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CISG CASE PRESENTATION

Russia 27 May 2005 Arbitration proceeding 95/2004 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/050527r1.html]

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

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Case identification

DATE OF DECISION: 20050527 (27 May 2005)

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: 95/2004

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russian Federation (respondent)

BUYER'S COUNTRY: Turkey (claimant)

GOODS INVOLVED: [-]


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 7 ; 8 ; 25 ; 26 ; 45 ; 49 ; 74 ; 81 [Also cited: Article 45 ]

Classification of issues using UNCITRAL classification code numbers:

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

7A3 [Observance of good faith];

8C [Interpretation of party' statements or other conduct: interpretation in light of surrounding circumstances];

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

26A Notification of avoidance: effective declaration of avoidance];

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

74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Outer limits of damages: foreseeability of loss];

81A [Effect of avoidance on obligations: obligations of both parties]

Descriptors: Scope of Convention ; Penalty clauses ; Good faith ; Intent ; Fundamental breach ; Avoidance ; Damages ; Profits, loss of ; Foreseeability of damages

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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): M.G. Rozenberg, Praktika Mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF 3z 2005 g. [Arbitration decisions rendered by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in 2005], published by "Statut" (2006), Case No. 27 [222-231]

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 95/2004 of 27 May 2005

Translation [*] by Gayane Nuridzhanyan [**]

Edited by Alexander Morari [***]

1. SUMMARY OF RULING

      1.1 By virtue of the agreement reached by the parties at the hearings of the MKAC Arbitral Tribunal [hereinafter referred to as Tribunal], the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG] is held applicable to the relations under the international sales contract concluded by the parties, the place of business of one of which is not located in a Contracting State to the CISG, and Russian law is applicable as the subsidiary law.

      1.2 Having in mind the disagreement of the parties as to the interpretation of a contractual term -- considering the provisions of art. 8 CISG, the meaning of the contractual term is determined by comparison of the content of that term with that of the other contractual terms and the tenor of the contract as a whole with due regard to the subsequent conduct of the parties.

      1.3 A fundamental breach of the contractual terms was committed by the [Seller]. This constituted a basis for the satisfaction of [Buyer]'s claim for the avoidance of the contract.

      1.4 However, due to [Buyer]'s failure to present evidence confirming the transfer of the respective sum to the third party on the instruction of the [Seller] and the expenses incurred by the [Buyer], the Tribunal refused satisfaction of these claims.

      1.5 [Buyer]'s claim for recovery of the loss of profit in the proven amount is satisfied taking into account that the [Seller] could not have failed to foresee the occurrence of the loss in that amount as a consequence of its breach of the contractual terms.

2. FACTS AND PLEADINGS

The action was brought by [Buyer], a Turkish organization, against [Seller], a Russian organization, in connection with non-fulfillment of the obligations under the contract for international sale of goods concluded by the parties on 20 January 2004. According to the [Buyer], it made the prepayment for the first installment of goods on the basis of the contractual terms and [Seller]'s invoice. However, the [Seller] did not execute the delivery and did not return the sum of the prepayment.

      2.1 In its claims, the [Buyer] sought:

      -    To have the Tribunal find that the [Seller] committed a fundamental breach of contract, and to oblige the [Seller] to make the delivery of the installment for which it received the prepayment or to return the sum of the prepayment and the sum which was additionally transferred to a third party on [Seller]'s instruction;
 
      -    To oblige the [Seller] to perform all the obligations under the contract;
 
      -    Payment of contractual penalty;
 
      -    Recovery of loss in connection with expenses incurred and recovery of loss of profit;
 
      -    Recovery of the arbitration fee and expenses for legal representation.

      2.2 In its statement of defense, the [Seller] contended that its contractual obligation as to the delivery of the goods was to arise only after prepayment by the [Buyer] of the full price of the contractual goods and that the delivery term under the contract had not yet commenced. Additionally, the [Seller] alleged that the third party, to whom, according to the [Buyer]'s statement, funds were transferred, did not transfer this sum to the [Seller] as initially intended. Thus, in [Seller]'s opinion, [Buyer]'s claims are completely unfounded.

