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CISG CASE PRESENTATION

Ukraine 18 November 2004 Arbitration proceeding (Manufactured articles) [translation available
[Cite as: http://cisgw3.law.pace.edu/cases/041118u5.html]

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

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Case identification

DATE OF DECISION: 20041118 (18 November 2004)

JURISDICTION: Arbitration ; Ukraine

TRIBUNAL: Tribunal of International Commercial Arbitration at the Ukraine Chamber of Commerce and Trade

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Ukraine (respondent)

BUYER'S COUNTRY: Czech Republic (claimant)

GOODS INVOLVED: Manufactured articles


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 49(1)(a) ; 74 ; 81 [Also cited: Article 45 ]

Classification of issues using UNCITRAL classification code numbers:

6A [Autonomy of parties: Convention yields to contract];

74A [General rules for measuring damages: loss suffered as consequence of breach];

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

81A ; 81C [Consequences of fundamental breach: obligations of both parties under Convention; Restitution by each party of benefits received]

Descriptors: Autonomy of parties ; Fundamental breach ; Avoidance ; Damages ; Restitution

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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): Praktika ofzhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP Ukraine. Vneshneekonomicheskie spory [Practice of the International Commercial Arbitration Tribunal at the Ukraine Chamber of Commerce and Industry, Foreign Economic Disputes], Kyiv, published by Praksis (2006), Case No. 52 [445-456]

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

Tribunal of International Commercial Arbitration at the Ukrainian Chamber of Commerce and Trade

Award of 18 November 2004

Translation [*] by Gayane Nuridzhanyan [**]

The International Commercial Arbitral Tribunal at the Ukrainian Chamber of Commerce and Trade (hereinafter Tribunal) having considered the action brought by [Buyer], Czech company, against [Seller], affiliated undertaking of Ukrainian company, for the cancellation [avoidance] of Contract #3/66 of 17 October 2002, recovery of US $109,615 and reimbursement of the expenses on the payment of arbitration fee, has decided the following

The legal basis for the adjudication of the dispute by the Tribunal is § 10 of Contract #3/66 of 17 October 2002 according to which:

"Seller and buyer shall take all the measures to settle by negotiations all disputes and disagreements arising from the fulfilment of the present contract or in connection with it. In case the parties cannot reach an agreement on the issue within 60 days from the beginning of the first negotiations on this issue, after written statement materials of the dispute are submitted to the ICA Tribunal at the Ukrainian Chamber of Commerce and Trade in compliance with the Rules of the Tribunal and substantive law of Ukraine."

Having considered the materials of the case and having heard statements of the parties' representatives, the Tribunal has found the following:

      On 17 October 2002 the [Seller] and the [Buyer] concluded Contract #3/66 according to which the [Seller] was obliged to sell on the conditions FCA airport Boryspil, Ukraine (INCOTERMS 2000) and the [Buyer] undertook to purchase goods for the amount of US $160,000, in sets, at the price, on the terms and on the delivery conditions set forth in Supplement # 1-3 to the Contract which are an integral part of the Contract.

The goods were to be delivered in two consignments, ten manufactured articles in each, on the terms agreed by the parties, however, not later than 90 days from the day on which the contract entered into force and the payment was received from the [Buyer], according to the contract. The [Seller] is to notify the [Buyer] via fax about preparedness of the consignment of the goods to the delivery. According to para. 11.2 of the Contract the latter enters into the force from the time when the [Seller] receives the permit from the State Service of Export Control of Ukraine to export the goods. According to the [Buyer], this permit was received by the [Seller] before 21 January 2003.

The Contract provided that, in the event of delivery delay or underdelivery of the goods, the [Seller] was obligated to pay a penalty in the amount of 0.05% of the cost of the delayed or non-delivered goods for each late day, however, not more than 5% of the total cost of the delivered goods.

Regardless of the payment of the penalty, the party which has breached the contract shall compensate the other party for the direct losses which are incurred as a consequence and are confirmed by the corresponding payment documents.

In pursuance of the obligations under the Contract and on the basis of the bill invoiced by the [Seller], on 25 January 2003 the [Buyer] transferred to the [Seller] a prepayment in the amount of US $80,000 which constitutes 50% of the total cost of the goods. The [Buyer] alleges that [Seller], however, has not fulfilled its obligations with regard to the delivery of the goods under the Contract, notwithstanding the fact that [Buyer] has more than once addressed the [Seller] with a request to fulfil the obligations in kind.

