Russia 22 October 2003 Arbitration proceeding 134/2001 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/031022r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 134/2001
CASE HISTORY: Unavailable
SELLER'S COUNTRY: [-]
BUYER'S COUNTRY: [-]
GOODS INVOLVED: [-]
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:
7A3 [Principles of interpretation: observance of good faith]; 74A ; 74A1 [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit]; 77A [Mitigation of damages: obligation to take reasonable measures to mitigate damages]
7A3 [Principles of interpretation: observance of good faith];
74A ; 74A1 [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit];
77A [Mitigation of damages: obligation to take reasonable measures to mitigate damages]
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. 34 [197-209]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Queen Mary Case Translation Programme
Translation [*] by Yelena Kalika [**]
1. SUMMARY OF RULING
1.1 Since the Seller, who brought a claim to recover the payment for the goods delivered, acknowledged that there was an error in his computations and since he could not provide a definite amount of the sum in arrears, the Tribunal based its determination of the sum in arrears on the data presented by the Respondent [Buyer].
1.2 The Tribunal could not review Seller's claim to terminate the contract because the contract had expired by the time when such claim was brought.
1.3 Where the parties entered into a frame agreement - which required an annual verification and coordination of the volume, specifications and quantities of the goods to be delivered - and where it was necessary to calculate the profits lost due to non-delivery of the goods, the Tribunal could take into account only those periods of time in connection with which such verification and coordination was made.
1.4 The delay in delivery, which resulted from the breach of contract by the Buyer, could not entail the recovery from the Seller of the profit lost due to non-delivery of the goods.
1.5 The Seller's refusal to accept the necessary component parts from the Buyer resulted in a loss to the Buyer which Buyer is entitled to recover from the Seller.
1.6 Since the Seller did not bring his claims in connection with the component parts, which were shipped by the Buyer, within the period of time set in the contract, he must reimburse Buyer's expenses incurred in connection with the addition of the [new] component parts required to make the finished goods.
1.7 The actions of the Seller, who sold the goods to third parties, did not violate the agreement granting the Buyer an exclusive right of sale because, according to the appendix to the agreement of the parties, the Seller had the right to take such steps if the Buyer breached his obligations to make a payment. The fact of such a breach was duly established.
2. FACTS AND PLEADINGS
A Russian Seller brought a claim against an Italian Buyer in connection with a partial non-payment for goods delivered under a contract made by the parties on 19 May 1999. The Buyer brought a counterclaim against the Seller to recover damages resulting from the Seller's breach of the parties' Agreement giving the Buyer an exclusive right to sell a particular item manufactured by the Seller as well as from the Seller's improper performance of the contract of 19 May 1999. The Buyer also insisted on the termination of the said Contract and Agreement. In accordance with the terms of the Contract of 19 May 1999, the Buyer was to deliver component parts and details to the Seller. The Seller was to use [the component parts and details] in manufacturing the goods that were to be delivered to the Buyer. The Buyer was to pay for the goods by means of a wire transfer of the difference between the price of the goods and the price of the component parts and details supplied to the Seller. The Contract provided that it would expire at the end of 2001. Besides, it was specifically stated that no later than 1 November each year the parties would make an annual verification and coordination of the volumes, specifications and quantities of the goods and component parts and details. Such verifications and coordinations were made in 1999 and 2000.
3. TRIBUNAL'S REASONING
The Tribunal's award contained the following main points.
3.1 The competence of the Tribunal
The Tribunal has competence to arbitrate this dispute since the subject of the claim is a contract for the international sale of goods of 19 May 1999 made by Russian and foreign legal entities. In accordance with Clause 12.2 [of the Contract], "all disputes, disagreements and claims arising out of the contract or in connection with it, including the ones concerning its performance, breach, termination or invalidity, shall be arbitrated by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in Moscow in accordance with the Rules of the said Tribunal." The competence of the Tribunal to arbitrate the counterclaim following from the Agreement on the exclusive right to sell Seller's goods of 19 May 1999 is set forth in Clause 2.4 of the Agreement providing that "All disputes and disagreements, including the ones concerning the performance of the Agreement, shall be arbitrated by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in Moscow in accordance with the Rules of the said Tribunal."