      2.3 At the hearings of the Tribunal:

      -    The [Buyer] abandoned its claim to have the [Seller] perform the obligation in kind and claimed avoidance of the contract.
 
      -    The [Seller] adhered to its position set forth in the statement of defense.

3. TRIBUNAL'S REASONING

The award of the Tribunal contained the following main points.

      3.1 [The competence of the Tribunal]

      It follows from the available materials of the case that the parties to the present dispute are located in different States and that the dispute arose out of a contract for the international sale of goods concluded by the parties. Since the place of arbitration is Moscow, Russian Federation, the Tribunal holds that the the Law of the Russian Federation "On International Commercial Arbitration" is applicable to the issue of the Tribunal's competence to consider the present dispute as an arbitration body.

Art. 8 of the contract provides:

"All disputes and differences which may arise out of the present contract shall be settled by amicable negotiations between the parties. In case of failure to settle the dispute, the case shall be submitted to arbitration, which shall take place at the International Commercial Arbitration Tribunal at the Chamber of Commerce and Industry of the Russian Federation [that is, the Tribunal] …"

In view of the aforesaid, based on arts. 1(1) and (2), art. 7 and art. 16(1) of the Law of the Russian Federation "On the International Commercial Arbitration", para. 2 of the Tribunal Regulations which is Supplement No 1 to the mentioned Law, section 1(2),(3) and (5) of the Rules of the Tribunal and taking into consideration that neither the [Buyer] nor the [Seller] contested the Tribunal's competence, the Tribunal declared itself competent to consider the present dispute.

      3.2 [Applicable law]

      The parties did not agree on the applicable law in the contract.

In its statement of action, the [Buyer] stated that relations of the parties shall be governed, first, by the provisions of the contract; second, by the CISG; and third, by the substantive law applicable by virtue of the conflict of laws rules of the Russian law.

The [Seller], in its statement of defense, contended that the law of the Russian Federation shall be applicable.

At the arbitration hearings, the parties agreed that provisions of the contract, the CISG and Russian law shall be applicable to the relations of the parties.

Under such circumstances, the Tribunal, based on art. 28(1) of the Law of the Russian Federation "On the International Commercial Arbitration" and section 13(1) of the Rules of the Tribunal, stated that, at the hearings of 31 March 2005, the parties reached an agreement on the applicable law and held that, while considering the present dispute, the terms of the contract and provisions of the CISG shall be applied. The CISG is applicable since by virtue of art. 15(4) of the Constitution of the Russian Federation and art. 7(1) of the Civil Code of the Russian Federation it is a constituent part of the Russian legal system, whereas the provisions of the Russian civil law, according to art. 7(2) CISG, shall apply as the subsidiary law.

      3.3 [The merits of the case]

            3.3.1 Proceeding to the consideration of the dispute which has arisen between the parties, the Tribunal states that the contract concluded by the parties provided for the delivery by the [Seller] to the [Buyer] of the quantity of goods specified in the contract to the total sum in US dollars with advanced payment on terms FCA, departure point in Russia.

One of the principal disagreements between the parties consists in the different interpretation of the contract terms, in particular, whether the specified quantity of the goods shall be delivered by installments with the prepayment of the price of each installment or whether the deliveries shall start only after the payment by the [Buyer] of the full price of the contractual goods.

According to the [Buyer], the terms of the contract stipulated deliveries of the goods by installments. The [Buyer], on the basis of the invoices issued by the [Seller] no later than on the day of the contract signing, i.e., 20 January 2004, made the prepayment for the first installment of the goods in the amount indicated in the invoice by two bank transfers (the first one on 2 February 2004, the second one on 10 February 2004). However, to the present day, the [Seller] has not delivered to the [Buyer] the goods for the amount indicated in the invoice. Hence, in [Buyer]'s opinion, the [Seller] has breached its contractual obligations.

For its part, the [Seller] contended that the contract provided [Buyer]'s obligation to make the prepayment of the total price specified by the contact and that the delivery of the goods should have taken place only after such payment.

