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CISG CASE PRESENTATION

Russia 24 January 2006 Arbitration Court [Appellate Court] for the Far East Area [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060124r1.html]

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

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Case identification

DATE OF DECISION: 20060124 (24 January 2006)

JURISDICTION: Arbitration ; Russian Federation

TRIBUNAL: Federal Arbitration Court for the Far East Area

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: F03-A73/05-1/4096

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States

BUYER'S COUNTRY: Russia

GOODS INVOLVED: Maize


UNCITRAL case abstract

RUSSIAN FEDERATION: Far East Area Federal Arbitration Court
Case No. F03-A73/05-1/4096 of 24 January 2006

Case law on UNCITRAL texts [A/CN.9/SER.C/ABSTRACTS/113],
CLOUT abstract no. 1112

Reproduced with permission of UNCITRAL

Abstract prepared by A. S. Komarov, National Correspondent, A. I. Muranov and N. S. Karetnaya

A seller from the United States of America sued a Russian buyer for the payment of moneys owed for the purchase of goods (maize) and damages for the delay in payment. The respondent transferred the goods to third parties and notified the plaintiff that the financial obligation had been assigned to those third parties, which paid part of the price of the supplied goods.

The court of first instance upheld the claim. The court of appeal overturned that decision and rejected the claim on the grounds that, in breach of the contract, the goods had been supplied on an FAS rather than a CIF basis, so that the plaintiff had not paid freight and insurance costs. Moreover, the seller had supplied goods of inferior quality and had not supplied the full quantity ordered. On these grounds, the court of second instance considered that, under articles 25, 30, 32, 35, 38 and 50 CISG, the total costs which the plaintiff had failed to pay relating to CIF delivery, the direct losses due to the low quality of the goods and the extra customs dues paid by the respondent should be deducted from the payments due under the contract.

The seller contested the decision of the court of appeal.

The court of cassation overturned the decision of the court of appeal on the following grounds. The main issue in the dispute was a business relationship relating to the international supply of goods; CISG is thus applicable to the relationship between the parties. In accordance with the generally accepted standards of international law, enshrined in CISG and the Civil Code of the Russian Federation, private international law and Russian civil law are based on an acknowledgement of the equality of the participants in social interactions, the inviolability of property and the freedom to conclude a contract. However, the court of appeal did not consider the terms of the contract in the light of article 8(3) CISG and the Civil Code of the Russian Federation, taken in conjunction with the terms of delivery on an FAS or CIF basis, laid down in the Incoterms Rules and proved in the current case. The court of appeal's conclusion that the goods had been supplied on an FAS basis and its justification of the payment due and the amount of the payment were based on an unsatisfactory evaluation of the situation. The court of appeal's conclusion that the seller had failed to observe all the obligations arising from delivery on a CIF basis was unfounded, since the court had not properly determined, in the light of article 8(3) CISG, the terms governing the basis for the delivery agreed by the parties in the contract between them.

According to articles 35 and 36 CISG, the seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. The seller is liable in accordance with the contract and with CISG for any lack of conformity which exists at the time when the risk passes to the buyer, even if the lack of conformity becomes apparent only after that time.

Article 39 CISG states that a buyer loses its right to rely on the lack of conformity if it does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after it has discovered it, or should have discovered it. No proof was submitted that the respondent had observed the procedure laid down in article 39 CISG.

The court of cassation overturned the decision of the court of appeal and sent the case for retrial, indicating that, in the reconsideration of the case, the violations which had previously been allowed should be rectified, the circumstances of the case should be fully and comprehensively investigated and the evidence presented by the plaintiff and respondent in support of their claims and counterclaims should be evaluated.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 5 ; 8(3) ; 25 ; 30 ; 32 ; 35 ; 36 ; 38 ; 39

Classification of issues using UNCITRAL classification code numbers:

1A [Internationality: Parties' places of business in different States];

5A [Exclusion of claims based on death or personal injury];

8C [Interpretation in light of surrounding circumstances];

25A [Effect of a fundamental breach]

30 [Summary of Seller’s Obligations];

32 [Shipping Arrangements];

35A [Quality, quantity and description required by contract];

36 [Time for Assessing Conformity of Goods];

38 [Time for Examining Goods];

39A [Buyer must notify seller within reasonable time];

Descriptors: Fundamental breach ; Ships or vessels ; Death or personal injury ; Reasonableness ; Internationality ; Conformity of goods