The parties to the dispute did not contest the Tribunal's competence to arbitrate the dispute which followed from the Contract and Agreement. Moreover, the parties agreed that the Tribunal had competence to arbitrate the present dispute.
3.2 The applicable law
The parties' Contract in controversy does not contain provisions on the applicable law. The Agreement also does not settle the issue of the applicable law.
When arbitrating the present dispute, the Tribunal should apply the CISG to the issues not settled in the contract. Since the parties failed to exclude the application of the CISG, it applies pursuant to Article 1(1)(a) CISG because both Russia and Italy are CISG Contracting States and because, when the contract was made, the parties' commercial enterprises were located in the said states. In accordance with Article 166 of the USSR Principles of Civil Law 1991, Article 28 of the Russian Federation Law "On International Commercial Arbitration" and Article 13 of the Rules of the Tribunal, Russian civil law should apply to the contract as subsidiary law.
During the oral argument, the parties reached a mutual agreement that both the Contract of 19 May 1999 and the Agreement on the exclusive right to sell goods of 19 May 1999 were related to each other.
3.3 Evaluation of reasonableness of Seller's claims to recover from the Buyer the sum in arrears for the goods delivered
The Seller argues that the said claim results from the Buyer's improper performance of his payment obligations under the contract.
The Tribunal believes that both the claim and additional claims are reasonable and supported by necessary evidence. The Tribunal draws this conclusion based on the following.
First of all, it is necessary to point out that the Buyer does not contest either the price of the goods received, or the price of the component parts and details or the volume of deliveries as stated in the documents presented by the Seller.
In October 2000, the Seller issued nine invoices to the Buyer for 410 finished products delivered in July, September and October 2000. That the Seller shipped the goods is evidenced by the railroad waybills (see Appendix 4 to the Seller's claim) and is not contested by the Buyer.
The total price of the goods delivered amounted to the sum stated by the Seller. The sum in arrears to be paid by the Buyer to the Seller was calculated taking into account the previous trade balance in favor of the Buyer.
The period of time within which the payment was to be made was determined in accordance with Appendix 6 to the Contract as 75 days beginning on the first day o the month at issue, i.e., by 14 December 2000.
The Buyer has presented no evidence denying the said periods of time. Moreover, he confirmed [them] in his counterclaim.
The Buyer breached his payment obligations set forth in Clause 5.3 of the Appendix No. 1 to the Contract (in the version provided in Appendix 6 to the Contract) when he failed to timely pay the amount stated by 14 December 2000.
The final sum in arrears due from the Buyer was determined as of March 2001 based on the data of the bank, an agent of the currency control [authority], taken from the bank control sheet.
At the same time, evidence presented by the Seller in support of his claims is contradictory. In particular, the data stated in the bank control sheet differ from the trade balance of the mutual deliveries. The Buyer pointed out this circumstance at the hearing held on 15 May 2003. The Buyer submitted his computations, which represented the correct balance of deliveries of component parts and finished products for the period of time from 1 August 2000 to 1 November 2000. Based on the extracts from the invoices issued from 6 September 1999 to 2 February 2001, as of 1 November 2001 the trade balance represented a much smaller amount in favor of the Seller. The Seller agreed that there was an error. However, he could not state a definite sum in arrears. For the above reasons, the Tribunal takes the data presented by the Buyer as the basis [for its computations].
The contract made by the parties is a contract for the sale of goods.
In accordance with Article 53 CISG, the Buyer's primary obligation under the contract of sale is to pay the price for the goods delivered. Moreover, in accordance with Article 54 CISG, the Buyer's obligation to pay the price also includes taking such steps as may be required to enable payment to be made. Thus, the Buyer was to pay for the goods (products) within the periods of time set in the Contract, taking into consideration Appendix 6, i.e., by 14 December 2000.
