his bank a documented, certified, irrevocable, transferable letter of credit in favor of the Seller within 5 days from signing the contract with a deadline of 40 days for the amount corresponding to the entire value of the goods. [Seller] did not prove that the will of the parties as expressed in Article 10.1 of the Contract was that the buyer “produces a timely payment for goods conveying resources from the letter of credit account to the seller’s account under warranty”.

The will of the parties, as expressed in Article 13.1 of the Contract, was that in the case of defective performance of obligations under the Contract, the Parties are entitled to calculate penalties and state losses in the additional section of the contract, which Parties regulated in detail in Annex 2 of the Contract. Consequently, [Seller] did not prove that Parties altered this Article later by adding the text “that the breaching party must pay damages and penalties to the aggrieved party by SWIFT bank transactions or by transferring currency resources of open letter of credit.  It is completely clear that [Buyer] did not accept such an alteration since it gives [Seller] the right to be compensated for his loss from the letter of credit, while [Buyer] does not have such a possibility (he is not a beneficiary of a letter of credit). Consequently, in deciding on the merits of this dispute a reference was made to the articles of the Contract which was signed and sealed at the end of every page of the Contract.   

Arbitration examined whether the contract was altered via fax no.  [….], by hearing testimony of witness [] who allegedly signed the fax, and came to a conclusion that Parties did not modify the Contract with the above-mentioned fax. Witness [], whose testimony was entirely trusted upon since it was given in a secure manner and in accordance with the usual manner for international business transactions, explicitly stated that her signature is not contained on that fax and that nobody from [Buyer]’s company could have altered the contract without verifying every page of the contract with a signature and a seal. It is not common in international business transactions to modify essential terms of the contract by fax containing a signature, without the signature being verified with a seal and without a letterhead of such company.

Therefore, the statement of [Seller] that the contract was modified by changing the party to the Contract (company from Bosnia instead of [Buyer]) and that [Buyer] ought to have delivered to [Seller] a report on transfer of his rights and obligations to the third party, because if according to new conditions of the letter of credit, the buyer of the goods was changed, [Buyer] should have delivered the confirmation that the third party  is willing to be a party to the contract, and that [Buyer] should have delivered the text of the modified contract, is without merit since it does not arise from legally valid evidence. However, even if one assumes that the parties agreed on modifying the contract by [Buyer]’s delivery of the said documents, which [Buyer] failed to do, the contract would not have been deemed altered but it could be said that an attempt to alter the contract was made.

Pursuant to Article 10.3 of the Contract, the Parties agreed on making payment via an open, irrevocable, affirmed, transferable letter of credit issued in favor of the Seller upon delivery of the following documents by the Seller: Seller’s invoice, bill of lading, a certificate of quality of the goods with notification of data on control of the radioactivity level (given that Seller’s country is the one  in  which the Chernobyl disaster took place) and a certificate of origin of the goods. [Seller] claims that those conditions were altered so that [Buyer] permitted that the amount of the letter of credit be transferred to the account of [Seller] provided that [Seller] issues a guarantee (Warrant) that the amount on [Seller]’s account will be saved. [Seller]’s notice of 3 December 1999, which is contained in the case-file, shows that [Seller] suggested adding to the list of documents: invoice, guarantee and the certificate of origin, while it suggested that the report on qualitative and quantitative takeover of goods, which is issued by the freight-forwarder, be deleted from the list. [Buyer] responded to this notice via fax on 14 December 1999, in which he accepted the change of documents under the letter of credit so that only four documents were specified to be submitted to the bank when demanding the payment of the amount of the letter of credit: a commercial invoice, Warrant, certificate of quality and certificate of origin. Pursuant to Article 3.1 of the Contract, which was not altered, [Seller] was bound to submit evidence on quality of the goods, i.e. a certificate issued by the National Laboratory, as a precondition to collect the amount of the letter of credit. However, [Seller] charged the amount by presenting his certificate of quality, by which he breached the conditions of the letter of credit.

Bearing in mind the parties’ will in regards to the stipulated documents relevant for payment under the letter of credit, expressed in the contract which was signed and stamped at the end of the Contract and on every page, also taking into consideration the alteration of the condition for collecting the amount of the letter of credit in relation to the certificate of quality with notice on radioactivity level, the [Seller] should not have collected the amount from the letter of credit since he had to submit to the bank the certificate of quality (pursuant to Article 3.1 of the Contract for which [Seller] claims was altered) issued by the National Laboratory, since he undoubtedly failed to do so.

