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CISG CASE PRESENTATION

Russia 24 May 2004 Arbitration proceeding 138/2003 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/040524r1.html]

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

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Case identification

DATE OF DECISION: 20040524 (24 May 2004)

JURISDICTION: Arbitration ; Russian Federation

TRIBUNAL: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 138/2003

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Italy (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: [-]


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 71

Classification of issues using UNCITRAL classification code numbers:

4B [Scope of Convention(issues excluded): penalty clauses];

71A1 [Suspension of performance: grounds for suspension]

Descriptors: Scope of Convention ; Penalty clauses ; Suspension of performance

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg, Praktika of Mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 2004 g. [Practice of the International Commercial Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry for 2004] Moscow (2005) No. 26 [172-180]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 138/2003 of 24 May 2004

Translation [*] by Gayane Nuridzhanyan [**]

1. SUMMARY OF RULING

     1.1 Inaccuracy in the arbitration clause of the contract does not impede consideration of the case at the ICA Arbitral Tribunal (hereinafter: Tribunal), taking into account that it clearly follows from the wording of the clause and the subsequent behavior of the parties that they intended to settle disputes arising from their contract at the Tribunal.

     1.2 Since Russia and Italy, where the places of business of the parties are located, are Contracting States to the Vienna Convention of 1980 (CISG), the dispute between the parties is to be considered on the basis of norms of this Convention, with Russian substantive law chosen by the parties to be applied as the subsidiary law.

     1.3 The breach of the contract conditions committed by the [Buyer] in not paying in full for the goods -- retention of the part of the price of the goods -- does not deprive the [Buyer] of the right to demand from the [Seller] payment of the contract penalty for breach of [Seller]'s obligations. Also, the [Seller] is not deprived of the right to demand supplemental payment from the [Buyer] of the price of the goods.

     1.4 [Buyer]'s alleged ignorance of the fact of the conclusion of an Additional Agreement to the contract which changed its conditions cannot serve as a basis for disclaiming this document proper proof in the case since the Director General of the [Buyer]'s firm has confirmed the validity of the signature of the person signing the document on behalf of the [Buyer].

     1.5 The fact that the [Seller] is not the producer of the goods does not release him from responsibility of fulfilling the obligations envisaged by the contract to present original Certificates of Quality Conformance of the goods. The [Seller] could not fail to have known of this requirement when concluding the contract and assuming this obligation.

2. FACTS AND PLEADINGS

The claim was filed by a Russian firm [Buyer] against an Italian company [Seller] in connection with the breach by the [Seller] of the conditions of the contract for the international sale of goods concluded by the parties on 30 May 2002, in regard to the delivery terms and the production of Certificates of Quality Conformance of the goods. The [Buyer] demanded payment of the penalty set by the contract for these violations.

The [Seller] filed a statement of defense to support its refusal to comply with the claim. In its statement of defense, [Seller] indicated that the [Buyer] did not pay for the goods in full, however, the [Seller] did not present a demand for the supplemental payment due.

In response to the [Seller]'s statement of defense, the [Buyer] presented additional written explanations in response to which the [Seller] filed written objections.

The representatives of the [Seller] have not appeared at the hearings.

3. TRIBUNAL'S REASONING

The award of the Tribunal contained the following basic points.

     3.1 Non-appearance of the [Seller]

In connection with non-appearance of the [Seller], the Tribunal notes that, via registered letter with delivery notification which is added to the files of the case, on 25 February 2004, the [Seller] was properly notified of the hearings on the case that were scheduled for 9 April 2004. According to para. 12(5) and para. 28(2) of the Rules of the Tribunal, non-appearance of a party properly notified of date and place of the hearings does not impede the adjudication of the case and the passing of judgment on the case unless the party which failed to appear has applied for an adjournment of the proceedings for a valid reason.

The [Seller] was duly notified of the date and place of the proceedings and has not applied for adjournment of the proceedings in written form. Moreover, the materials of the case are sufficiently complete to permit settlement of the dispute on the merits. Taking into account [Buyer]'s position presented at the hearings on considering the dispute in the absence of the [Seller]'s representatives, the Tribunal has considered it possible to adjudicate the case in the absence of [Seller]'s representatives.

     3.2 The competence of the Tribunal

According to para. 2 of the Regulations on International Commercial Arbitral Tribunal and para. 1(2) of the Rules of the Tribunal, disputes on contract matters and other civil relations that arise out of foreign trade and other kinds of international economic relations, if agreed by the parties, can be considered by the Tribunal if the commercial enterprise of at least one of the parties is located abroad.

The Tribunal concluded that the contract signed by the [Buyer] and the [Seller] on 30 May 2002 is a contract for the international sale of goods between a Russian firm [Buyer] and an Italian company [Seller].