In its statement of defense, the [Seller] acknowledged receipt of the mentioned sum from the [Buyer] and its representatives, at the arbitration hearings, confirmed the receipt of the sum to the [Seller]'s account. However, the [Seller] believes that the [Buyer] has breached its obligations under the contract by failing to transfer the total amount of the prepayment and, therefore, the [Buyer] is not entitled to demand the delivery of goods corresponding to the transferred sum.

            3.3.2 The Tribunal stated that, by virtue of clause 4.1 of the contract, the delivery of goods should have been carried out by installments by railroad cars. In addition, range, quantity, quality and delivery terms of each specific installment were to be agreed by the parties and indicated in the supplement to the contract.

A number of clauses of the contract, in particular, clauses 6.1, 7.1 and 7.2 as well refer to the delivery of the goods by installments.

According to sections 4.1 and 5.2 of the contract, 100% prepayment for the goods was to be carried out before the start of the delivery.

Clause 3 of Supplement No 1 of 20 January 2004 to the Contract specifies the quantity of the goods which are to be delivered under this Supplement (Supplement No 1 to the contract is composed in Russian only).

Proceeding to the analysis of the aforesaid statements of the parties and provisions of the contract in order to determine its true content and genuine intent of the parties, the Tribunal applied art. 8 CISG. In particular, para. (3) of the mentioned article provides:

"In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."

            3.3.3 Having analyzed the mentioned provisions of the contract and Supplement No 1 to the Contract with due regard to the aforesaid and comparing it with other conditions of the contract as a whole, the Tribunal concluded as follows.

                  3.3.3.1 The [Seller] was to deliver the contractual goods by installments and the [Buyer] was to pay for each installment by prepayment.

                  3.3.3.2 The fact that the [Seller] issued an invoice for the price of the first installment of the goods on the day of contract signing implies that the [Seller] clearly understood that, according to the agreement with the [Buyer] fixed in the contract, the total quantity of the goods was to be delivered by installments with an advance payment for each installment. Otherwise, the [Seller] would have issued the invoice for the full price of the contract for the total quantity of the goods.

                  3.3.3.3 Having transferred the prepayment for the price of the first installment of goods to the [Seller], the [Buyer] acted in complete compliance with the contract and, having fulfilled its obligation, is entitled to demand from the [Seller] reciprocal performance of the contractual obligation, i.e., the delivery of the goods to the prepayment sum.

                  3.3.3.4 Having recognized [Buyer]'s right to receive the goods in accordance with the prepaid sum, the Tribunal finds it necessary to clarify the issue of the terms within which the [Seller] was to deliver the goods to the indicated sum.

According to clause 2.1 of the contract, all deliveries of goods under the contract were to have been completed by 1 December 2004.

According to the second paragraph of clause 6.1. of the contract, the [Seller] is obliged to agree with the [Buyer] on the delivery of an installment of goods 25-30 days before the beginning of a calendar month.

By virtue of art. 33(a) CISG, the seller must deliver the goods on the date which is fixed by or determinable from the contract.

In view of the above mentioned, the Tribunal, taking into account the meaning of clauses 2.1 and 6.1 of the contract and the contract as a whole, holds that the contract conditions enable one to conclude that goods are to be delivered on a monthly basis and, consequently, enable one to determine the term (date) of the delivery of each installment of goods, i.e., within one month from the date of the prepayment for the respective installment. Thus, since the prepayments were made on 2 and 10 February 2004, the installment of goods to this amount was to be delivered no later than 10 March 2004.

      3.4 [Establishing a fundamental breach by the Seller]

      On the basis of the evaluation of the meaning of the contract and conduct of the parties as to its fulfillment, the Tribunal concludes that the [Seller]:

      -    Committed a fundamental breach of its contractual obligations (clause 6.1 of the contract) by failing to deliver to the [Buyer] the prepaid installment of goods;
 
      -    Deprived the [Buyer] of the possibility to gain expected profit by means of which the [Buyer] would have covered expenses on the fulfillment of the contract; and
 
      -    Continues to retain unlawfully [Buyer]'s prepayment sum.

The Tribunal considers that [Seller]'s conduct does not comply with the principle of good faith (art. 7(1) CISG) and finds it possible to regard this conduct as a de-facto unilateral refusal to fulfill the contract.

