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CISG CASE PRESENTATION

Ukraine 2005 Arbitration proceeding Case no. 48 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050000u5.html]

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

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Case identification

DATE OF DECISION: 20050000 (2005)

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: Austria (respondent)

BUYER'S COUNTRY: Ukraine (claimant)

GOODS INVOLVED: Goods


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 71 ; 74 ; 77 [Also cited: Articles 7 ; 64 ]

Classification of issues using UNCITRAL classification code numbers:

6A [Exclusion of modification of Convention by contract: Convention yields to contract]

71C1 [Obligations of party suspending performance: immediately notify other party]]

74A1 [General rules for measuring damages (loss suffered as consequence of breach): includes loss of profit];

77A [Obligation to take reasonable steps to mitigate damages]

Descriptors: Autonomy of parties ; Suspension of performance ; Damages ; Profits, loss of ; Mitigation of loss

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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 (Ukrainian): 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. 48 [417-426]

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 of the Ukrainian Chamber Commerce and Trade

Case no. 48 of 2005

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 Claimant [Buyer], an Ukrainian company, against Respondent [Seller] an Austrian company, for the recovery of US $1,700,000 has decided the following.

The legal basis for the adjudication of the dispute by the Tribunal is Section 11 of the Contract concluded by the parties on 23 November 1998 according to which all disputes or disagreements arising in the course of performance of the present Contract shall be adjudicated by the International Commercial Arbitral Tribunal at the Ukrainian Chamber of Commerce and Trade with application of the substance and procedural law of Ukraine in accordance with the Rules of Tribunal. The Tribunal's award shall be final and binding upon the parties.

According to the Contract of 23 November 1998, the [Seller] undertook to sell and the [Buyer] to purchase the goods in the agreed amount of tons plus-minus 10% under the agreed delivery conditions. Prices and payment conditions were set forth by the parties in the Supplements # 1-9 which are an integral part of the Contract.

According to the [Buyer], under Supplement # 4 of 10 December 1998, the first consignment of the goods was delivered by the [Seller] on the basis of Acceptance-Conveyance Act of 25 December 1998. No disagreements with regard to the delivery or payment for that delivery have arisen between the parties. As [Buyer] alleges, in the note of 19 January 1999 the [Seller] agreed to the price and undertook to deliver a certain amount of the goods during the period from 3rd decade of January till the 1st decade of February.

The [Buyer] has sent to the [Seller]'s address a confirmation of the acceptance of the goods which were to be delivered in the agreed amount for processing. However, according to the [Buyer], the [Seller] has not fulfilled its obligation and has not delivered the goods. This has caused complication of [Buyer]'s financial conditions since the latter has concluded sales contracts of the processed goods with private undertaking.

According to the action, as a consequence of non-delivery of the goods by the [Seller], the [Buyer] has suffered significant losses in the form of lost profit related to the impossibility to fulfil delivery obligations and to profit.

As stated by the [Buyer], in order to reduce the amount of the losses in the form of lost profit, the [Buyer] has many times requested the [Seller] to carry out the delivery of the goods. However, the [Seller] has refused to deliver the goods invoking non-fulfilment by the [Buyer] of its obligations with regard to prepayment. [Buyer] contends that the Contract conditions do not foresee such prepayment. Supplement # 1 of 23 November 1998 provides for delivery of the goods with payment postponed for the period of 60-120 days without any prepayment.

In its statement of defense with enclosed documents, the [Seller] alleges that [Buyer] has repeatedly breached the terms of payment for delivered goods and has many times changed the payment terms violating conditions of the Contract and Supplements to it agreed by the parties. Taking into consideration these facts, the [Seller] has decided (with reference to art. 71 of the UN Convention on Contracts for the International Sale of Goods (Vienna, 1980)) to suspend performance of the Contract with regard to delivery of the goods to the [Buyer] until the latter fulfils all its obligations or until the [Buyer] grants sufficient and reliable guarantees of its fulfilment. The [Seller] has notified the [Buyer] about that in advance by fax dated 29 January 1999.

Deliveries of goods were recommenced in March-April of 1999, i.e., after full payment for the consignment of goods delivered earlier.

According to the [Seller], untimely delivery of the goods took place through [Buyer]'s fault since the latter has breached its contract obligations with regard to the timely payment for the goods. In the view of above, the [Seller] requested the Tribunal to dismiss the [Buyer]'s claim and to impose the expenses for the payment of arbitration fee on the [Buyer].

