Russia 15 August 2003 Arbitration proceeding 57/2001 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/030815r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 57/2001
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Netherlands (respondent)
BUYER'S COUNTRY: Russian Federation (claimant)
GOODS INVOLVED: Clothes
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
6B [Agreements to apply Convention: choice of law of Contracting State equals choice of Convention]; 74A1 ; 74B1 [General rules for measuring damages (loss suffered as consequence of breach): includes loss of profit; Outer limits of damages: foreseeability of loss as possible consequence of breach]
6B [Agreements to apply Convention: choice of law of Contracting State equals choice of Convention];
74A1 ; 74B1 [General rules for measuring damages (loss suffered as consequence of breach): includes loss of profit; Outer limits of damages: foreseeability of loss as possible consequence of breach]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Russian): M.G. Rozenberg, Praktika Mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 2003 g./Sost. [Arbitration decisions rendered by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in 2003], published by "Statut" (2004), Case No. 29 [161-169]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Case text (English translation) [second draft]
Queen Mary Case Translation Programme
Translation [*] by Yelena Kalika [**]
1. SUMMARY OF RULING
1.1 Upon analyzing the evidence submitted by the parties, the Tribunal dismissed the Respondent [Seller]'s objections to the Tribunal's competence to arbitrate the present dispute on the ground of the invalidity of the contract that contained an arbitration clause stating that disputes should be arbitrated by the Tribunal. At the same time, since the contract did not contain any special provisions stating either that it should govern all the previous relationships of the parties or the date on which it should come into force, the Tribunal concluded that both the contract as a whole and its provisions separately (including the arbitration clause) came into force only on the date on which the contract was signed and that the contract governed the relationships of the parties that arose after that date. Thus, the Tribunal found that it had competence only with respect to that portion of the goods as to which such relationships of the parties arose after that date.
1.2 The Tribunal did not find reasonable the Respondent [Seller]'s argument that its relationships with the Claimant [Buyer] were governed by the General Terms of Delivery 1996 and not by the provisions of the contract signed by the parties. There are no references to [these General Terms] in the contract. In the absence of the [Buyer]'s agreement that [such terms] shall apply, the presence of such references in the [Seller]'s standard forms (blank invoices) does not mean that the [Buyer] is bound by them.
1.3 In the absence of the parties' agreement on the applicable law, the Tribunal found that the parties' relationships should be governed by the CISG. Both States, where the commercial enterprises of the parties to the contract are located, are CISG Contracting States. It was noted that if it were necessary to apply the rules of domestic law, the Tribunal would be governed by the provisions of the CISG (Article 7(2)). It was not necessary for the Tribunal [to apply domestic law]. The award was rendered based on the relevant provisions of the CISG.
1.4 The [Buyer]'s claims in connection with delivery of defective goods were reviewed based on the statements of disinterested expert organizations which were duly licensed by the State.
1.5 The Tribunal found that the [Buyer]'s claim of lost profits were excessive but nevertheless granted it. The Tribunal took into account the [Buyer]'s expenses in connection with the uncompensated storage of the defective good for several years as well as damages sustained in connection with the sale of goods returned by its customers.
1.6 The Tribunal denied the [Buyer]'s claim to recover from the [Seller] the sums paid to the buyers of the defective goods as compensation of moral damages based on the provisions of Article 74 CISG. [Article 74] sets forth that only such loss shall be compensated that the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known.
2. FACTS AND PLEADINGS
[Buyer], a Russian firm, brought a claim against Respondent [Seller], a Dutch firm, in connection with delivery of non-conforming goods. The goods were delivered under the contract for the international sale of goods made by the parties on 27 January 2000. The claim concerned the shipments made by the [Seller] from August 1999 to April 2000. In the [Buyer]'s opinion, the provision in the contract stating that the quality of the goods should meet the requirements of the State Standards means the standards that are in force in Russia. The goods delivered are both non-conforming and not fit for any ordinary use.
The [Buyer] claimed restitution of the damages sustained including both expenses and lost profits.
The [Seller] contested the competence of the Tribunal to arbitrate the present dispute on the ground that the contract, based on which the [Buyer] brought its claim, was invalid. In [Seller]'s opinion, the relationships of the parties were governed not by the contract but by the General Terms of Delivery 1996 which provided for the adjudication of this dispute by the District Court in Amsterdam. The [Seller] also made some objections concerning the merits of the [Buyer]'s claims.
3. TRIBUNAL'S REASONING
The award rendered by the Tribunal contained the following main points.
3.1 The International Commercial Arbitration Tribunal considers it necessary to review the issue of its competence to arbitrate the dispute. As follows from the positions of the parties, the answer to this question depends on whether the contract of 27 January 2000 was valid.
3.2 The [Seller] does not contest the fact that he signed this contract. In the fax message of 15 February 2000 addressed to the [Buyer], the [Seller] stated that it was sending the contract "signed by him" to the [Buyer].
The [Seller]'s argument, that it signed this contract only in order to carry out certain formalities that the [Buyer] needed - i.e., that [the contract] was sham and there were no intentions to create the legal consequences set forth in the contract - and that in reality the parties agreed that their relationships should be governed by the General Terms 1996, which were drafted and applied by the [Seller], is not supported by the materials of the case including the documents submitted by the [Seller].