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): online database of court judgements <http://kad.arbitr.ru>

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [first draft]

Queen Mary Case Translation Programme

Federal Arbitration Court for Far Eastern District of Russian Federation

Case No. F03-A73/05-1/4096 of 24 January 2006

Translation [*] by Dmytro Galagan and Yaroslava Sorokhtey [**]

Federal Arbitration Court of Dalnevostochnyj District examined the appeal of the [Seller]against the decision made on 23.08.2005 in case N A73-7610/4/13-99 (AI-1/372-2005-44) of Arbitration Court of Khabarovsk Territory on the suit of the [Seller] against the [Buyer], to recover 27575295 rubles, 53 kopecks.

[Seller] appealed to the Arbitration Court of Khabarovsk Territory with the claim to the [Buyer] on recovery of 26,262,186 rubles 26 kopecks of unpaid balance in payments for maize and 1,313,109 rubles 27 kopecks as a penalty for late payment.

Before the decision the claimant in accordance with Article 37 of the Arbitration Procedure Code of the Russian Federation (APC) (as amended in 1995), changed the amount of the claim, increasing the amount of the debt up to 29,144,126 rubles 33 kopecks and the amount of fines up to 1,457,206 rubles 27 kopecks.

To participate in the case as respondents were involved Khabarovsk Territory Government, Ministry of Finance of the Khabarovsk Territory, the Ministry of Food Industry and Consumer Services of Khabarovsk Territory.

By a decision of 09.02.2000 claims were partially satisfied. The respondent collected 27,012,940 rubles 64 kopecks of debt and 1,350,647 rubles 03 kopecks of fine. The rest of the claim was denied.

The appellate court reversed the decision of 06.06.2000, the claims were dismissed.

The order of the Presidium of the Supreme Arbitration Court of the Russian Federation of 25.09.2001 N 8508/00 cancelled the decision of 09.02.2000 and the appellate decision of 06.06.2000, the case was sent for reconsideration to be revised by the same court of the first instance.

After reconsideration the decision of 10.01.2002 satisfied the claim on account of the Finance Department of the Administration of the Khabarovsk Territory.

Resolution of the Court of Appeal of 04.06.2004 reversed the decision, the claim was dismissed.

Disagreeing with the decision of the appellate court, the [Seller] applied to the Supreme Arbitration Court of the Russian Federation with the request to write a statement of its supervisory review.

By a decision of 22.11.2004 N 8508/00, the Supreme Arbitration Court of the Russian Federation on the basis of Art. 304 of APC denied the transfer of the case to the Presidium of the same court and the case was sent for review to the Federal Arbitration Court of the Far Eastern District to verify the application of the law in order of appeal.

Decision of the arbitration court of appeal on the given case of 02/22/2005 canceled the given decision and the case was sent for a new trial to the Court of Arbitration of the Khabarovsk Territory.

During reconsideration the appellate court decision of 23.08.2005 cancelled the decision of 10.01.2002; the claim about the recovery of the [Seller] of 27,363,411 rubles 51 kopecks of debt and 1,368 rubles 37 kopecks of penalty was dismissed.

Judicial act is motivated by the fact that the claimant violated the UN Convention "On Contracts for the International Sale of Goods" (Vienna, 04.11.1980) by the short delivery and low-quality goods delivery. Also, the court concluded that, in violation of Section 1 of the contract the goods were not delivered under the CIF terms, but under the FAS terms, due to which the claimant did not pay the freight and cargo insurance, so the court excluded the cost of insurance and freight, the faulty goods, overpaid customs payments to the wrong bill of lading and poor quality products from the cost of goods, and concluded that the respondent overpaid 556,168.95 USD to the [Seller] as of the day the claim.

In the appeal of the [Seller] it is suggested that the appeal claim decision of 23.08.2005 should be canceled because it violates the rules of substantive law. In support of the claimant's complaint the claimant challenged the Court's conclusion that the goods were delivered on FAS terms and that the cost of vessel freight were not made by the claimant as not based on the facts of the case, and contrary to the terms of the contract. The claimant believes that the product was delivered under the CIF terms (taking into consideration changes made in this contract as to this delivery basis). Duty cargo insurance was not assigned to the seller under the contract, and the reference of the court to non-compliance by the claimant of all obligations under the CIF delivery basis, including insurance, should be considered unfounded. The claimant believes that the court wrongly excluded from the sum of the costs to be recovered costs of short delivery and poor quality delivery and the cost of paid customs duties. Conclusion of the court about the losses the claimant inflicted on [Buyer] through overpaid customs in the amount of 389,425,584 rubles was made without taking into account the FAS, CIF terms, contract of 16.02.1996 N 1 and Art. No. 125 of the Labour Code (revised, as in force in 1995 – 2002).

