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CISG CASE PRESENTATION

Russia 25 June 2004 Arbitration proceeding 120/2003 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/040625r1.html]

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

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Case identification

DATE OF DECISION: 20040625 (25 June 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: 120/2003

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Ukraine (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: A manufacturing production line


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 3 ; 8 ; 25 ; 49 ; 81 [Also cited: Articles 45 ; 74 ; 84 ]

Classification of issues using UNCITRAL classification code numbers:

3C [Sale of goods, including services];

8A [Interpretation of party's statement or other conduct: intent of party making statement or engaging in conduct];

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

81C [Effect of avoidance on obligations: restitution of benefits received]

Descriptors: Intent ; Fundamental breach ; Avoidance ; Restitution ; Currency issuese

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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. 32 [245-252]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 120/2003 of 25 June 2004

Translation [*] by Gayane Nuridzhanyan [**]

Edited by Dimitri Slobodenjuk [***]

1. SUMMARY OF RULING

      1.1 Since the commercial enterprises of the parties to the contract for the international sale of goods are located in Contracting States of the Vienna Convention of 1980 (CISG) [Russia and Ukraine], and the parties did not exclude the application of the CISG, the provisions of the Convention regulate the relations between the parties. The Russian substantive law chosen by the parties is to be applied as the subsidiary law.

      1.2 Taking into account that the contract envisages as its object the delivery of manufacturing lines for the production of certain goods with a reference to the Work specifications, the ICA Arbitral Tribunal (hereinafter: Tribunal), contrary to the opinion of the [Seller], concluded that the obligation of the [Seller] was specifically delivery of the manufacturing line corresponding to the requirements of the contract and Work specifications, including not only the delivery of the equipment in the set-up of the manufacturing line.

      1.3 Taking into account the difference of opinions of the [Seller] and the [Buyer] on the causes of the problems encountered with the manufacturing line that was delivered, the Tribunal called for a technical expert examination which was provided by specialists proposed by the parties.

      1.4 Considering the result of the expert examination which established that the delivered manufacturing line cannot produce the goods envisaged by the contract and with the characteristics envisaged by the contract and that it needs revision causing long term and significant expenses, the Tribunal concluded that a fundamental breach of the contract was committed by the [Seller]; and that, by virtue of the Vienna Convention of 1980 (arts. 25 and 49(1)(a)), the [Buyer] was entitled to declare the contract avoided.

      1.5 Under the wrong qualification in the contract the requirement of the [Buyer] in case of the redelivery of the goods the Tribunal interpreted it with due account to the regulations of the Vienna Convention of 1980 and to the merit of the content of the contract condition

      1.6 Since the [Buyer] did not present a claim to recover damages caused by the breach of the contract by the [Seller], this issue was not considered by the Tribunal, nor was interest awarded [as Buyer withdrew its claim for interest].

      1.7 An obligation to repay to the [Buyer] the cost of the goods paid in currency (US dollars) in which the calculations between the parties were carried out was imposed on the [Seller].

      1.8 The [Buyer] was obligated to return the delivered goods to the [Seller] at the expense of the [Seller]. It is especially noted that (contrary to the request of the [Buyer]) the goods are to be returned without the conclusion of a new contract; the grounds for this are the contract for the delivery of the equipment and the present decision of the Tribunal.

2. FACTS AND PLEADINGS

This action was filed by Claimant [Buyer], a Russian organization, against Respondent [Seller], a Ukrainian firm, in regard to the contract concluded between the parties on 5 October 1999 which envisaged the delivery of a manufacturing line for the production of certain goods. In accordance with the affirmation of the [Buyer] who paid to the [Seller] for the cost of the manufacturing line as provided in the contract, the manufacturing line was not set in operation in the term provided in the contract (six months from the date of the delivery of the last consignment of goods) because of defects in the delivered equipment and manufacturing technology as reported in the expert examination.

The [Buyer] referred to the requirements and specifications set forth in the contract. [Para. 7.1 of] the contract states:

"If at the expiry of six months after the delivery of the last consignment of goods, the equipment is not set in operation through the fault of the [Seller] and does not provide the production of goods of the appropriate quality in accordance with the Work specifications and Technical documentation, then the [Seller] shall cover the damages of the [Buyer] in the amount of the full price of the delivered goods ... and the [Buyer], at the expenses of the [Seller], shall return the delivered goods in terms agreed with the [Seller] ..."