The Tribunal stated that the arbitration clause in art. 11 of the contract envisages the following:

"All disputes and differences that could arise will be settled amicably. All disputes arising out of the performance of this contract, which cannot be amicably settled and are not the matter of legal procedure of the state court and commercial court, are to be settled by the International Commercial Court at the Chamber of Commerce and Industry of the Russian Federation ..."

According to para. 1(3) of the Rules of the Tribunal, the Tribunal is eligible to hear disputes where the parties have agreed in writing to refer to the Tribunal existing disputes or disputes that can arise. Based on article 11 of the contract, the Tribunal concludes that the parties have agreed in writing to refer to the Tribunal existing disputes or disputes that can arise.

The arbitration panel took into account the following:

   -    The [Buyer] presented its statement of claim, and a rebuttal to the statement of defense of the [Seller], and additional documents to the Tribunal of International Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation;
 
   -    The [Seller] presented to the Tribunal its statement of defense and defensive pleadings in opposition to the allegations of the [Buyer].

In opinion of the Tribunal, this material reaffirms that, in their contract, the parties impliedly named the Tribunal of International Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation. This is also confirmed by the reference to the proper name of the Chamber: the Tribunal of International Commercial Arbitration is created at the Chamber of Commerce and Industry of the Russian Federation. The Tribunal concludes that the inaccuracy in writing of the name of the court does not affect the substance of the arbitration clause of the contract on the place of the hearings on the dispute and the arbitral body eligible to hear the dispute that the parties have chosen by mutual agreement.

Taking into consideration the above, according to art. 11 of the contract, para. 1 of the Rules of the Tribunal and considering art. 7 of the Law of the Russian Federation "On International Commercial Arbitration", the Tribunal concludes that it is competent to hear this dispute.

     3.3 Applicable law

The Tribunal concludes that, according to art. 11 of Contract #37-02, the parties have chosen the substantive and procedural law of the Russian Federation as the applicable law.

This wording of the contract implies the application of the Vienna Convention of 1980 which, as an international treaty, is applicable as a priority by virtue of article 7 of the Civil Code of the Russian Federation.

Russia and Italy, where the places of business of the parties to the dispute are located, are Contracting States to the CISG (art. 1(1)(a) of the Vienna Convention). Accordingly, the CISG applies. For issues not regulated by the CISG, Russian substantive law is applicable as the subsidiary law.

     3.4 The merits of the [Buyer]'s claim

          3.4.1 Pursuant to the case materials provided and the explanations of the representatives of the [Buyer], the [Seller] had delivered to the [Buyer] goods in the amount confirmed in the invoice of 3 December 2002, international consignment note CMR, declaration, and cargo custom declaration, with an additional schedule (TD-2) (the informational number) of 26 December 2002 added to the case materials. As the representatives of the [Buyer] affirmed during the hearings, the goods were received by the [Buyer], passed customs clearance and were passed into circulation.

The goods were only partly paid for by the [Buyer]. As the representatives of the [Buyer] explained during the hearings, a part of the price for the goods was retained by the [Buyer] to compensate [Buyer] for expenses incurred by him as a result of the [Seller]'s improper execution of his obligations under the contract.

The [Seller] in his statement of defense of 27 October 2003 and in his 21 January 2004 response to [Buyer]'s pleading, acknowledged that the [Buyer] had only partly paid for the goods.

The Tribunal established that the case materials did not show that the [Seller] up to the moment of the hearings had claimed against the [Buyer] in regard to the partial payment for the goods. The [Seller] has not filed a counterclaim at the present hearings, though it had a real possibility to do that.

Referring to the expenses (damages) that [Buyer] alleges, the Tribunal notes that the [Buyer] has not presented these damages as a claim, has not defined their amount and has not presented to the Tribunal any proof of the cause-effect relation between the expenses (damages) incurred by the [Buyer] and the proper execution by the [Seller] of its obligations under the contract.

The Tribunal established that there are no provisions under the contract or supplements to it that address the possibility of one party retaining monetary funds that are due to the other party as a compensation for expenses (damages) incurred by the first party or/and for the recovery of penalties envisaged by the contract. Moreover, pursuant to the case materials and as the representatives of the [Buyer] affirmed during the hearings, the [Seller] had not agreed to this retention of funds by the [Buyer]. The Tribunal notes also that neither the Vienna Convention of 1980, nor the Russian law envisage such retention of funds.

Based on the above, the Tribunal concludes that the [Buyer] had no right to retain any funds due to the [Seller] for the delivered goods and had to pay for the goods in full.