On 9 August 2004, [Buyer] lodged an action against the [Seller] before the Tribunal claiming cancellation of the contract of 17 October 2002, invoking arts 526, 611 and 612 of the Civil Code of Ukraine, and to recover from the [Seller]:

   -    The prepayment transferred to the [Seller] in the amount of US $80,000;
   -    Losses in the form of the lost profit in the amount of US $15,743;
   -    Losses incurred in connection with the payment of the penalty in the sum of US $4,872;
   -    Penalty in the amount of US $8,000;
   -    Expenses for legal services incurred in connection with protection of the [Buyer]'s interests in the Tribunal in the amount of US $1,000.

The [Buyer]'s claim for recovery of losses from the [Seller] is based on Supplement # 1 of the Contract according to which the final recipient under the contract is a Bulgarian company and Bulgarian department. The [Buyer] in its turn has concluded with the Bulgarian company Contract # S-K for delivery of the mentioned goods. As a result of the non-fulfilment of the obligations under Contract # 3/66 by the [Seller], the [Buyer] on 16 December 2003 had to sign with the Bulgarian company Additional Agreement # 2 to Contract # S-K concerning its cancellation and payment of contract penalties in the amount of US $4,872 and return of the prepayment in the amount of US $15,743. This Additional Agreement was duly fulfilled.

The [Buyer] alleges that the US $15,743 returned to the Bulgarian firm under Contract # S-K constituted lost profit of the [Buyer] and the penalty paid by the [Buyer] in the amount US $4,872 constituted direct losses which are to be compensated by the [Seller].

Since the delay in the fulfillment of the Contract, according to para. 3.3. of the Contract, beginning on 25 April 2003 and continuing to the moment of bringing this action constitutes 462 days, the [Buyer] considers it possible to apply sanction in the form of the penalty in the amount of 5% which is US $8,000.

By virtue of the resolution of the Tribunal President of 9 August 2004, the Tribunal has initiated proceedings in the case. After the composition of the Tribunal, proceedings were appointed on 5 November 2003. There were recesses during the proceedings; hearings were conducted on 5, 9 and 18 November 2004.

OPINION OF THE ARBITRAL TRIBUNAL

Taking into account that:

1. The parties have concluded Contract #3/66 of 17 October 2002.

2. The UN Convention on Contracts for the International Sale of Goods (Vienna, 1980) and the UN Convention on Limitation Period in International Sale of Goods (New York, 1974) are applicable to the Contract as both the Czech Republic and Ukraine are Contracting States to these Conventions.

In compliance with para. 10.2 of Contract # 3/66 of 17 October 2002, the substantive law of Ukraine is applicable subsidiary to the issues not regulated by the mentioned Conventions.

3. The [Seller] has acknowledged receipt of the prepayment in the sum of US $80,000 and the non-fulfilment of the obligations with regard to the delivery of the goods.

4. According to para. 5.2, in case the Contract cannot be fulfilled due to the fault of the [Seller], the latter is obliged to return the payment to the [Buyer] within the period of 15 bank days after written request of the [Buyer].

In accordance with art. 45 of the UN Convention on Contracts for the International Sale of Goods:

"If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may: (a) exercise the rights provided in articles 46 to 52; (b) claim damages as provided in articles 74 to 77."

Article 49(1)(a) provides that the buyer may declare the contract avoided "if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract."

5. Under the conditions of para. 3.3 of the Contract, the [Seller] was obliged to deliver two consignments of the goods, ten manufactured articles in each, on the agreed terms, however, not later than 90 days after the contract has entered into force and after the receipt of the payment from the [Buyer] in accordance with the conditions of the Contract. The [Buyer] has transferred to the [Seller] US $80,000 which amounts to 50% of the cost of the goods subject to delivery on 25 January 2003. Thus, the [Seller] was to deliver goods before 25 April 2003, however, [Seller] has not fulfilled its obligations and has delayed the delivery for more than 15 months as of the date this action was brought.

Such a long non-fulfillment of the obligations with regard to the delivery by the [Seller] amounts to a fundamental breach of the contract and is a basis for the cancellation [avoidance] of Contract # 3/66 of 17 October 2002.

Under the circumstances, the Tribunal finds that [Buyer]'s claim for cancellation of the Contract is well-founded and states that Contract # 3/66 of 17 October 2002 is avoided.

6. In conformity with art. 81(1) of the UN Convention on Contracts for the International Sale of Goods:

"Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract."

According to art. 81(2):

"A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract."

Therefore, [Buyer]'s claims to recover US $80,000 from the [Seller] preliminarily paid by the [Buyer] for the goods subject to delivery but not delivered are well-founded and are subject to satisfaction.