Under such circumstances and in view of the motivated statement of the [Buyer] concerning its unwillingness to continue contractual relations with the [Seller], the Tribunal qualifies this statement as a declaration of avoidance of the contract in terms of art. 26 CISG. Therefore, on the basis of arts. 25, 45(1)(a), 49(1)(a) CISG, the Tribunal holds that the contract between the parties is avoided.

      3.5 [Recovery of the prepayment]

      Pursuant to its contractual obligations (clause 5.2 of the contract\), the [Buyer] made the prepayment for the first installment of goods in accordance with the [Seller]'s invoice of 20 January 2004. However, the [Seller] has not performed its contractual obligation (clause 6.1) as to the delivery of the goods and continues to unlawfully retain the sum of prepayment by the [Buyer].

The Tribunal holds that [Buyer]'s claim for the recovery of the prepayment sum received by the [Seller] for the goods which were not supplied by the latter shall be subject to satisfaction on grounds of art. 81(2) CISG.

      3.6 [Recovery of the penalty]

      Having considered [Buyer]'s claim to recover from the [Seller] the contractually agreed penalty, the Tribunal found that clause 7.1 of the contract provides for the penalty for non-delivery of the goods in the amount of 0.03% of the advance payment made by the [Buyer] for each day of delay.

[…]

As it follows from the statement of action and explanations of the calculation of the penalty presented by the [Buyer] at the arbitral hearings on 31 March 2005, the [Buyer] calculated the penalty starting from 8 March 2004, i.e., the deadline for the supposed delivery of goods, to 8 July 2004, i.e., the date of the commencement of the arbitration, which amounts to 122 days of delayed payment. The [Buyer] capitalized the penalty as of 8 July 2004.

The Tribunal believes that the [Buyer] incorrectly indicated the initial date for the calculation of the penalty since the initial day is 11 March 2004 and not 8 March 2004 (see para. 3.4 of the award).

Taking into account the above, the Tribunal -- following clause 7.1 of the contract and art. 330 of the Civil Code of Russian Federation, which is applicable to the present case as subsidiary law, since the CISG does not contain any provisions regarding penalties -- finds that [Buyer]'s claim for the recovery from the [Seller] of the penalty is well founded and is to be satisfied.

      3.7 [Recovery of expenses incurred and loss of profit]

      Proceeding to [Buyer]'s claim for recovery from the [Seller] of the expenses incurred and loss of profit, the Tribunal states that, according to art. 45(1)(b) CISG, the [Buyer] may claim damages provided the fact of the damage and its amount are proven by the [Buyer].

      3.8 [Recovery of the sum paid on [Seller]'s instruction]

      As to the [Buyer]'s claim for the recovery from the [Seller] of the sum which was paid by the [Buyer] to the indicated third party allegedly on [Seller]'s instruction, the Tribunal stated the following.

It was contended by the [Buyer]'s representatives at the hearings that the [Seller] requested the [Buyer] by facsimile to transfer a specified sum to a third party, which the [Buyer] did by means of a bank transfer from Turkey to the bank account opened in the name of this third party. The [Buyer] failed to present any document (facsimile) confirming [Seller]'s instruction [to this effect].

At the hearings, the [Seller]'s representatives objected to [Buyer]'s statement that the mentioned funds were transferred at the [Seller]'s request. Also, [Seller]'s representatives remarked that the third party to whom, according to the [Buyer], the funds were transferred, is not an employee of the [Seller]'s organization and was not authorized to receive the funds as performance of the contract. For its part, the [Buyer] did not present the necessary evidence to prove its claims.

Taking into account the above and based on the provisions of section 34 of the Rules of the Tribunal, the Tribunal holds that the [Buyer] failed to prove that the mentioned funds were transferred to this third party as part of the relations of the parties under the contract at issue and refused to satisfy this claim made by the [Buyer].