As follows from the [Buyer]'s fax messages of 4 February and 9 February 2000, which were submitted by the [Seller], the [Buyer] indeed asked the [Seller] to sign the contract. However, while doing so, the [Buyer] referred not to any necessity to carry out a simple formality but to the fact that under Russian law "import transactions shall not be performed in the absence of a signed contract", that [without a signed contract] neither customs clearance of the goods nor their certification can be carried out. Nor can the payment be made through a bank. It follows from the fax message of 9 February 2000 that the [Buyer] deliberately included in the contract the provisions that had already been agreed upon by the [Seller] (Clauses 3.1 and 3.2).
Even assuming that, as the [Seller] claims, the signing of the contract was necessitated only by the [Buyer]'s needs and request, it does not follow that the signing of the contract was a sham transaction. It is not possible that the [Seller], which considers itself "a serious firm carrying out business activities worldwide" (see letter of 13 June 2001) and which, according to its attorneys, is "a major supplier of first class goods in Europe" (see letter of 9 October 2001), did not understand the legal consequences of its signing the contract translated into English.
Besides, as evidenced by the documents contained in the materials of the case, the parties had been negotiating the contract for at least eight months. The [Seller] actively participated in the drafting of the terms of the contract. The language of the numerous letters between the parties also evidences this fact:
|-||On 25 May 1999, the [Buyer] wrote to the [Seller]: "... we would like to sign a contract with your company as it is required by Russian law."
|-||On 10 June 1999, the [Seller] wrote to the [Buyer]: "Please send your draft contract via fax so we could see what you need. Then we will be able to send you our contract."
|-||On 8 October 1999, the parties had negotiations in The Netherlands concerning two issues. One issue concerned the negotiations of the terms of the contract. The parties further agreed on the terms of the contract by means of exchanging fax messages ([Buyer]'s fax messages of 14 October, 21 October and 1 November 1999, [Seller]'s fax messages of 13 October, 22 October and 12 November 1999). In particular, the parties agreed on Clause 3.1, 3.2 and 11 (see [Seller]'s fax message of 18 November 1999, [Buyer]'s fax message of 9 February 2000).|
It is clear that the [Seller] was well informed of the terms of the draft contract, had a real opportunity to influence its contents and did so on several occasions. Therefore, the Tribunal does not see any grounds to hold that the [Seller] entered into the contract in order to do a "favor" to the [Buyer], did not fully understand its contents and viewed it only as a simple formality.
3.3 The [Seller] is of the opinion that its relationships with the [Buyer] were governed not by the contract but by the General Terms 1996. The Tribunal does not find any evidence in the materials of the case in support of this position.
As follows from the text of the General Terms submitted by the [Seller], their full title was "The general terms of a private limited liability company" with the indication of the name of the [Seller]'s company. Thus, their application is a unilateral act which can be applied to the bilateral obligations only with the assent of the other party. The [Seller] has not presented any evidence of such assent on the part of the [Buyer]. The words "the Supplier's terms of delivery", which the [Seller] relies upon as on the ones stated in the Protocol of 13 January 2000, represent only a small part of the introductory sentence in that protocol: "[The parties] discussed the list of issues concerning the terms of delivery of the Supplier's goods (delivery terms of Suppliers product) [translator: the italicized words are written in English in the text of the award] to Russia in 2000". Neither the Protocol, not this phrase mentions the General conditions. Nor there is a reference to [such conditions] in the contract.
As to the standard boilerplate references to the General Terms 1996 in the blank invoices and other [Seller]'s documentation, they by themselves cannot make such general terms binding on the other party.
3.4 For the above stated reasons, the Tribunal concludes that by signing the contract of 27 January 2001 the [Buyer] and [Seller] made an agreement and became bound by its terms, including the arbitration clause stated in Clause 10 of the contract.
This clause sets forth that
"All disputes, that may arise out of the present contact or in connection with it, shall be resolved by means of negotiation. If it is not possible to resolve disputes by negotiation, they shall be submitted for arbitration to the Arbitration Commission at the Russian Federation Chamber of Commerce and Industry and shall be arbitrated in accordance with the Rules of the Commission. The award rendered by the Commission shall be final and binding on both parties."
This arbitration clause erroneously uses a portion of the old name of the Tribunal.
In accordance with Clause 10 of the contract and the Russian Federation Law "On International Commercial Arbitration", the Tribunal finds that it is competent to resolve disputes arising out of the contract or in connection with it. Such disputes should be excluded from the jurisdiction of the State courts.
3.5 The parties dated the contract 27 January 2000. The contract does not contain any specific provisions concerning whether it covers the preceding relationships of the parties or the time of its coming into force. Therefore, the Tribunal concludes that the contract in general and its terms in particular (including the arbitration clause) came into force on 27 January 2000 and has been governing the parties' relationships since that date.
This means that the contract governs the parties' relationships in connection with two deliveries of goods from the [Seller] to the [Buyer] in 2000 (see invoices dated 14 February and 28 February 2000). Thus, the Tribunal has competence to arbitrate disputes in connection with these two deliveries.