The [Buyer] claimed avoidance of the contract and demanded the return of the cost of the manufacturing line paid to the [Seller]. The [Buyer] characterized his claim as a demand for the recovery of expenses and recovery of interest for the use of his monetary funds.

The [Seller] rejected the [Buyer]'s claims. According to [Seller], the obligations are to be determined by the provisions of the contract but not by the Work specifications referred to by the [Buyer]. The [Seller] contested the technical expert examination and alleged that the impossibility of setting the equipment in operation was caused by circumstances depending on the [Buyer], not the [Seller]: the corresponding qualified engineering managing personnel was understaffed and the water supply corresponding to the need of the technologies was not provided.

In [Seller]'s opinion, the [Buyer] has to prove the [Seller]'s fault in order for the [Seller] to bear responsibility. The [Seller] referred to the fact that the [Buyer] has not provided the manufacture of works which was in violation of art. 328 of the Russian Civil Code.

As for the [Buyer]'s claim for payment of the annual interest, the [Seller] has stated that annual interest could be charged only in respect to financial obligations, however, the [Seller] was not obliged to fulfill such obligations under the contract.

During the hearing, the [Buyer]'s representatives withdrew their claim for the recovery of annual interest while insisting on repayment by the [Seller] of the cost of the manufacturing line. In [Buyer]'s opinion, non-fulfillment of the obligations under the contract by the [Seller] was the result of the absence of fully developed technical documentation for the manufacturing line and non-fulfillment of the requirements of certain parameters of the equipment envisaged by the contract as a result of manufacturing and technological incompleteness. The certificate of correspondence issued by the State Standard Department of Ukraine and presented by the [Seller] was also contested by the representatives of the [Buyer], since the manufacturing line is not an output of mass production and since it was not tested in Moscow where it was fabricated. To prove their statement, the representatives of the [Buyer] presented the conclusion of a specialist authorized in this field and documents prepared by specialized manufacturing organizations that included suggestions for completion of the technology.

The representatives of the [Seller] continued to insist on the validity of their position.

On the basis of the application of the [Buyer], the Tribunal has scheduled a technical expert examination provided by the specialists proposed by the parties.

During the hearing of the Tribunal on 25 June 2004, the opinions of the experts (the chairman and co-chairman of the expert examination commission) were heard; the examination and the opinions of the parties in relation to the results of the examination were considered.

On the question of the Tribunal whether the parties are willing to continue the joint work, the representative of the [Buyer] responded that he did not see the opportunity for such work; representatives of the [Seller] noted that the contract between the parties had already been cancelled.

3. TRIBUNAL'S REASONING

The award of the Tribunal contained the following basic points.

      3.1 The competence of the Tribunal

The competence of the Tribunal in relation to the disputes between the parties is provided by para. 7.13 of the contract of 5 October 1999, according to which all disputes arising in connection with performance of or in connection with the contract are to be settled by means of amicable negotiations and consultations between the parties. Disputes and questions not settled by the parties are committed to the Tribunal and are to be tried in accordance with the Rules of the Tribunal on the basis of the norms of substantive law of the Russian Federation

The dispute between the parties is a matter of object and subject competence of the Tribunal envisaged by the Regulations on International Commercial Arbitral Tribunal and Rules of the Tribunal.

Based on the above and following paras. 2, 3, 5, art.1 of the Rules of the Tribunal, the Tribunal concluded that it is competent to consider this dispute.

      3.2 The change of the [Buyer]'s name

Considering the petition of the [Buyer] on the change of its name, the Tribunal established that the petition is proved by documents and concluded that, in accordance with the certificate on the entry into the Uniform State Register of Legal Entities of 26 March 2004, the name of the [Buyer] is to be recognized as changed.

      3.3 Applicable law

The Tribunal concluded that, according to para. 7.13 of the contract, the substantive law of Russian Federation is the law applicable to the relations of the parties.

According to the Constitution of the Russian Federation (art. 15(4)) international treaties of the Russian Federation are a constituent part of its legal system. If an international treaty of the Russian Federation establishes rules other than envisaged by the law of the Russian Federation, the rules of the international treaty are applicable.