The Tribunal found that the Buyer's reliance on Article 328 of the Russian Federation Civil Code as the basis for his refusal to perform his obligations was erroneous. Article 310 of the Russian Federation Civil Code does not permit a unilateral refusal to perform one's obligations.
Therefore, the Seller's claims to recover the sum in arrears should be partially granted.
3.4 Evaluation of the reasonableness of the Buyer's claims
a) The Buyer's claim to terminate the contract
The Tribunal cannot grant a claim to terminate the contract since Clause 1.1 of the Contract states that the parties agreed to cooperate in the field of manufacturing the goods until the end of 2001. Therefore, the contract expired on 31 December 2001. The parties agreed [with such conclusion] at the hearing.
b) The Buyer's claims to recover from Seller damages sustained as result of non-delivery of 18,240 items
The claims of the Buyer to recover damages resulted from non-delivery of the goods should be granted only partially for the following reasons.
In the Tribunal's opinion, the volume of deliveries set in the Contract was only preliminary since in Clause 1.6 of the Contract the parties agreed to make annual verification and coordination of the volumes, specifications and quantities of the goods to be delivered. Thus, the Contract represented a frame agreement and it is not possible to base the computation of lost profits on the alleged volumes of deliveries stated in Clause 1.1 of the contract.
Appendix 6 was the only appendix in which the volumes of deliveries were set. Both parties signed the said appendix and did not contest it at the hearing.
As to the breach in connection with the volume of deliveries in 1999, the first lot of the component parts and details delivered by the Buyer in 1999 was short and could not be used. [This fact] is evidenced by the protocol of 15 September 1999 signed by the Buyer (see Appendix 1/3 to Appendix 1 to the claim). There was a shortage and regrading of the goods in the lot delivered. Some positions were not included [in the lot]. Some of the component parts could not be used in the manufacturing of goods due to design defects. The Buyer did not contest this fact at the hearing. The shortage in the first lot was not corrected till 16 December 1999.
The said breach by the Buyer of his obligations under the contract resulted in the delay of shipment without any fault of the Seller, as provided in Clause 4.4 of the Contract. Thus, the Tribunal denies the Buyer's claim to recover lost profits for 1999.
A breach of the volume of deliveries agreed upon by the parties in 2000 resulted from the Seller's delaying his acceptance of the component parts and details as well as delivery of the finished products. As follows from the materials of the case and the parties' statements, both before and after Appendix 6 was signed, the Seller delayed his performance of obligations, namely, the acceptance of the parts delivered by the Buyer. The Seller made delays from 3 to 92 days in delivery of the finished goods. [Such delays] resulted in delays in Buyer's selling the goods to his customers and, thus, in a lack of funds required to purchase the new lots of details from the manufacturer.
Besides, in 2000 the Seller left the Buyer without a right of homologation, i.e., without the right to have Buyer's status in this respect confirmed. This led to difficulties in selling the goods by the Buyer and a lack of funds necessary to buy new lots of component parts. It later led to the Buyer's firm going bankrupt.
Notwithstanding the fact that the Agreement of 19 May 1999 remained in force until 30 June 2002, the Seller violated the principles of good faith and impossibility of a unilateral refusal to perform one's obligations. In his Declaration of 8 February 2000, his letter of 29 May 2000 and again in his circular No. 00010/152 of 24 August 2000, which were addressed to a relevant authority in the Republic of Italy, the Seller announced that the Buyer was no longer an exclusive importer of the Seller's goods to the Italian market. However, notwithstanding the [above mentioned] circumstances, on 21 February 2000 the Seller and Buyer signed Appendix 6 to the Contract concerning deliveries of goods in 2000.