Nevertheless, the Tribunal concludes that the fact that the [Buyer] has not paid in full for the delivered goods cannot be considered grounds for the [Seller] not to be subject to penalties for [Seller]'s breach of its obligations under the contract. Neither the Vienna Convention of 1980, Russian law nor the conditions of the contract contain any provisions that prohibit a party, who has improperly executed his obligations under the contract, from demanding from the other party that breached its obligations under the contract, a payment of fines or sanctions if the sanctions are envisaged in the agreement between the parties or under the applicable law.

The [Seller] is eligible to settle independently the question of unauthorized retention by the [Buyer] of part of the purchase price as a compensation of incurred expenses.

          3.4.2 The Tribunal studied Additional Agreement #3 of 10 December 2002 to the contract presented by the [Seller] and established the following:

The Additional Agreement of 10 December 2002 was signed by the Claimant [Seller] and the Respondent [Buyer] and the seals of both parties were attached to it.

In its statement of defense of 27 October 2003, the [Seller] referred to this agreement as having been concluded by the parties. And at the hearings of the Tribunal, the [Buyer], represented by its General Director, affirmed the validity of the signature on behalf of the [Buyer] on the Additional Agreement. Nevertheless, the representatives of the [Buyer] stated that the Additional Agreement was not applicable because the [Buyer] did not have a copy of this Additional Agreement and because the [Buyer] did not know of its existence.

Taking into consideration the above, the Tribunal concludes that ignorance by the [Buyer] of the existence of this Additional Agreement, (although it was properly signed by the [Buyer]) cannot serve as a ground for non-applicability of the Additional Agreement to the relations between the parties. Hence, the Tribunal ruled that this Additional Agreement was concluded between the parties and that there exist sufficient grounds for its use as a proof at the hearings which establishes the rights and obligations of the parties under the contract.

          3.4.3 The Tribunal has examined the claim of the [Buyer] to recover delay penalties from the [Seller] and has concluded that art. 8(1) of the contract envisages that, in case of delay in delivery, the [Seller] is to pay to the [Buyer] 0.5 % of the cost of undelivered equipment, goods or materials for every week during the first four weeks and 1 % for every subsequent week, but not more then 10 % of the cost of undelivered equipment, goods or materials.

As follows from the claim and the explanations of the calculations of the penalty presented by the [Buyer] at the 9 April 2004 hearing, the penalty the [Buyer] claims equals 0.5 % of the cost of goods undelivered in term for every week during the first four weeks, i.e., during the period from 27 September 2002 till 25 October 2002, and thereafter at 1 % for every subsequent week, i.e., during the period from 25 October 2002 till 21 December 2002. On 21 December 2002, the sum of the penalty reached the highest level envisaged by the contract, which is 10 % of the cost of undelivered goods, i.e., of the sum claimed to be recovered by the [Buyer].

The Tribunal does not agree with the [Buyer]'s calculation on the following grounds.

When calculating the penalty, the [Buyer] applied para. 2 of Additional Agreement #3 of 14 September 2002 in which the parties had agreed on a final date of delivery of 26 September 2002. In the Tribunal's opinion, it is appropriate to determine the final date of the delivery of the goods as adjusted by the parties pursuant to para. 2 of Additional Agreement #3 of 10 October 2002 rather than by para. 2 of Additional Agreement #3 of 14 September 2002. Para. 2 of Additional Agreement #3 of 10 October 2002 envisages the following:

"Art. 4 of the contract 'Delivery conditions and terms' is to be to presented in the following edition: 'The equipment under the contract is to be delivered according to the terms FCA/Turin, Italy (INCOTERMS 2000) not later then 20 (twenty) calendar days from the date of documents under the letter of credit arrival to the Italian bank indicated at the annexion'."

On 15 October 2002, the [Buyer] fulfilled its obligation to open the letter of credit in a bank for payment transactions with the [Seller], with the approved application opening the letter of credit of 15 October 2002 added to the case materials.

According to para. 2 of Additional Agreement #3 of 10 October 2002, the [Seller] was to deliver the goods not later then 4 November 2002 (15 October 2002 plus twenty calendar days). However, the goods were not delivered by the [Seller] in term.

Based on the fact that the goods were to be delivered according to the terms FCA/Turin, Italy (INCOTERMS 2000), the Tribunal considers the date of the delivery of the goods by the [Seller] to the carrier (the First Carrier) to be the date of the delivery of the goods to the [Buyer]. The date of the delivery of the goods to the carrier was 9 December 2002 which is the date indicated at the section "Date/Datum" of heading 4, "The place and the date of the cargo loading/Ort und Tag der Ubernahme des Gutes" of the International Consignment Note CMR, that is included with the case materials.