The contract of the parties from which the dispute has arisen is by its legal nature a contract for the international sale of goods. The Russian Federation is a Contracting State to the Vienna Convention of 1980 [CISG]. According to art. 1(1)(a) of the Convention, it applies to contracts of sale of goods between parties whose places of business are in different States and when the States are Contracting States, i.e., parties to the Convention. Taking into consideration that Ukraine and the Russian Federation are Contracting States of the CISG and the places of business of the parties are located in these countries, the Tribunal concluded that the Convention is to be applied. Issues not governed by this Convention and by the general principles on which it is based are to be settled in conformity with Russian substantive law, which is to be applied as the subsidiary law.

      3.4 Evaluation of reasonableness of [Buyer]'s claim to recover from the [Seller] the damages [Buyer] suffered

The Tribunal established that para.1 of the contract provides that the subject of the contract of the parties of 5 October 1999 is the manufacturing line for production that is manufactured in a certain way and with an established one-year productivity and a three shifts regime. According to the Work specifications the sale of the manufacturing line includes:

1)   Technical documentation and samples;
2) Equipment for the loading and unloading from the line;
3) Equipment for preparation of the production to the processing;
4) Equipment for processing the production;
5) Installation, installation supervision, balancing and commissioning.

The Tribunal concluded that the requirements for the manufacturing line are determined by two documents, namely, the contract of 5 October 1999 and the Work specifications. The Work specifications are an integral part of the contract since para.1 of the contract contains direct reference to them.

For the reason of differences in opinions of the [Buyer] and the [Seller] about the causes of the problems encountered with the manufacturing line, the Tribunal has set the technical expert examination provided by the Bauman's Moscow State Technical University and the Kyiv Polytechnic University.

Based on the result of the examination, the Report of 16 April 2004 was composed and signed by the Chairman (Bauman's MSTU) and Co-Chairman (KPU) of the Expert Examination Commission. According to paras. 8.1 and 8.2 of this Report, the manufacturing line delivered under the contract of 5 October 1999 cannot release to manufacture production with the characteristics corresponding to the requirements of the contract of 5 October 1999 and the Work specifications.

Taking into consideration the Report of 16 April 2004 and the oral statements of the experts, the Tribunal concluded that the manufacturing line delivered by the [Seller] under the contract does not correspond to the requirements of the contract and the Work specifications.

As for the documents presented by the [Buyer] -- the Conclusion on the results of the technical expert examination of 21 April 2004 signed by the Chairman of the Expert Examination Commission -- the Tribunal established that this examination was implemented on the instructions of the [Buyer] but not the Tribunal and its results are contested by the [Seller]. Based on that this document cannot be considered as evidence for the passing of the judgment.

      3.5 Evaluation of the conformity of the goods delivered by the [Seller] with the requirements of the contract and its integral components

While examining the [Buyer]'s demands on the merits, the Tribunal proceeded from the fact that the [Buyer] did not fulfill all the conditions of the contract of 5 October 1999. However, the main question of the dispute is whether the goods delivered by the [Seller] comply with the requirements of the contract and the Work specifications which are an integral part of the contract.

The Tribunal established that according to para. 4, section 5 of the Work specifications to the contract of 5 October 1999, the testing of the manufacturing line must have been carried out. This obligation was not satisfied by the [Seller]. According to the Report of the expert examination of 16 April 2004 and the opinions of the experts, the manufacturing line lacks essential completion.

The Tribunal established that from the moment of delivery of the manufacturing line to the [Buyer] till the moment of the present hearing of 25 June 2004, about two years and a half have passed (the date of the last delivery of the goods was 15 January 2002 which is proved by the consignment note # 0387780 of 15 January 2002). Even if one agrees with the statement of the [Seller] that the date of the delivery was 5 November 2002, then more then one year and a half has passed from that date.

According to the opinion of the experts, the manufacturing line needs about half a year or one year and a half for its completion and according to the opinion of one of the experts a large sum of monetary funds comparable to the initial price of the goods is needed. Moreover, in compliance with conditions of the contract, the manufacturing line should have been set in operation not later then six months from the date of the delivery. There is no doubt that a fundamental breach of the contract was committed by the [Seller], as this term is defined in art. 25 of the CISG. This entitles the [Buyer] to declare the contract avoided by virtue of art. 49(1)(a) of the Convention.