Only on 12 October 2000 did the Buyer receive a letter from the Seller which stated that the Agreement on the exclusive right to sell goods in Italy was terminated. In addition, a reference to the Seller's letter of 13 March 2000 was made and it was stated that the Buyer was no longer an importer of the Seller's goods to the territories stated in the agency agreement of 28 February 1992.
Thus, without any reference to the grounds for a unilateral refusal to perform the Agreement, the Seller committed a serious violation of the principle of good faith in his relationships with the Buyer.
As to the deliveries under the Contract in 2000, Appendix 6 set forth that 4,140 finished products were to be delivered. In reality, only 1,350 items were manufactured in 2000 of which the Buyer received only 1,010 items. Such discrepancy between the goods planned to be delivered and the goods in fact delivered resulted from the Seller's unlawful actions.
Pursuant to Articles 45 and 74 CISG, if the Seller fails to perform any of his obligations under the contract, the Buyer may claim damages, including loss of profit, suffered by the Buyer as a consequence of the breach of contract.
The Buyer suffered loss of profit because he did not receive 2,790 finished products (4140-1350) and, thus, he could not sell them to his potential customers. The profit received by the Buyer for each sold item was determined in the audit report based on the sales made by the Buyer. The Tribunal finds reasonable such computation of the lost profit.
As to the Buyer's claim to recover lost profit for 2001 in connection with non-delivery of 10,980 finished products by the Seller, the Tribunal draws the following conclusion. As stated above, in Clause 1.6 of the Contract, the parties agreed that by 1 November of each year they would make annual verification and coordination of the volumes, specifications and quantities of the component parts and details to be delivered in the next year. Since no additional agreements to the Contract were signed in connection with the volume, prices, etc. for 2001, the Buyer could not expect deliveries of goods from the Seller in 2001.
Besides, in accordance with Article 393(4) of the Russian Federation Civil Code, when determining the amount of lost profit, any measures taken or any preparations made by the creditor (Buyer) in order to receive such profit shall be taken into consideration. The Buyer has presented no evidence of any measures taken or any preparations made by him in connection with deliveries under the Contract in 2001. Moreover, the Buyer made no attempts to coordinate with the Seller the volumes and schedules of deliveries for 2001.
Therefore, pursuant to the Russian Federation Civil Code, it is not possible to determine the amount of the profit lost by the Buyer in 2001.
c) The Buyer's claim to recover from the Seller damages sustained as a result of the delay in acceptance of the component parts and details by the Seller
The Buyer argues that he sustained damages as a result of the Seller's suspension of his acceptance of the component parts and details that led to the unexpected necessity to store them in the manufacturer's warehouse.
It follows from the documents submitted by the parties that on 12 January 2000 the Buyer received a fax message from the Seller that contained the agreed text of Appendix 6 on deliveries of goods to be made in 2000. [The fax message] also contained a suggestion that the Buyer sign [the Appendix] and provide the schedule of deliveries of the component parts in 2000. By his fax message of 21 January 2000, the Buyer notified the Seller that he was ready to ship 270 units of [component] parts. By his fax message of 24 January 2000, the Buyer notified the Seller that he was ready to ship 270 units on 31 January 2000 and again 270 units on 4 February 2000. By his fax messages of 25 January 2000 and 18 February 2000, the Seller informed the Buyer that he was unable to accept deliveries because Appendix 6 was not signed by the General Director of the Seller's firm and, thus, the bank did not issue the documents required to complete the transaction.
It was established based on the materials of the case that from January to April 2000 the Buyer paid damages to the manufacturer for the storage of 540 units. Damages were paid in accordance with invoices of 12 April 2000 and 7 July 2000.
The Tribunal believes that there is a causal connection between the breach of contract obligations by the Seller, delay in signing of Appendix 6, issuance of documents [by the bank], refusal to accept the parts and details and damages sustained by the Buyer and evidenced by the invoices issued by the manufacturer in connection with the storage of the parts and details in the warehouse.