In its response to [Seller]'s defense, the [Buyer] disagreed with the [Seller]'s arguments for the following reasons:

   -      -      -   
The [Seller] undertook to deliver the goods in 1998-1999 in the agreed total amount in equal monthly consignments with postponement of payment for 60-120 days; this foresees that [Seller] realized the fact that the payment will not be carried out simultaneously with the delivery;
 
The [Seller] has misled the [Buyer] and regardless of the previous arrangement on delivery of the agreed amount of the goods in the first decade of December 1998, has in fact delivered lesser amount of the goods and only in the third decade of December 1998; this caused the failure of the contracts on processing the goods concluded by the [Buyer];
 
None of the faxes sent by the [Seller] evidenced suspension of the fulfilment of the [Seller]'s obligations under the Contract.

The [Seller] has presented explanations to the Tribunal according to which with due account of the provisions of the Contract (para. 11.1) and legislation applicable to the relations of the parties under the disputable contract:

   -      -      -      -      -      -   
The [Seller] has stated that UN Convention on Contracts for the International Sale of Goods (Vienna, 1980) and the provisions of the Contract itself shall apply;
 
The [Seller] has noted that parties have used the principle of freedom of contract and autonomy of will (art. 6 of the Vienna Convention) on the basis of which application of the provisions of the USSR Civil Code are precluded; this will contradict the procedure of application of the international agreement rules in the territory of Ukraine;
 
Referring to the report on the negotiations of the parties of 16-17 November 1998, the [Seller] requested the Tribunal to take into consideration that the [Buyer] had an indebtedness to the [Seller] under other contracts and has systematically committed breach of the payment terms;
 
Based on the above and on the analyses of the correspondence, the [Seller] contended that these facts evidenced deficiencies in the [Buyer]'s ability to perform its payment obligations and significant weaknesses of [Buyer]'s creditworthiness which allows the [Seller] to suspend fulfillment of its obligations according to art. 71 of the Vienna Convention, about which the [Seller] has informed the [Buyer] in written form;
 
The [Seller] has stated that the supply of goods was recommenced only after full payment was received from the [Buyer]; the previous payment concerned only [Buyer]'s obligations with regard to goods purchased;
 
The [Seller] also drew the Tribunal's attention to para. 7.1 of the Contract in which, [Seller] alleges, the parties -- based on the principle of freedom of contract -- have set liability terms for non-fulfillment of obligations; the parties have fixed the principle of responsibility for fault and right to the reimbursement of losses which are to be confirmed with supporting documents.

Based on the above, the [Seller] asserts that [Buyer]'s claims should not be satisfied.

At the Tribunal's proceedings the [Buyer]'s representatives have confirmed the full amount of [Buyer]'s claims. They have alleged as well that monthly deliveries of goods were to be carried out by the [Seller] in accordance with the agreed terms with payment postponement (indulgence).

In [Buyer]'s opinion, its obligations related to the payment for the delivered goods were fulfilled and that the establishment of the dependence of the delivery of goods on the payment for the delivery of the first consignment does not correspond to the conditions of the disputed Contract. The [Seller] knew from the very beginning that goods were purchased by the [Buyer] for further processing and sale of the derived products. Therefore, the [Seller] had to realize that stoppage of supply will cause certain losses for the [Buyer].

[Buyer]'s representatives have strongly claimed that the [Seller] had not notified the [Buyer] about avoidance of the Contract or stoppage of the deliveries according to the procedure envisaged in the CISG. Furthermore, on 5 January 1999 the [Seller] asked the [Buyer] to confirm its readiness to accept the following consignment of its goods.

[Seller]'s representative has, in turn, alleged that in his opinion, payment delay for the first consignment of the goods took place. At that stage of the contract execution, the [Buyer] had not lodged any claims with regard to the delivery delay which was confirmed in the present action. Moreover, referring to the correspondence, the [Seller] contended that the [Buyer] requested it to somewhat delay delivery of the goods until some of the issues connected with Ukrainian legislation will be clarified.

As to the payment terms for the delivered goods, 50% of its price was to be paid in 40 and in 60 days after signature of the Acceptance-Conveyance Act, i.e., payment is foreseen on the 40th and 60th days.

Regarding the grounds for and calculations of losses, the [Seller]'s representative has first of all stated that, according to art. 7.1 of the Contract of 23 November 1998, the parties have foreseen that "the party at fault will reimburse the injured party expenses which are connected with improper execution of the contract and are confirmed by the corresponding documents". Regarding provisions of the Contract and that of the Convention as certain conflict of law norms, the [Buyer] referring to autonomy of will of the parties and art. 6 of the Vienna Convention considers that particularly art. 7.1 of the disputed Contract is applicable to the evaluation of the grounds and conditions of the liability of the parties. It is [Seller]'s position that the [Buyer] has not proved fault of the [Seller] and has not confirmed the fact of its real expenses.