In objection to the appeal, Khabarovsk Territory Government and the Ministry of Finance do not agree with the arguments set out in the appeal, and offer to leave the appellate resolution of 23.08.2005 unchanged as legitimate and reasonable.

In accordance with generally accepted rules of international law set in the Convention and in the Civil Code of the Russian Federation, private international law and Russian civil law are based on the recognition of the equality of parties in social relations, the inviolability of property, and freedom of contract.

According to Article 8(3) of the Convention, 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.

As it is evident from the terms of the sale-purchase contract of February 16, 1996 No. 1 concluded between the [Seller] and the [Buyer], the League undertook:

-    to ensure the delivery of cargo to the port of Vladivostok under CIF terms;

-    to provide all the documents necessary for the export of goods from the United States;

-    to conclude a contract with the carrier of the goods;

-    to transfer the goods for disposal of the [Buyer] at the port of Vladivostok;

-    to bear all costs and risks connected with the delivery of the goods to the point of destination, including the unloading of the goods at the port of Vladivostok;

-    to inform the [Buyer] about the venue and time of delivery;

In turn, the [Buyer] undertook:

-    to ensure the taking of delivery of the goods (maize) at the port of Vladivostok;

-    to obtain documents necessary for import of maize to Russia;

-    to take delivery of the goods as soon as the League makes it available for disposal of the [Buyer];

-    to bear all the risk and pay the costs related to the payment of customs procedures, duties and taxes at the port of Vladivostok and transportation costs from the port to the place of storage and processing; and

-    pay for the goods to the League within the period set in paragraph 2.2 of the contract (case sheet 11 - 12, Vol. 1).

According to the International Rules of Interpretation of Commercial Terms "Incoterms" (publication of the International Chamber of Commerce of 1990 No. 460, hereinafter – the "Incoterms" Rules ) the delivery of goods under the FAS (free alongside ship) means that the seller is deemed to fulfill his obligation to deliver when the goods are placed alongside the vessel on the pier or on the barges at the agreed point of shipment. This means that from this point the buyer has to bear all costs and risks of loss or damage of the goods. Under the FAS terms, the buyer shall procure, at his own risk and on his expense, export licenses, and carry out all customs formalities for the export or import of the goods (including the payment of customs duties), and to conclude on his expense a contract for carriage of the goods from the agreed port of shipment.

In accordance with the abovementioned "Incoterms" Rules the seller under the CIF terms shall procure, at his own risk and on his expense, export license, and carry out all customs formalities for the export of goods, conclude on his own expense under the general terms a contract for carriage of the goods to the agreed port of destination, and to provide, on his expense, as provided for in the sale-purchase contract, marine cargo insurance against the risk of loss or damage of the goods during transportation under the minimum conditions.

The buyer in case of delivery under the CIF terms shall pay the price provided in the sale-purchase contract, take delivery of the goods and take the goods from the carrier at the port of destination, bear all risks of loss or damage of the goods and all expenses incident to the goods from the moment the goods have passed over the rail of the ship at the port of shipment, procure, at his own risk and on his expense, import license or other official authorization necessary for the import of the goods, carry out all customs formalities for the import of the goods, and bear all costs and charges for unloading of the goods at the port of destination.

Meanwhile, the appellate court did not assess the conditions of the contract agreed upon by the parties, in accordance with the provisions of Article 8(3) of the Convention, Art. 431 of the Civil Code of the Russian Federation, comparing to the terms of delivery under FAS and CIF rules as specified in the Incoterms Rules and evidence available in the materials of the case, as presented by the parties in support of the delivery of the goods in dispute.

Evidence supporting the fact of receipt of the goods by the [Buyer] (the buyer under the contract) at the shipping point in the USA in the manner provided in the Incoterms Rules under the FAS (Free Alongside Ship) terms was not considered by the appellate court according to Article 71 of the Arbitrazh Procedural Code of the Russian Federation, and is not specified in the reasoning of the judgment.