Since 9 December 2002 could be considered the date of the delivery of the goods to the [Buyer], the Tribunal concluded that the period for the penalty [Seller] is obligated to pay for the delay in delivery of the goods is from 5 November 2002 till 9 December 2002.

Taking into consideration the above and on the basis of art. 8(1) of the contract, para. 2 of the Additional Agreement #3 of 10 October 2002 and arts. 330 and 331 of the Civil Code of the Russian Federation, the Tribunal concluded that the [Buyer]'s demand for the penalty payment by the [Seller] for delivery delay is subject to satisfaction in a sum defined according to the above-mentioned calculations.

          3.4.4 The Tribunal also examined the [Buyer]'s demand for a penalty payment by the [Seller] for the failure to submit to the [Buyer] the corresponding documents, and established that art. 6(2) of the contract envisages that: "The goods must have the certificate of origin and the certificate ROSTESTA (Russia)".

According to Supplement #3 of 22 July 2002 (hereinafter: the Supplement) to Additional Agreement #2 of 22 July 2002 to the contract, the [Seller] was to consign to the [Buyer], in addition to the goods and all other documents, a Certificate of Conformance of the goods issued by the requisite authority (the original document and three copies authenticated with a signature and a seal of the authorized representative of the [Seller]).

In accordance with para. 3 of the Supplement, in case the [Seller] does not consign to the [Buyer] the above-mentioned documents with the goods, the [Seller] must pay the penalty provided under the contract.

Based on art. 8(1) of the contract, the [Buyer] calculated the 0.5 % penalty of the cost of the goods which are not accompanied with the corresponding documents for every week during the first four weeks, i.e., for the period from 27 September 2002 till 25 October 2002, and 1 % penalty for every subsequent week, i.e., 25 October 2002 till 21 December 2002. On 21 December 2002, the sum of the penalty reached the highest level envisaged by the contract, which is 10 %.

As follows from the case materials and the act of expert examination of 24 January 2003 and as the representatives of the [Buyer] affirmed during the hearings, the original documents for the Certificate of Conformance of the Goods and Qualities have not been sent by the [Seller] to the [Buyer].

The [Seller] in its statement of defense of 27 October 2003 and in the [Seller]'s 21 January 2004 defense to the allegations of the [Buyer], objected to the demand for the penalty on the above ground, stating that [Seller] did not consign the original documents of the Certificate of Conformance of the Goods and Quality because the [Seller] is not a producer and cannot have these original documents.

In the opinion of the Tribunal, this statement cannot be accepted since the [Seller], entering into a contract that contained the condition about the presenting of the original certificates, must have known about this condition and also about the fact that [Seller] was not the producer of these goods and would purchase the goods from the third parties, the producers of the goods.

Evaluating the actions of the [Seller], the Tribunal qualified them as a unilateral refusal to fulfill the obligations to consign the corresponding documents in respect to the delivered goods envisaged by the contract and the Vienna Convention.

As to the period according to which the calculations of the penalty payment should be executed, the Tribunal concluded that the [Buyer] defined incorrectly the initial date of the delay in presenting the documents, which [Buyer] defined as 27 September 2002.

Since the goods can be considered as delivered to the [Buyer] on 9 December 2002 (para. 3.4.3 of the present award), the Tribunal concluded that it is from that date that the [Seller] committed the delay in presenting the documents.

Taking into consideration the above as well the fact that the [Seller] has still not consigned the original Certificates of Conformance of the Goods and Quality to the [Buyer] and based on art. 8(1) of the contract, para. 3 of the Supplement #3 of 22 July 2002 to the Additional Agreement #2 of 22 July 2002 to the contract, and article 330 and 331 of the Civil Code of the Russian Federation, the Tribunal concludes that the demand of the [Buyer] to the [Seller] to recover the penalty for non-presenting of the documents is subject to satisfaction in the amount claimed by the [Buyer].

     3.5 Payment of arbitration fees

Taking into consideration the demand of the [Buyer] for the recovery of the arbitration expenses from the [Seller] and according to para. 6(2) of the Regulations on Arbitration Expenses and Fees, which is a Supplement to the Rules of the Tribunal, the Tribunal imposes on the [Seller] the recovery to the [Buyer] of the arbitration fee proportionate to the amount of the satisfied claims.


FOOTNOTES

* 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 Italy is referred to as [Seller].

** Gayane Nuridzhanyan, junior associate at the law firm Danylko, Kushnir, Solltys & Yakymyak, Attorneys & Counselors at Law, Kyiv, Ukraine <http://www.dksylaw.com/>, student at Kyiv International University with major in private international law; participant of Canada-Ukraine Parliamentary Program, member of Ukrainian team at 2005 Telders International Moot Court Competition, The Hague.

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Pace Law School Institute of International Commercial Law - Last updated March 27, 2006
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