Based on the above, the [Seller] requests the Tribunal to dismiss the action.

The [Buyer] has presented explanations as to the merits of the calculation of the losses: expenses connected with subsequent operations with the delivered goods upon the agreement with private undertakings were included in the cost of the kinds of products subject to delivery.

Concerning the measures related to reduction of the amount of the foreseeable losses, the [Buyer]'s representatives have explained that during the entire period of underdelivery they have notified the [Seller] many times about pecuniary consequences of such non-fulfillment. Furthermore, at the time the Contract was signed, the [Seller] was aware of the fact that goods were purchased by the [Buyer] for the processing and resale to third parties and not for personal use.

The [Seller] for its part has declared that, in its opinion, the alleged agreement with private undertaking is false and the parties did not intend to fulfill obligations under the agreement.

The [Buyer] responded that the agreement with private undertaking of 28 December 1998 is a general agreement and that it is ready to present the documents confirming the validity of the mentioned contract relations.

OPINION OF THE ARBITRAL TRIBUNAL

Taking into account that:

1. According to para.11.1 of the Contract of 23 November 1998, the parties agreed to apply to the dispute settlement the substantive and procedural law of Ukraine. At the same time, para. 12.7 of the Contract states that all the other relations which are not covered by the Contract are to be regulated by the UN Convention on Contracts for the International Sale of Goods (Vienna, 1980).

On the basis of comparative analysis of the indicated paragraphs, the Tribunal rules that the parties did not intend to exclude application of the Vienna Convention by their agreement on application of Ukrainian substantive law, which is confirmed by the reference to provisions of the CISG by both parties in their written arguments and in their oral pleadings during the Tribunal's proceedings.

According to art. 7(2) of the Vienna Convention, norms of Ukrainian substantive law are to be applied to the relations of the parties as subsidiary provisions related to the issues not directly regulated by the Convention.

2. [Seller]'s statement that para. 7.1 of the Contract ("party at fault will reimburse the injured party expenses which are connected with improper execution of the contract and are confirmed by the corresponding documents") excludes the possibility of either party claiming compensation of other losses is unfounded for the following reasons:

   -      -      -   
In fact, art. 6 of the Vienna Convention permits the parties to derogate from any of its provisions , including the provisions on liability;
 
The wording of para. 7.1 of the Contract should be interpreted so that it concerns only the rules of the compensation of factual expenses of the one party which the other party is obliged to compensate provided it is at fault and provided the expenses are confirmed by the corresponding documents;
 
If the parties indeed would intend to exclude the possibility of any other losses including lost profit (art. 74 of the Vienna Convention) they would have to express this in a sufficiently precise manner.

Hence, the provisions of para. 7.1 of the Contract do not exclude the right to claim lost profit, which is the subject of the present action, according to the Convention.

3. According to the Contract of 23 November 1998, delivery of the goods was to be carried out in equal consignments (para. 1.1). The second consignment of the goods to be provided in accordance with Supplement # 5 with a delivery deadline of 10 February 1999 was not delivered by the [Seller]. At the same time, according to the Tribunal, it is obvious that Supplements # 8 and 9, which foresee delivery of a certain amount of goods and set forth a fine of 25% for the non-delivery or delivery delay, did not constitute a replacement of the delivery which had not taken place. The mention of the "second consignment of the goods" in the Supplements without any other instructions should be interpreted as delivery of the second consignment of the goods after December 1998 and not as the substitute of the independent consignment foreseen but not delivered under Supplement # 5, which is as well confirmed by the materials of the case with regard to its delivery by the [Seller] and payment by the [Buyer] and is not disputed by the parties.

4. [Seller]'s statement about the presence of a fundamental breach of the contract by the [Buyer] does not exempt [Seller] from liability for non-delivery of the goods in February 1998 for the following reasons:

   -      -      -      -   
Assuming that [Buyer] has not paid for certain delivered goods in due time and thereby has fundamentally breached the contract, the [Seller] could have used the measures of legal protection foreseen in the Vienna Convention and claimed avoidance of the contract according to art. 64 of the Vienna Convention, which the [Seller] has not done.
 
In any event, [Seller] was entitled to claim compensation and interest which the [Seller] has not petitioned for as well; according to the [Seller] this decision was based on the lack of money of the [Buyer].
 