Pursuant to Article 445 of the Russian Federation Civil Code, a party, who unreasonably delays the making of a contract, shall reimburse the other party any damages sustained as a result [of such delay].
For the above reasons, the Tribunal cannot agree with the Seller's argument that the Seller did not breach the Contract since he was unable to carry out the customs clearing of the parts and details imported.
Taking the above into consideration and pursuant to Article 445 of the Russian Federation Civil Code, the Buyer's claim to recover damages from the Seller should be granted.
d) The Buyer's claims to recover from the Seller the damages sustained due to short delivery of goods
According to the Buyer, during the period of time, within which the contract was in force, the Seller delivered 29 finished products in which one of the details was missing. Since it was impossible to sell these goods without such details, the Buyer made an additional purchase of the missing details and installed them. In support of his claims, the Buyer has presented his letter to the Seller of 10 November 2000 (see Appendix 24 to the counterclaim) in which he listed the expenses incurred in connection with the purchase of the materials and installation. Besides, according to the Buyer, additional expenses were incurred in connection with hiring [workers] to install [the missing details] and to make pre-sale preparations.
The Seller argues that he received 29 units without the said details. The Buyer claims that he delivered the component parts and details to the Seller. When receiving the units, the Seller failed to claim that the said details were missing and did not begin the procedure of disputing defects and shortages in the goods received which is set forth in the Contract. In accordance with Article 513 of the Russian Federation Civil Code, the goods accepted by the Buyer (recipient) shall be inspected by him within the period of time set in the contract of sale. The Buyer must inspect the quantity and quality of the goods accepted within the same period of time. Pursuant to Clause 10.1 of the Contract, in case of discrepancies between the quantity of goods received and the quantity of goods stated in a waybill or specification, any claims in connection with the quantity of the goods shall be brought within 30 days.
Besides, in his letter to the Buyer of 21 December 1999, the Seller stated that the issue of payment would be decided upon receipt of the results of the expert inspection issued by the relevant service at the [Seller's] enterprise and by the Department of Internal Affairs. The Seller asked to confirm the acceptance of 29 units with the further installation [to be performed] during the pre-sale preparation.
Since, upon receipt of component parts from the Buyer, the Seller failed to utilize the procedure of bringing claims, which was set forth in the Contract, and, moreover, since he introduced that problem to the specialists at the relevant department of [his] enterprise as well as to the Department of Internal Affairs, the Tribunal concludes that the details were lost (stolen) after the component parts were received by the Seller. The Tribunal does not accept the Seller's argument that the Buyer breached the period of time and procedure of bringing claims in connection with a shortage because the Seller himself informed the Buyer of the shortage and postponed the resolution of the issue of payment until his receiving the results of an inspection made by the relevant department of his enterprise and by the Department of Internal Affairs.
Therefore, the Seller must reimburse to the Buyer the amount spent on the making the 29 units suitable for use.
e) The Buyer's claim to recover from Seller contract penalties under their Agreement of 19 May 1999
This claim of the Buyer has no grounds and should not be granted for the following reasons.
Indeed, pursuant to Clause 1.1 of the Agreement, the Seller granted the Buyer an exclusive right to sell Seller's goods. Clause 1.7 of the Contract provided for the same right. Since both contracts were made on the same day and since the subjects of both contracts were the same goods, the Tribunal believes that, pursuant to Article 421 of the Russian Federation Civil Code and taking into consideration the purposes of the said two contracts, the mutual will of the parties was directed at giving the Buyer an exclusive right to sell certain goods.
On 21 February 2000, the parties signed Appendix 1 to the Contract (see appendix 1 to the appendix to the claim of the Seller). In Clause 5.4 of [Appendix 1] the parties agreed upon the provision stating that the goods could be sold to other customers, if the Buyer did not pay off the sum in arrears within 30 days after the due date.
Thus, the parties modified the obligations that previously existed and provided that the right to sell goods exclusively to the Buyer depended on the duly and timely payment of the Seller's invoices.