In the course of the hearing, the representatives of the [Buyer] objected to the recommencement of the relations with the [Seller] under the contract since the [Buyer] suffered significant damages because of the outage of the manufacturing line. Taking into consideration the statement of the [Buyer], the Tribunal recognizes that the contract between the parties is cancelled.

The Tribunal establishes that para. 7.1 of the contract envisages a qualification of the [Buyer]'s demand in case of the redelivery of the goods. The demand of the [Buyer] in this case with due account of the content of this requirement of the contract and its interpretation in the light of art. 8 of the CISG is not a claim for the recovery of damages, as indicated in the action, but a claim for repayment of the cost of the goods, a right to which is envisaged by art. 81 of the CISG. The [Buyer] has not presented a claim for recovery from the [Seller] of the damages caused by the violations of the conditions of the contract according to arts. 45, 74 of the CISG. Therefore, such a claim is not a matter of the Tribunal's consideration in the course of the present proceedings.

The Tribunal established the overall sum of monetary funds transferred by the [Buyer] to the [Seller] according to the contract of 5 October 1999. The representative of the [Seller] did not contest the fact of receipt of the above-mentioned sum.

Taking into consideration the application of the [Buyer] to express the sum subject to recovery from the [Seller] in US dollars the Tribunal recognizes that it is reasonable to compel the [Seller] to pay the above mentioned sum to the [Buyer] in US dollars, since:

   -    First, according to the para.2.1 of the contract, the price of the goods was expressed in US dollars; and
 
   -    Second, payment for the goods was carried out in US dollars.

Considering the application of the [Buyer] not to demand payment from the [Seller] of the annual interest according to the contract of 5 October 1999, the Tribunal takes into account art. 84 of the CISG which provides that if the [Seller] is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.

As was mentioned, the [Seller] did not refute the fact of the [Buyer]'s payment of the sum adjusted on his behalf but claimed that non-fulfillment by the [Buyer] of his obligations under the contract resulted in additional expenses for the [Seller] while fulfilling the contract. The Tribunal concludes that the refusal of the [Buyer] to demand from the [Seller] the recovery of the annual interest on the price the [Buyer] paid can be regarded as a voluntarily compensation by the [Buyer] of those expenses that, according to the statement of the [Seller], the [Seller] had suffered due to the illegal, in [Seller]'s opinion, actions of the [Buyer].

The contract between the parties (para. 7.1) envisaged the obligation of the [Buyer] to redeliver to the [Seller] the delivered goods at the expense of the [Seller] on terms agreed with the [Seller] but not later then one year after the last delivery of the goods. Taking into account the circumstances of the case, the Tribunal concludes that the [Buyer] is to redeliver to the [Seller] the goods delivered and that terms and procedure of the redelivery are to be agreed by the parties.

In the course of the hearing on 25 June 2004, the representatives of the [Buyer] expressed willingness to redeliver to the [Seller] the equipment on terms indicated by the [Seller] and at [Seller]'s expense. The Tribunal considers that, contrary to the claim of the representatives of the [Buyer], the conclusion of a new contract is not needed. The ground for this is para. 7.1 of the contract of 5 October 1999 and the present decision of the Tribunal.

      3.6 Evaluation of reasonableness of [Buyer]'s claim to recover the arbitration fee from the [Seller]

Addressing the issue of the recovery of the [Buyer]'s expenses by the payment of arbitration fee by the [Seller], the Tribunal concluded that the [Buyer]'s demands are partly justified and following para. 6(2) of the Regulations on Arbitration Expenses and Fees decided to impose on the [Seller] reimbursement of the [Buyer]'s expenses on arbitration fee in proportion 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 the Ukraine is referred to as [Seller].

** Gayane Nuridzhanyan, junior associate at the law firm Danylko, Kushnir, Soltys & 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.

*** Dimitri Slobodenjuk, Research Assistance and Doctoral candidate at the Chair in Common Law and Comparative Legal Theory at the University of Münster, Germany.

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Pace Law School Institute of International Commercial Law - Last updated September 6, 2006
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