7. The [Buyer]'s claim for recovery of US $8,000, which constitutes a penalty for the delivery delay is also well-founded and is to be satisfied. The penalty for delivery delay or non-delivery of the goods is foreseen by para. 9.1 of the Contract in the amount of 0.05% of the cost of delayed or non-delivered goods for each late day, however, no more than 5% of the total cost of the delivered goods.

As of the day the action was brought, the [Buyer] has delayed delivery of the goods for 462 days, however, with due account of the limitation, the penalty to be recovered from the [Seller] is in the amount of US $8,000, which constitutes 5% of the cost of the non-delivered goods.

8. Furthermore, the [Buyer] claims to recover losses in the form of lost profit in the amount of US $15,743 and direct losses in the amount of US $4,872 caused by the payment of the penalty to its Bulgarian customer under Contract # S-K.

The sum of US $15,743 had been paid to the [Buyer] by the Bulgarian company as a prepayment under Contract # S-K and was returned by the [Buyer] in connection with cancellation of this Contract. Copies of Contract # S-K of 30 August 2002 and Contract # S-K-2 of 15 May 2003 were presented by the [Buyer] at the hearing of the Tribunal.

The [Seller] alleges that these claims are unfounded, stating that:

   -    The [Buyer]'s claims for recovery of losses contradict the effective legislation and the present Contract; the fact that the losses were incurred is lacking as well;
 
   -    Prepayment for the goods in the amount of US $ 15,743 cannot constitute lost profit, it is prepayment for the goods;
 
   -    Para. 9.3 foresees compensation of direct losses. Since lost profit is not a direct loss, it is not to be compensated according to the law and the Contract;
 
   -    [Buyer] misunderstands the definition of losses;
 
   -    According to para. 13.3 of Contracts # S-K and # S-K-2 of 15 May 2003, these Contracts were to come into force from the moment of the receipt of the export licenses by the [Buyer]. Evidence of the coming into force of these Contracts has not been presented;
 
   -    In accordance with paras 2,3 of the Explanation of the Supreme Economic Court of Ukraine # 02-5/218 of 30 March 1995 "On Some Issues Related to the Practice of the Resolution of the Disputes Connected with Reimbursement of the Losses Caused by the Non-fulfillment or Undue Fulfillment of the Obligations Under Delivery Contracts", lost profit for an intermediate trading company may constitute only the sum of the trade extra charges deducting (minus) the expenses for the sale of goods;
 
   -    The [Buyer] mistakenly invokes arts 611 and 612 of the Ukrainian Civil Code which establish general conditions and consequences of the non-fulfillment of obligations;
 
   -    Art. 624 of the Ukrainian Civil Code specifically sets forth the correlation between losses and penalties. According to art. 624(2) and para. 9.3 of the Contract, the parties have envisaged that only direct losses are reimbursed in addition to the penalty. Therefore, according to the requirements of art. 624 of the Ukrainian Civil Code, dispute on reimbursement of the lost profit cannot take place at all.

It is [Buyer]'s position that para. 9.3 of Contract # 3/66 provides compensation of the direct losses confirmed by the corresponding payment documents. At that, the Contract does not foresee exclusive reimbursement of the direct losses or limitations of the right to the reimbursement of the lost profit in full comparing to the law. At the same time, para. 2 and para. 5 of art. 225 of the Economic Code of Ukraine stipulate the inadmissibility of limitations of the liability for the non-fulfillment or improper fulfillment of obligations under the contract of the parties and states that limitation of the liability can be established only by the law. [Buyer] considers that US $15,743 constitutes lost profit and US $4,872 constitutes direct losses.

The Tribunal has found that the claims for recovery of US $15,743 are not founded and are not to be satisfied due to the following considerations.

      According to para. 9.3 of the Contract, irrespective of the payment of the penalty, the party which has breached the contract shall compensate the other party's direct losses which were incurred as a consequence and are confirmed by the payment documents.

The Tribunal considers that the wording of para. 9.3 of the Contract evidences agreement of the parties on reimbursement of the direct losses only and denial of the compensation of the losses in the form of lost profit which complies with one of the most significant principles of private international law -- autonomy of the will of the parties. This principle exists in international practice and does not contradict the Ukrainian legislation.

Moreover, the Tribunal admits that with regard to the trade, intermediary and supply and sale organizations non-received amounts of the trade and extra charges, discounts which they would receive from the sale of the goods in case of proper fulfillment of the obligations by the contracting parties are subject to compensation.