Therefore, [Buyer] has timely made the deposit on the account of the letter of credit thus  duly performing his obligations under the contract (negotiations on the terms of the letter of credit went on until 14 December 1999). However, [Seller] did not perform his obligation of delivering the goods. Not only was he late with the delivery, but he did not deliver the goods at all, despite claiming in his notifications that he would deliver the goods until 25 January 2000 and no later than 31 January 2000.  

[Seller]’s claim that [Buyer] is in default, since it did not enable [Seller] to perform its part of the bargain, by not delivering, under the allegedly modified contract, the acceptance of the third party to enter into the contract as the buyer of the goods, was not proven. First of all, [Seller] did not prove that the contract was altered in the way it claims (and which is only in his favor). Therefore, [Seller]’s duty was to deliver the goods 30 days after the date of issuing of the letter of credit (Article 6 of the Contract) and to charge the amount of the letter of credit only after delivery of the goods.

Consequently, the fact that [Seller] charged the letter of credit without delivering the goods and without fulfilling the conditions of the letter of credit represents not only the breach of the contract, but is also not in accordance with international customs and the purpose of the letter of credit (the seller’s interests are secured by enabling him to receive payment upon delivery of the goods, while the buyer’s interests are protected by enabling payment only upon presentation of evidence that the delivery has been made).

[Seller] was himself aware of that fact, since he refunded the charged amount of the letter of credit on [Buyer]’s demand, but retained the amount of DEM 99.403,00 without legal grounds. [Seller] believes that it is entitled to that amount representing 10% of the price on behalf of the contractual penalty clause, since [Seller] considers that the breach of the contract was not his fault. [Seller] bases [Buyer]’s responsibility for the breach on the terms of the contract that bears the same number and date as the contract submitted by the [Buyer], but without a signature and a seal, unlike the contract submitted by [Buyer]. [Seller] also bases his claim on the modification of the contract from 2 December 1999, i.e. on the fact that [Seller] could not have delivered the goods, since according to the new contract, [Buyer] did not submit one out of three required documents. It was already elaborated that the clause of [Seller]’s contract in Article 13.1 is not credible, since the parties have not negotiated the possibility of charging the contractual penalty from the amount of the letter of credit. Charging the amount of contractual penalty from the amount of the letter of credit is unusual and contrary to the function of the letter of credit which represents means of payment for delivered goods.

Therefore, [Seller] acted against the usual course of the business transactions, by unilaterally altering the terms of the contract, that is, by adding articles to the contract in a way that favors him. Consequently, he charged the amount of the letter of credit without delivering the goods, not only 30 days after issuing the letter of credit but did not delivering the goods at all. All of this shows that [Seller] is the one who breached the contract.

[Buyer] was the one who adhered to the terms of the contract, while [Seller] did everything to alter the contract in a way that favors him and to benefit from such alleged change by charging the amount of the letter of credit without presenting stipulated documents and without delivering the goods.

During the arbitration [Buyer] specified and altered his claim, as follows: the amount of DEM 407.712,78 out of which: the amount of DEM 99.000,00 on behalf of unjust enrichment, the amount of DEM 94.350,00 on behalf of the contractual penalty, the amount of DEM 61.000,00 on behalf of damages for failure to perform his obligations towards his partners, the amount of DEM 104.750,00 on behalf of lost profit, the amount of DEM 30.000,00 on behalf of non-material loss, the amount of DEM 13.019,78 on behalf of the costs of the letter of credit, and the amount of DEM 5.190,00 on behalf of legal, economic and translation costs.

Applicable law

Application of Swedish law was agreed by the Parties in Article 16, point 14.6 of the contract No. 11-06-1099.

However, the sole arbitrator considers that, in regards to the dispute which is the result of the realization of the named contract, the UN Convention for Contracts on International Sale of Goods (Vienna Convention) should be applied since two conditions for its application from Article 1, points a) and b) are met.

Pursuant to Article 1 this Convention applies to contracts of sale of goods between parties whose places of business are in different States when the States are Contracting States. Given that Yugoslavia ratified the Vienna Convention on 27 December 1984 and Ukraine ratified the Vienna Convention on 1 February 1991, both States, where parties have places of business, are Contracting States.