Accordingly, the conclusion of the court that the goods were delivered under the FAS terms was made on the basis of incomplete investigation of the circumstances of the case.

The conclusion of the court that the seller unreasonably withheld freight costs in amount of 30.43 USD per ton, and 471,576.29 USD or 2,355,051,992 RUB for the whole delivery (without denomination at the exchange rate as of the moment of delivery) is also not based on the evidence.

In violation of Article 271(2)(12) of the Arbitrazh Procedure Code of the Russian Federation the court did not refer to any evidence in support of its conclusion regarding this price of the freight and that it was paid not by the plaintiff but by the [Buyer].

The conclusion of the court that the plaintiff caused losses to the [Buyer] by the way of excessive customs payment for the amount of 389,425,584 RUB (without denomination) taking into account the correction of the customs value, is not based on evidence and contradicts the terms of delivery under FAS, CIF and the contract of February 16, 1996 No. 1, which provides for the payment of import customs payments by the buyer.

In addition, the court did not take into account the fact that, in course of the process of consideration of this dispute before the decision on the merits was made by the court of the first instance, the [Buyer] did not file a counterclaim against the plaintiff for compensation for the unjust enrichment and losses.

As it is seen from the terms of the sale-purchase contract February 16, 1996 No. 1, the seller did not have an obligation to procure insurance for the cargo (case p. 11 - 12, Vol. 1).

According to the INCOTERMS rules, marine insurance of the goods is to be carried out under the CIF terms against the risk of loss or damage in transit (paragraph A.3 CIF INCOTERMS - 90).

Thus, the reference by the court to the failure of the seller to comply with all obligations under the CIF delivery terms, including insurance, lacks merit, since the court did not take into account the abovementioned circumstances and did not determine terms of the delivery agreed by the parties in their contract under Article 8(3) of the Convention and Article 431 of the Civil Code of the Russian Federation.

In light of the above, the conclusion of the court that the seller unreasonably withheld the insurance payment in amount of 309,687,928 RUB (without denomination) lacks merit.

According to Articles 35, 36 of the Convention the seller must deliver goods which are of the quantity, quality and description required by the contract and which are registered or packaged in the manner required by the contract.

The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.

Article 39 of the Convention provides that the buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.

In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, since this time-limit is inconsistent with a contractual period of guarantee.

A copy of the claim of June 21, 1996 No. 06-335, the general act No. 72 И, and the act-notice No. 72/1 of June 4, 1996 are included into the case and were accepted by the court in support of the short delivery and poor quality of maize in the amount 4,304.25 tons for the sum of 3,675,717,590 RUB (without denomination) (case p. 18 - 19, Vol. 2, case p. 25, Vol. 8)

However, there is no evidence that aforementioned documents were presented to the [Seller] according to the procedure provided for in Article 39 of the Convention.

Under Article 50 of the Convention, if the goods do not conform with the contract, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time.

Hence, the conclusion of the court that short delivery took place, goods were unfit for the purpose they were supplied, and that the moneys paid for the goods and customs clearance (3,675,717,590.00 RUB and 1,008,767,726.00 RUB, accordingly) were to be excluded from the sum to be recovered, was reached on the basis of incomplete determination of the circumstances of the case, which was material to the outcome of the case.

Considering the above, the decision of the appellate court of August 23, 2005 shall be reversed on the basis of part 3 of the Article 288 of the Arbitrazh Procedure Code of the Russian Federation, and the case shall be remanded to the arbitrazh court of appeals.

On remand, the court shall eliminate the violations, completely and thoroughly investigate the circumstances of the case, assess the evidence submitted by the plaintiff and the defendant in support of their claims and defenses, and, depending on its findings, to resolve the dispute.

Pursuant to Articles 286 - 289 of the Arbitrazh Procedural Code of the Russian Federation, the Federal Arbitrazh Court of the Far Eastern District

ORDERED:

To reverse the appellate decision of the Arbitrazh Court of Khabarovsk Territory of August 23, 2005 in the case No. A73-7610/4/13-99 (АИ-1/372-2005-44) and remand the case to the same court of appeals.


FOOTNOTES

* All translations should be verified by cross-checking against the original text.

**Dmytro Galagan is an intern at the Association for International Arbitration. He can be reached at dmytro.galagan@hotmail.com. Yaroslava Sorokhtey [bio to be added].

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Pace Law School Institute of International Commercial Law - Last updated September 18, 2012
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