Such understanding of lost profit follows from arts 74-77 of the UN Convention on Contracts for International Sale of Goods.

Thus, the cost of the goods preliminarily paid for and returned to the contracting party cannot be considered as lost profit.

9. [Buyer]'s claim for recovery of losses in the amount of US $4,872 is subject to satisfaction partially. The indicated sum constitutes losses incurred due to the payment of the penalty by the [Buyer] under Contract # S-K for failure of prompt delivery. The connection of this Contract with Contract # 3/66 of 17 October 2002 is confirmed by the materials of the case.

[Seller] has not recognized claims for the recovery of the losses in the amount of US $4,872.

As for the legal evaluation of Contract # S-K including its coming into force and interpretation and legal evaluation of Contract # S-K-2 of 15 May 2003 as well, the Tribunal considers that legal evaluation of these contracts is beyond the competence of the Tribunal since their fulfillment is not a subject of the present dispute.

At the same time, the presence of the contract concluded by the [Buyer] with the Bulgarian company, its partial execution and documents enclosed with it, in the Tribunal's opinion, confirm the existence of the [Buyer]'s obligation to deliver goods which are the subject of the disputed contract to the third party and, consequently, the existence of basis for payment of the penalty sanctions for its non-fulfillment.

The obligation of the [Buyer] to return to its Bulgarian customer the prepayment in the amount of US $15,750 and the payment of the penalty in the amount of US $4,872 under Contract # S-K is provided by the Additional Agreement #2 of 19 December 2003 to Contract # S-K. The same Additional Agreement envisages payment procedure between the parties, according to which the sum of US $20,622 will be detained by the Bulgarian company at the execution of the payment under Contract # S-K-2 of 15 May 2003.

In Additional Agreement #2 to Contract # S-K, signed on 19 December 2003, the parties have agreed on the following:

   -    To avoid the Contract due to the significant delay and non-fulfillment by the [Buyer] of the delivery of two consignment of the goods under Supplement #1 on the basis of art. 10 of the Contract before conclusion of the present Agreement;
 
   -    The [Buyer] undertook to return the prepayment paid by the [Buyer's Bulgarian customer] under the contract and to pay the penalty in the amount of US $4,872 according to art. 9.1 of the Contract (US $2,698.50 for the first consignment delivery delay and US $2,173.50 for delay for 207 days of the delivery of the second consignment of the goods);
 
   -    The [Buyer] agreed that sum of US $20,622 which was supposed to be paid by the [Buyer] according to para. 2 of the present Additional Agreement is to be detained by the [Buyer's Bulgarian customer] during execution of the payment due under Contract # S-K-2 of 15 May 2003.

In witness of the off-set of the mentioned amount in the mutual payments of the [Buyer] and Bulgarian company under Contract # S-K-2 of 15 May 2003, the following documents were presented: invoice of 10 December 2003 in the sum of US $119,000, invoice of 16 December 2003 in the sum of US $98,378 of the [Buyer], i.e., with the deduction of US $20,622, credit letter of advice of 30 January 2004 to the sum of US $98,378.

At the same time, in the explanations to the writ given by the [Buyer] on 18 November 2004. the [Buyer] has presented factual evidence of payment of the penalties under Contract # S-K of 30 August 2002 indicating the date of its coming into effect -- 15 October 2002, the delay period of the first consignment: from 7 April till 16 December 2003, which constitutes 257 days, and the penalty in the amount of US $2,698.50; delay period of the second consignment of the goods -- from 27 May till 16 December 2003 which constitutes 207 days and the penalty of US $2,173.50. Therefore, according to calculations of the [Buyer]'s penalty, it is charged starting from 7 April 2003.

However, under the conditions of Contract # 3/66 of 17 October 2002, delay of the delivery of the goods begins from 25 April 2003. Thus, [Buyer] is not entitled to claim reimbursement of the losses incurred from 7 till 24 April 2003, since, in concluding the contract with third party on the delivery of the goods with earlier terms comparing to the main contract, the [Buyer] acted at its own risk.

The [Buyer] is entitled to claim reimbursement of the losses caused by the payment of the penalty under Contract # S-K starting from 25 April 2003 till 19 December 2003, which is the date of avoidance of the contract, i.e., for the delivery failure for 238 days. The penalty for the mentioned period amounts to US $2,499 and this sum was to be recovered from the [Buyer].