Taking into consideration that Sweden ratified the Convention on 1 January1989, the Court of Arbitration finds that the CISG forms a part of the domestic law of all three countries (Yugoslavia, Ukraine and Sweden), and that consequently the CISG should be applied as applicable law.

Unjust enrichment

[Seller] holds, without grounds, a partial amount of the letter of credit, that is DEM 99.403,00 ( EUR 49.701,50), since [Seller] is a contractual party that breached the contract, and therefore does not have the right to hold that amount on behalf of the contractual  penalty (10%), that is, [Seller], as the party that breached the contract, is not entitled to contractual penalty.

Pursuant to Article 81 (2) of the Convention, a party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract.

[Buyer] is the party that performed the contract and paid the goods by opening the letter of credit. [Seller] charged the amount of the letter of credit, however, avoided delivering the goods. Therefore, [Seller] was bound to refund the amount charged from the letter of credit, without retaining any part of the amount. [Seller] retained 10% of the charged amount of the letter of credit and, therefore, must refund that amount (DEM 99.403,00) since it is held without grounds.

Pursuant to Article 45 of Vienna Convention there are other remedies aimed at compensation of loss suffered as a consequence of breach of contract. Consequently, CISG allows parties to agree on contractual penalty as means of compensation for the loss.

In comparative law contractual penalty has great importance as a factor of strengthening contract discipline (securing the performance of the contract) and as means of enforcement of the right to claim damages resulting from breach of the contract. Therefore, both in comparative law and in our law, contractual penalty has double function – it is a means of securing the contract performance, as well as the remedy aimed at compensation of loss.

Both of the said functions of contractual penalty are an important attribute of the legal nature of contractual penalty, although in different cases different function will prevail.

[Seller] did not perform his obligation of delivering the goods despite the fact that he charged the amount of the letter of credit and was due to deliver the goods until 25 January 2000, i.e. by 31 January 2000 at the latest and is, therefore, bound to pay the contractual penalty amounting to DEM 94.350,00 which, in this case, has a function of partial compensation of damages. 

Interest

Pursuant to Article 78 of the UN Convention on Contracts for the International Sale of Goods, if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without losing the right to any claim for damages recoverable under Article 74.

However, this provision does not provide answers to questions regarding the relevant time period for calculation of interest and the appropriate interest rate.

Pursuant to Article 7 (2) of the CISG, questions concerning matters governed by this Convention, which are not explicitly settled in it, are to be settled in conformity with the general principles on which it is based on or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

General principles on which the Convention is based upon are principle of good faith, party autonomy, foreseeability, principle of exchange of information and cooperation and like, however, these principles cannot serve as bases for determination on the applicable interest rate and the time when the interest starts accruing.

That is why the sole arbitrator finds the application of the subsidiary solution necessary, i.e. to determine the applicable law based on conflicts of laws rules. On question of applicable law considering interests, the applicable law is the one relevant for payment itself which is the law of the creditor. According to the principle of full compensation, the creditor has the right to be compensated for the loss of use of money by application of such interest rate as he would be entitled to under the laws of his own country.

[Buyer] was granted the interest rate of 6% until 2 March 2001 and starting from that date until payment at a domiciliary rate in accordance with the Law on Statutory Interest Rate.

[Buyer] does not have the right to claim interest for the period starting from the day it ordered its bank to issue the letter of credit (4 November 1999), but from the day the letter of credit was issued. This is why [Buyer]’s claim for interest on the amount of EUR 49.701,50 from 04 November 1999 until 14 December1999 was rejected.

Considering the success in this dispute, in the partial decision [Buyer] was granted the costs of proceedings in amount of RSD 57.000, which refer to arbitral costs that [Buyer] had incurred in this proceedings.

In Belgrade, 9 December 2002

Arbitrator
[signed]


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Serbia is referred to as [Buyer] and Respondent of Ukraine is referred to as [Seller].

** Mina Sreckovic and Anja Tasic are third year students of the University of Belgrade Faculty of Law. Dr. Vladimir Pavic is an Associate Professor in Private International Law and Arbitration at the University of Belgrade Faculty of Law. Milena Djordjevic, LL.M. (U. of Pittsburgh) is a Lecturer in International Commercial Law at the University of Belgrade Faculty of Law.

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