Russia 29 December 2004 Arbitration proceeding 189/2003 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/041229r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 189/2003
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Russian Federation (respondent)
BUYER'S COUNTRY: Ukraine (claimant)
GOODS INVOLVED: Equipment
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:
80A2 [Failure of performance caused by other party: general principle that party causing nonperformance loses rights (compromise case)]
80A2 [Failure of performance caused by other party: general principle that party causing nonperformance loses rights (compromise case)]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
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. 51 [365-370]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Queen Mary Case Translation Programme
29 December 2004 [Case No. 189/2003]
Translation [*] by Kirill Lebedyanskiy [**]
Edited by Alexander Morari [***]
1. SUMMARY OF RULING
1.1 The [Buyer] brought an action to the Tribunal of International Commercial Arbitration at the Russian Chamber of Commerce and Industry [hereinafter Tribunal] and the Respondent [Seller] does not call into question the competence of the Tribunal but has raised a question only as to whether these proceedings are premature by virtue of a Joint Commission that was to be established by the parties. Due to the above, an inaccurancy in the name of the arbitration tribunal in the arbitration clause of the contract does not preclude consideration of the case by the Tribunal.
1.2 The Bilateral Commission that was called for in the contract could not determine a cause-and-effect relation between the breakdown of the contract equipment during the guarantee period and the [Buyer]'s breach of service conditions. As a result, the parties are jointly liable and jointly have to pay compensation for the damages caused by the breakdown of the equipment. The allocation of damages by the Tribunal between the parties was governed by the principle of justice and fairness.
2. FACTS AND PLEADINGS
The action was brought by [Buyer], a Ukrainian organization, against [Seller], a Russian organization, as a result of the breakdown of equipment during the guarantee period provided by the [Seller] according to their contract for the international sale of goods concluded on 29 December 1997. Since the Bilateral Commission, which was established according to the contract, concluded that the broken-down equipment can no longer be operational, the [Buyer] claimed for damages incurred and legal costs.
2.1 The [Seller] contested the [Buyer]'s claims. The [Seller] referred to the fact that the Bilateral Commission had established that the [Buyer] had failed to adhere to the operating instructions. The [Seller] declares that the [Buyer]'s claims are not justified as there are no conditions provided for by the contract that give a rise to [Seller]'s liability under quality guarantee. The [Seller] also alleges that the case should not be considered by the Tribunal as the contract stipulated the establishment of a Joint Commission in the event the [Seller] contests the [Buyer]'s complaint. However, such a Commission was not established. As a result, although the [Seller] agrees to the Tribunal's competence to consider this case, though only with regard to the establishment of this Commission.
2.2 The [Buyer] submitted its objections to the [Seller]'s position. The [Buyer] argued that failure to adhere to the operational instructions could not be a cause of the breakdown of the equipment. In addition, the [Buyer]'s representative noted that, according to Article 476(2) of the Civil Code of the Russian Federation [hereinafter - CCRF], the burden of proof that there is no liability under the quality guarantee rests with the [Seller]. The [Buyer] stated that the [Seller] had not responded to the complaint of the [Buyer] and to [Buyer]'s proposal concerning the establishment of the Joint Commission. The [Buyer] also noted that the Statement of the Bilateral Commission had not determined the cause of the breakdown of the equipment.
3. TRIBUNAL'S REASONING
The ruling of the Tribunal contained the following main points.
3.1 [The competence of the Tribunal]
In accordance with Clause 16.2 (the arbitration clause) of the contract of 29 December 1997, all disputes arising from the contract shall be considered by the Court of the Chamber of Commerce and Industry of the [Seller]'s country. The Tribunal is the only arbitration institution at the Russian Federation Chamber of Commerce and Industry that arbitrates cases arising as a result of international trade activities. The [Buyer] brought the claim to this arbitration institution according to the arbitration clause. The [Seller] did not contest the validity of the arbitration clause, but alleged that it was premature for the Tribunal to examine this case untill the Joint Commission is established in order to examine the disputed goods and the reasonableness of the [Buyer]'s complaint according to Clause 14.2 of the contract.
The Tribunal rules that, contrary to [Seller]'s allegations, clause 14.2 of the contract does not mean that the competence of the Tribunal depends on whether or not the Joint Commission is established.