10. The [Buyer] claims as well recovery of expenses for legal services in the amount of US $1,000. The right of the party in favor of which the decision was passed to reimbursement of the expenses connected with protection of its own interests including payment of the fees to the lawyers, is foreseen by para.1, § VII of the Regulations on Arbitration Fees and Expenses. According to the Regulation, these expenses can be imposed on the adverse party to the extent they are admitted as well-founded and reasonable by the Tribunal.

[Seller] objects to the satisfaction of this claim alleging that documents presented by the [Buyer] -- Contract # 07/07 of 15 July 2004, payment order of 14 September 2004, cash order of 28 October 2004 -- cannot serve as a confirmation of the [Buyer]'s expenses on the legal services in the present case and cannot be taken into consideration by the Tribunal for the following reasons:

   -    According to the documents presented, payment for the legal services is executed by a Ukrainian private undertaking which is not party to the present case or its adjudication;
 
   -    Contract # 07/07 and payment documents related to it do not contain any mentioning or reference to the fact of the preparation or consideration of the present dispute or mentioning that the private undertaking is executing payment on behalf of a third party;
   -    The materials of the case do not contain any documents testifying expenses of the very [Buyer] on the legal services.

The Tribunal finds the [Seller]'s arguments unsound for the following reasons.

      Legal services connected with protection of the [Buyer]'s interests in the Tribunal were paid by the Ukrainian private undertaking on the basis of the payment order # 190 of 14 October 2004 and cash order of 28 October 2004 in total amount of 5,300 UAH, which constitutes US $1,000. Contract on rendering of legal services # 07/07 of 15 July 2004 is indicated as the basis for the payment.

This Contract was concluded between the [Buyer]'s representative in the present case (executer) and Ukrainian private undertaking (client). The subject of the Contract is preparation and submission of the documents (suit and other procedural documents) to the Tribunal; representation of the [Buyer]'s interest before the Tribunal, rendering consultations with regard to the present action.

The Contract envisages payment of the fee to the executor in the amount of 5,300 UAH.

In the Additional Agreement to the present Contract of 15 November 2004, the parties have determined the subject of the contract, specifying that its subject is preparation and submission of the documents to the Tribunal with regard to the suit of the Czech company against the branch establishment of Ukrainian company and representation of the [Buyer]'s interests at the hearings.

The contract on rendering of legal services was concluded by the Ukrainian private undertaking on the basis of Contract # 01/04 of 10 July 2004 between the private undertaking (executor) and the [Buyer] (client). The subject of the Contract is rendering of intermediary services for the execution of the legal services, including search of lawyer for the legal support, payment of the fees, drawing up and presenting procedural documents (suit and other procedural documents) to the Tribunal; representation of the [Buyer]'s interests before the Tribunal (art. 1.1).

The fee paid under the Contract on rendering of the legal services # 07/07 of 15 July 2004 amounts to 50% of the cost of the services agreed in Contract # 01/04 of 10 July 2004.

The Tribunal considers it possible to reimburse expenses on the legal services in proportion to the satisfied claims (85.32%) which amounts to US $853.20. This sum is subject to recovery from the [Seller].

11. The arbitration fee in the present case is US $7,088.45, including US $5,888.45 for the claim of the material nature on recovery of US $109,615 and US $1,200 for the claim of non-material nature on the avoidance of the contract. With due account of the 100% satisfaction of the claim of the non-material nature and satisfaction of 85.32% of the claims of the material character, the arbitration fee is to be recovered from the [Seller] in the amount of US $6, 224.03.

AWARD

Following provisions of Contract # 3/66 of 17 October 2002, arts 45, 49, 74, 81 of the UN Convention on Contracts of International Sale of Goods (Vienna, 1980), art. 31 of the Law of Ukraine "On International Commercial Arbitration", arts 8.4-8.9 of the Rules of the Tribunal, paras 1,2, § V and para. 1, § VII of the Regulations on Arbitration Fees and Expenses, the Tribunal has decided:

      Contract #3/66 of 17 October 2002 between the [Buyer] and the [Seller] is avoided;

      To oblige the [Seller] promptly after receipt of the present award to pay to the [Buyer]:

         -    US $80,000, which were preliminarily paid for the goods subject to delivery but not delivered;
         -    US $8,000 [penalty for the delay in delivering the goods];
         -    US $4,672.50 [compensation of the losses];
         -    US $853.20 [compensation of the expenses for legal services];
         -    US $6,224.30 [compensation of the expenses on payment of the arbitration fee].

In total the amount of the satisfied claims amounts to US $99,749.73. All other action claims are rejected.

The judgment is final.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Czech Republic is referred to as [Buyer] and Respondent of Ukraine 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 September 7, 2006
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