The [Seller] was entitled to claim suspension of the fulfillment of its obligations under the Contract if the [Seller] believed that [Buyer] is not capable to pay, but this was not done.
 
Many of the [Seller]'s messages contain requests to the [Buyer] to execute the payment, however, mention of suspension of the fulfillment of obligations can be found only in two faxes (of 21 January and of 5 February 1999) which were presented to the Tribunal only on the day of the proceedings. At the same time, the [Buyer] has stated that it had not received these messages, indicating that the code numeration does not comply with the one usually used by the [Seller] in the correspondence.

Under such circumstances the [Seller] has not proved that these messages in fact were sent to the [Buyer] even though they were indeed written by the [Seller]. This could have been done for instance by presenting the letters that fix the time of its sending off from the [Seller]'s fax machine. Moreover, further correspondence of the parties which can be found in the materials of the case does not contain any reference to these messages.

5. [Seller]'s reference to the fact that not having received the payment from the [Buyer], it was deprived of the possibility to buy necessary quantities of goods from its suppliers that asked for advanced payment cannot be considered as a ground for [Seller]'s exemption from the fulfillment of the contractual obligations with regard to the delivery of the goods.

Taking into account the above and that the [Seller] has not advised of impossibility to deliver the February consignment of the goods as a consequence of force-majeure circumstances (para. 10 of the Contract), [Buyer]'s claims for reimbursement of the losses in the form of lost profit are subject to satisfaction.

At the same time, it is not possible to agree and to admit calculation of the amount of the lost profit calculated by the [Buyer] by simply subtracting the contract price of the goods determined by the [Buyer] in the amount of US $1,600,000 from the sum it could have received as payment for the processed product it would have sold to the private enterprises at the price which according to the [Buyer]'s calculations would amount to US $3,300,000.

Having taken into account the absence of approved methods for calculation of the amount of the lost profit, the Tribunal follows art. 77 of the Vienna Convention: "A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach." The Tribunal rules that the principle of proportionate mitigation of the losses shall apply. [Buyer]'s reference to its repeated requests for deliver of the goods addressed to the [Seller] cannot be regarded as sufficient means. Such means of mitigations would be purchase of analogous goods with price information presented by [Buyer].

6. On the basis of para. 1.1 of the Contract, the [Seller] was entitled to deliver in February of 1999 goods not in the amount of 25 000 tons but 10% less, i.e., in the amount of 22,500 tons. Therefore the [Buyer] would have to pay for this amount not US $1,600,000 but by 10% less, i.e., US $1,440,000.

To buy such amount of the goods on the Ukrainian market, according to the market prices provided by the [Buyer], it would have to pay US $1,700,000.

Moreover, it should be taken into consideration that during the respective period price-cutting was observed in the market of the product processing of the goods which was notified directly by the private undertaking to the [Buyer]. This was reflected in the correction of the prices for the goods, in particular the prices for the goods were reduced in Supplements # 8 and 9. In addition, the [Buyer] would have incurred expenses connected with storage and transportation of the goods in the amount of 10 % of its cost.

Taking into account the above and in the absence of any founded calculations by the [Buyer], the Tribunal has concluded that if the [Buyer] had used adequate preventive means it would have mitigated its losses. Therefore, [Buyer]'s claims for recovery of the lost profit are only subject to satisfaction in the amount of [US $897,000]. This is the difference between the market and contractual price of the goods reduced by 10% (per cent of deviation from concrete numbers admitted by the parties which is subtracted with due account of the price cut-off tendency on the markets for these goods in Ukraine).

The Tribunal considers that this sum is a proper compensation to the [Buyer] by the [Seller] according to the profit which can be received within the normal resale operations of the goods that are the subject of the disputed Contract. Under such conditions, [Buyer]'s claims for recovery of the losses in the form of the lost profit in the sum of US $1,700,000 are not well-founded. Recovery of the sum of [US $897,000] is, however, subject to satisfaction.

7. According to para. 2 of Section V of the Regulations on Arbitration Fees and Expenses, the arbitration fee is imposed on the [Seller] in proportion to the satisfied claims which constitutes 52.89 % from the amount of arbitration fee transferred by the [Buyer].

THE AWARD

Following provisions of Contract of 23 November 1998, arts 6, 7, 64, 74, 77 of the UN Convention on Contracts for the 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, para. 2, Section V of the Regulations on Arbitration Fees and Expenses, the Tribunal has decided:

Residual action claims are rejected. This judgment is final.


FOOTNOTES

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

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Pace Law School Institute of International Commercial Law - Last updated November 2, 2006
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