3.6 In the contract, the parties failed to agree on the applicable law governing their relationships. Therefore, if it is necessary to determine the applicable law, the Tribunal shall be governed by Article 7(2) CISG. Both Russian and the Netherlands are CISG Contracting States. The parties' relationships shall be primarily governed by the CISG since the contract does not contain any provisions excluding its application.
3.7 When discussing the issue of the absence of the [Seller]'s representative at the hearing, the Tribunal found that on 14 September and 17 October 2001 the [Seller] received notices stating that the hearings were to be held on 9 October and 10 December 2001. In the materials of the case there are postal receipts evidencing this fact. For this reason, it is necessary to hold that the [Seller] had sufficient time to prepare for and attend the hearing as prescribed in Article 23(1) of the Rules of the Tribunal.
According to Article 28(2) of the Rules of the Tribunal, a party's absence [at a hearing], where such party has been duly notified of the time and place of the hearing, does not preclude the arbitration of the case and rendering of an award, unless the absent party filed a written motion to adjourn the hearing for a good cause shown. Since the [Seller] has not filed such a motion, the Tribunal finds it possible to arbitrate the case in the absence of the [Seller]'s representative.
3.8 After reviewing the documents presented, including the expert testimony, and after hearing the arguments made by the [Buyer]'s representative, the Tribunal finds it just and reasonable to base the computation of damages sustained by the [Buyer] on the results of the inspection of the goods delivered to him. The inspection was made by several disinterested expert organizations duly licensed by the state to make such inspections.
On 12 May 2000, a branch of the Russian Federation Chamber of Commerce and Industry inspected the quality of the goods delivered to the [Buyer] by the [Seller]. As follows from the act of inspection of 5 June 2000, among the samples inspected there were samples of six kinds of goods delivered by the [Buyer] after 27 January 2000, i.e., based on the contract made between the parties on that date.
As a result of the inspection, it was established that some goods had quality defects as well as sewing and technological defects of fabrics. Other goods did not meet the requirements as to shrinkage. One item had a discrepancy between the factual size and the size stated on the label.
On 11 September 2002, an independent expert organization "Expert-Service" inspected the quality of other items delivered to the [Seller] under the contract of 27 January 2000.
As a result of this inspection, it was established that all of the items had "various technological fabric and sewing defects and excessive shrinkage..." The appendix to the expert's report of 26 September 2002 describes every defect of every item in detail.
The Tribunal finds that the [Buyer]'s claim to recover the cost of defective goods should be sustained.
3.9 The [Buyer] sustained damages in connection with the purchase from the [Seller] of the defective goods that are currently stored at the [Buyer]'s warehouse. The damages resulted from the payment of customs duties in the amount of 30% of the cost of the goods as well as the Value Added Tax in the amount of 20% of the cost of the goods.
The [Seller] should reimburse such expenses of the [Buyer].
3.10 The Tribunal finds excessive the [Buyer]'s claim to recover its lost profits in the amount of 50% of the cost of the defective - and, thus, unsold - goods. However, the Tribunal is of the opinion that nevertheless this claim should be granted taking into consideration that the [Buyer] has been keeping the goods [in his warehouse] for many years without any compensation. The [Buyer] has also sustained damages in connection with the sale of that portion of the goods which was later returned by its customers.
3.11 The Tribunal does not see any reason to grant the recovery of the expenses resulted from the sale of the goods, which were later returned to the [Buyer] by the customers, because the cost of such goods is included in the sums to be paid by the [Seller] in accordance with other clauses of the present award.
3.12 The [Buyer] asks the Tribunal to recover from the [Seller] expenses paid for the inspection of the defective goods. In the materials of the case there are relevant documents supporting this claim.
The Tribunal finds it possible to grant this claim of the [Buyer].
3.13 The [Buyer] included in his losses the sums paid to the customers who purchased the defective goods received from the [Seller]. [Such losses] were included as moral damages [translator: punitive damages?] based on the Russian Federation Law "On protection of customers rights". The Tribunal is of the opinion that, based on Article 74 CISG, such claim cannot be granted. In accordance with [Article 74], damages for breach of contract may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. The Tribunal has no reason to believe that, in the light of the facts and matters of the case, the [Seller] ought to have reasonably foreseen such consequence of the breach of contract as the [Buyer]'s payment of moral damages to his consumers. Moreover, as follows from the materials submitted by the [Buyer], it made such payments voluntarily.
3.14 The Tribunal grants [Buyer]'s claim to recover attorneys' fees taking into consideration the volume of the documents submitted in support [of the claims], the length of the hearings and the award rendered.
3.15 Taking into consideration that the claims were partially sustained, the arbitration fees paid by the [Buyer] must be reimbursed by the [Seller] in proportion to the claims sustained.
* This is a translation of data on Proceeding 57/2001, dated 15 August 2003, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in Rozenberg ed., Arb. Praktika (2003) No. 29 [161-169].
All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Russian Federation is referred to as [Buyer] and Respondent of The Netherlands 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.Go to Case Table of Contents