Taking into account the above, and pursuant to Articles 7 and 16 of the Law of the Russian Federation "On International Commercial Arbitration" and section 1(5) of the Rules of the Tribunal, the Tribunal declared itself competent to examine the present case.
3.2 [Applicable law]
Due to the fact that both Russia and Ukraine are States parties to the CISG and taking into account that clause 16.2 of the contract stipulates that the substantive law of the [Seller]'s country should be applicable to disputes arising out of the contract, the Tribunal, guided by Article 28(1) of the Law of the Russian Federation "On International Commercial Arbitration" and section 13 of the Rules of the Tribunal, stated that the CISG should be applied to this case, whereas provisions of the Russian law are applicable to issues not regulated by the CISG.
3.3 [The ruling on the merits of the case]
It is clear from the materials of the case that according to the Addendum to the contract of 9 December 1999, the [Seller] delivered the disputed goods to the [Buyer] in December 1999. From October to November 2000, during an examination of the functioning of the block which the equipment was built in, certain defects in the equipment were determined. As a result, the Bilateral Commission was set up for the purposes of examination of the equipment and determination of the cause of the defects.
A Report was drawn up by the Commission, which concluded that the equipment could not be operated any further. Based on the above facts, the [Buyer] claimed to recover from the [Seller] an indicated sum in US dollars (the main sum in arrears under the contract, which originated from the lack of conformity (improper quality) of the equipment within the guarantee period).
Having considered the materials of the case and explanations of the parties, the Tribunal concludes that the [Buyer]'s claims are to be partially granted for the following reasons:
3.3.1 [Assessment of the [Seller]'s arguments with regard to the objectives of the Bilateral Commission]
Both the statement of action and statement of defense are based on the Report of the Bilateral Commission and assessment of its content by the parties. Accordingly, the Tribunal states that the parties have no disagreement regarding the content of the Report itself. Thus, both parties, during the hearing of the case, acknowledged the findings of the Bilateral Commission that the equipment did not conform with the contract and could not function any more.
At the same time, the parties have different opinions as to the purposes of the Bilateral Commission, which drew up the Report and the consequences of the fact that the Report did not establish the reasons of defects in the equipment and its breakdown.
Having assessed the positions of the parties concerning the purposes and objectives of the Bilateral Commission, the Tribunal states that the arguments of the [Seller], who supposed that this Commission had been set up exclusively to examine the operational conditions of the equipment, cannot be accepted. It was clearly stated in the Report, signed by the representatives of the [Seller] as well, that the objective of the Commission was not to merely examine the goods and the conditions of equipment's operation, but also to conduct an examination with the specific purpose of determining the cause of its defects and breakdown.
Moreover, this argument of the [Seller] does not correspond to clause 12.2 of the contract, which stipulates that in the case of lack of conformity of the equipment, the [Seller] must appear before the [Buyer] in order to determine the cause of this circumstance.
3.3.2 [Assessment of the parties' positions with regard to the obligation to determine the cause of the breakdown of the equipment]
The above mentioned circumstance is of great importance for determination of the parties' liability with regard to the breakdown of the equipment.
Authorized representatives of the parties, who took part in drawing up the Report had to examine not only the operational conditions of the equipment but also to determine the cause of the breakdown. If the cause was impossible to be determined by the Bilateral Commission, as explained by the parties at the hearing, and there was a need for further examination, which follows from the comment in the Report provided by a representative of a Research Institution, the parties had to conduct a further examination according to clauses 14.2 and 14.3 of the contract.
Therefore, the Tribunal cannot agree with either the arguments of the [Seller] who refers to Clause 14.2 of the contract and alleges that it is the responsibility of the [Buyer] to determine the cause of the breakdown of the equipment, or with the arguments of the [Buyer], who alleges that this is the responsibility of the [Seller].
3.3.3 [Assessment of the [Seller]'s arguments, allegation that the [Buyer] has an obligation to determine the cause of the breakdown of the equipment]
First of all, the Tribunal disagrees with the allegations of the [Seller] that according to clause 14.2 of the contract, it is the Buyer who has the responsibility to determine the cause of the breakdown of the equipment and to bear the costs of expert examination.