Since the will of the parties set forth in Clause 5.4 of Appendix 1 to the Contract concerned the parties' relationships and was directed at the modification of the pre-existing agreement, which were reflected both in the Agreement and the Contract, the Tribunal believes it is possible to base its evaluation of the lawfulness of the Seller's actions in connection with the sale of the goods to third parties on the last intent of the parties which was reflected in the said provision. Taking into consideration Appendix 1 and the Agreement, a different interpretation of the parties' relationships would lead to a discrepancy between the terms of the Contract. The Tribunal has established that during the year 2000 the Buyer delivered to the Seller 1,350 component parts under the Contract. At the same time, the Seller delivered only 1,010 finished goods. A shortage on the Seller's part amounted to 340 finished goods and resulted from the Buyer's failure to make a timely payment within a period of time set forth in the Contract. Thus, since the Buyer failed to fulfill his obligation to pay the Seller's invoices, in accordance with Clause 5.4 of Appendix 1 to the Contract, the Seller had a right to sell the goods to third parties. Besides, the Buyer's position, that his exclusive right to sell the goods survived even in case of his breach of obligations to pay for the goods, constitutes an abuse of one's civil rights. [Such abuse] is prohibited by Article 10 of the Russian Federation Civil Code.
5. Division of arbitration expenses and fees and other expenses of the parties
Pursuant to Article 6(2) of the Regulations on arbitration fees and expenses, which represents an Appendix to the Rules of the Tribunal, if claims are partially granted, the Respondent shall pay the arbitration fees in proportion to the claims granted. The Claimant shall pay the arbitration fees in proportion to the claims denied.
In accordance with Article 9 of the Regulations on arbitration fees and expenses, a reasonable amount of the attorneys' fee paid by the winning party shall be recovered from the losing party. Arbitration expenses include any expenses incurred by the parties by the time when the Tribunal rendered its award. [Arbitration expenses] do not include expenses which may be hypothetically incurred in the future based on the agreement between a party and its [legal] representative depending on which party wins the case. Besides, when granting the recovery of such expenses, the Tribunal shall evaluate whether the amount of expenses sought by the party is reasonable.
For the above reasons, the Tribunal finds it reasonable to place the payment of arbitration fees in connection with the original claim on the Buyer. [The fees] should be paid in proportion to the claims granted.
In addition to the original claim of 9 September 2002, the Seller also brought a claim seeking recovery of his expenses incurred in connection with the arbitration. However, the Seller has presented evidence supporting only his claim of the amount paid for the services. The Seller has not presented evidence in support of the rest of the amount [sought].
Since the Seller has failed to present evidence supporting the claim that by the date of the award his expenses indeed amounted to the amount sought and since he has proved only his expenses in a smaller amount (see the Seller's additional explanations of 17 January 2003), pursuant to Article 9 of the Regulations on arbitration fees and expenses, in accordance with the principle of reasonableness and taking into consideration that the claim was partially granted, the Tribunal partially grants the said claim. The Buyer must pay the said expenses to the Seller. [The expenses] must be paid in the amount of 60% of the proven amount of the Seller's expenses.
The Seller must partially reimburse the Buyer his arbitration expenses in connection with the counterclaim. [The expenses] must be paid in proportion to the [counter]claims granted. The Buyer did not seek to recover his attorneys' fee.
6. Recalculation in EURO
Since the parties' claims were brought in German Deutsch Mark and French francs, the recalculation of the amounts sought was made based on the resolution of the EU Council of 31 December 1998. [Thus,] 1 EURO equals 1.95583 DEM, 1 EURO equals 0.55957 FRF.
* This is a translation of data on Proceeding 134/2001, dated 22 October 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. 34 [197-209].
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 [Seller] and Respondent of Italy is referred to as [Buyer].
** Yelena Kalika, JD Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Moscow law firm, and is an Associate at the Pace Institute of International Commercial Law.Go to Case Table of Contents