      3.9 [Recovery of expenses]

      Having considered [Buyer]'s claims for recovery from the [Seller] of the expenses incurred due to:

      -    the payment of the interest on the credits borrowed in order to make the advance payment for the first installment of goods;
 
      -    the payment of the vessel demurrage chartered by the [Buyer] for the transportation of the first installment of goods;
 
      -    the idle period which allegedly occurred at the [Buyer]'s enterprise because of the non-delivery of the first installment of goods,

the Tribunal concluded that there are no grounds for the satisfaction of the claim since the [Buyer] failed to present proper documentary evidence of the losses incurred and of its real amount which is provided for in section 34 of the Rules of the Tribunal.

Moreover, part of these expenses would have been incurred by the [Buyer] even had there been successful performance of the contract and these expenses would have been covered by the profit to be gained by the [Buyer] from the transaction (see para. 10 of the award).

      3.10 [Recovery of loss of profit]

      As to the [Buyer]'s claim for recovery from the [Seller] of the loss of profit, the Tribunal cannot agree with the objections of the [Seller] based on the allegation that it does not follow from the documents presented by the [Buyer] that the goods specified therein are the very goods, which were to be delivered by the [Seller].

The Tribunal, following section 34(4) of the Rules of the Tribunal according to which "assessment of the evidence is carried out by the arbiters at their own discretion", considers the following.

The [Seller], as well as the [Buyer], is an agency firm which purchases goods for further resale for the purpose of gaining profit. While evaluating the documents presented by the [Buyer], the essential information is not whose goods of generic character the [Buyer] resells but that these documents contain information about the rate of profit existent in the Turkish market, which can be gained from the resale of these goods. In addition, it can be pointed out that the profit rate, which was expected from the resale of the goods, as specified by the [Buyer] in the presented documents, is moderate enough and amounts to approximately 8%.

Under such conditions and taking into consideration that the [Seller] could not have failed to foresee the occurrence of this loss of the [Buyer] in case of non-performance by the [Seller] of of its contractual obligations to deliver the prepaid installment of goods (art. 74 CISG), the Tribunal holds that [Buyer]'s claim for recovery of the loss of profit is well-founded.

Since neither the contract nor the CISG contain any provisions with regard to the issue of correlation of the loss and penalty which has arisen in the present case, it is necessary to apply the applicable subsidiary rules of the Russian civil law contained in art. 394 of the Russian Federation Civil Code. According to art. 394(1) of the Russian Federation Civil Code, if the penalty is stipulated for the non-performance of an obligation, the loss is to be recovered in the part that is not covered by the penalty.

Based on above, the Tribunal finds that [Buyer]'s claim for recovery of the loss of profit with the deduction of the awarded sum of penalty shall be subject to satisfaction (see para. 3.6 of the award).

      3.11 [Arbitration fee]

            3.11.1 The Tribunal found that the [Buyer], when bringing the action, paid the specified amount of arbitration fee in US dollars that exceeded the fee foreseen by the Rules of Arbitration Expenses and Fees (Supplement to the Rules of Tribunal). Therefore, the Tribunal returns to the [Buyer] the overpaid sum.

            3.11.2 Having considered [Buyer]'s claim for recovery from the [Seller] of the arbitration fee paid by the [Buyer], the Tribunal, following section 6.2 of the Rules of Arbitration Expenses and Fees, imposes on the [Seller] the arbitration fee in proportion to the amount of the satisfied claims and on the [Buyer] the arbitration fee proportionally to the part of the claims which were not satisfied.

      3.12 [Recovery of the expenses for legal representation]

      Having considered [Buyer]'s claim for recovery from the [Seller] of the expenses incurred by the [Buyer] due to legal representation in the amount of 8% of the sum of the claims satisfied by the Tribunal, the Tribunal took into account:

      -    The complexity of the case and the period during which the legal services were rendered,
 
      -    The correlation between the sum awarded to the [Buyer] by the present decision and the sum initially claimed by the [Buyer], and
 
      -    Section 9 of the Rules of Arbitration Expenses and Fees concerning the admissibility of recovery of reasonable expenses of such kind,

and found that [Buyer]'s claim for the recovery of the above mentioned expenses from the [Seller] is well-founded and shall be subject to satisfaction in the amount which the Tribunal deems reasonable.


FOOTNOTES

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

*** 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.

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