The content of clause 14.2 does not lead to this conclusion at all. It is clear from this clause that it was the Bilateral Commission's obligation to examine all the circumstances concerning breakdown of the equipment, including inspection of the damaged unloaded output and checking whether the parties have followed the relevant provisions of the contract.
[Seller]'s suggestion that the [Buyer] shall conduct the inspection, in its essence, would imply an amendment of the inspection method of the quality of the equipment stipulated in the contract. For the same reason, the [Seller]'s application for expert inspection appointed by the Tribunal is also rejected. In Tribunal's opinion, the appointment of an independent expert inspection of the goods, particularly in the arbitral proceedings, might be justifiable only in the case where the parties have exhausted all possibilities in accordance with clause 14.2 of the contract to determine the cause of damage on their own.
Meanwhile, it is clear from the materials of the case that the Bilateral Commission only stated in the Report that the equipment had gone out of order and did not go further to establish the causes.
3.3.4 Assessment of the [Buyer]'s arguments, allegation that the [Buyer] has an obligation to determine the cause of the breakdown of the equipment
Also, the Tribunal cannot to agree with the [Buyer]'s position, who alleges that it did not breach the operational instructions.
Although, it is stated in the Report of the Bilateral Commission that the equipment was operated according to the operational instructions and safety requirements, the Report also stated in its sections 7 and 12 that there were certain breaches of these instructions.
Having established these violations, in particular certain deviations from the performance specifications concerning control of the conditions of the complex operation, discovery of the fact that the planned speed of the power decrease was exceeded at the moment when the complex operation was transferred to subcritical state, the Bilateral Commission ought to have recorded in the Report whether these breaches could have caused the breakdown of the equipment.
Without the Report determining the cause-effect relation between the said violations and the breakdown of the equipment, neither the [Seller] nor the [Buyer] has the right to provide their subjective view (which is not based on qualified assessment of these circumstances) as to whether these breaches may have caused a breakdown, which might lead to the application of contractual clauses 12.5 and 12.6 in this case.
Given that the Report did not determine a cause-effect relation between breach of the operational rules and breakdown of the equipment, the Tribunal states that the [Seller], according to Article 476(2) of the CCRF, has no right to refer to clause 12.6 of the contract in order to exempt itself from the liability arising out of the guarantee-related obligations.
However, the Tribunal declares that pursuant to clause 12.5.1 of the contact, the guarantee is valid on the condition that the equipment was operated according to the operational instructions. Hence, as the [Buyer] failed to prove that the violation of these instructions could not have caused the breakdown of the equipment, it may not unilaterally expect complete observance by the [Seller] of its guarantee-related obligations.
3.3.5 [Decision of the Tribunal]
Taking into account the above, the Tribunal states that pursuant to Articles 35-36, 45 and 74 of the CISG, Articles 475, 476 of the CCRF and sections 11-13 of the contract, the [Seller] must pay damages to the [Buyer]. At the same time, the Tribunal states that due to the fact that the parties failed to determine the cause of the breakdown of the equipment, both of them should suffer a financial burden resulting from that. The greater share of the liability is imposed on the [Seller] since it, as the supplier, had to take into account the specificity of the equipment and should have been more punctilious and demanding in following the provisions stipulated in the contract, in determining the cause of the breakdown of the equipment and in preventing further violations.
Taking the above circumstances into account and pursuant to the principle of justice and fairness, the Tribunal rules that the [Buyer] is entitled to reimbursement from the [Seller] of three-quarters of the losses suffered. The rest of the losses are to be covered by the [Buyer] itself.
3.4. [Arbitration fee]
[Buyer]'s claim for recovery from the [Seller] of the arbitration fee shall be granted in proportion to the amount of claims granted, according to section 6(2) of the Regulations on Arbitration Expenses and Fees (Supplement to the Rules of Tribunal).
* All translations should be verified by cross-checking against the original text. For the purposes of this translation, Claimant of the Ukraine is referred to as [Buyer] and Respondent of the Russian Federation is referred to as [Seller].
** Kirill Lebedyanskiy is a qualified lawyer in Russia. He is a graduate of the Faculty of Law, Moscow State Social University (2000), and is currently an LL.M. candidate at Queen Mary College, University of London.
*** Alexander Morari, born in the Republic of Moldova, has taken part in a number of international moot courts as a member of the Moldovan Team and as the coach of a Russian Team.Go to Case Table of Contents