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CISG CASE PRESENTATION

Russia 27 January 2006 Arbitration proceeding 65/2004 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060127r1.html]

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

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Case identification

DATE OF DECISION: 20060127 (27 January 2006)

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: 65/2005

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: [-]

BUYER'S COUNTRY: [-]

GOODS INVOLVED: [-]


Classification of issues present

APPLICATION OF CISG: [-]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 53 ; 62

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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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 of Mejdunarodnogo Kommercheskogo Arbitrazhnogo Suda pri TPP Za 2006 g. [Arbitration decisions rendered by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in 2006], published by "Statut" (2008) No. 4 [51-59]

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

Russian Federation arbitration proceeding 65/2004 of 27 January 2006

Translation [*] by Andriy Kril [**]

1. SUMMARY OF RULING

1.1 The Tribunal decided on the applicable law in absence of the parties' agreement on this matter. The Tribunal used an approach foreseen by the Law of the RF "On International Commercial Arbitration" and the Rules of the MKAC. Said approach is consistent with the provisions of the European Convention on International Commercial Arbitration of 1961 (article VII). Italy and Kazakhstan (states where the parties are located), as well as the Russian Federation, are parties to this Convention.

1.2 Following art. 1211 of the Civil Code of the Russian Federation the Tribunal recognized Italian law (the law of the seller) as applicable to the parties' relations. The Tribunal concluded that the Vienna Convention of 1980 (art. 1 (1) (b) CISG) shall be the primary law applicable in the case at hand, despite the fact that only Italy is the state party to the Convention (Republic of Kazakhstan has not acceded to the treaty).

1.3 The Tribunal dismissed the motion of the respondent to adjourn the hearing of the case because of respondent's intention to pay arbitration fee for counterclaim's filing. The Tribunal ruled that responded was granted sufficient time for doing so but failed to pay in a timely manner.

1.4 The Tribunal based its ruling on the agreement of the parties fixed in their correspondence exchanged by the parties during the arbitration proceedings.

2. FACTS AND PLEADINGS

The claim was lodged by the [Seller], an Italian firm, against the [Buyer], a Kazakh organization, in connection with the underpayment for the goods delivered on DDU specific destination point in Kazakhstan according to INCOTERMS 2000 under the international sales contract concluded by the parties on 11 December 2002.

The contract provided, inter alia, for the following:

1)    Date of delivery shall be the date when the goods reach the destination point specified by the [Buyer];
 
2)  The contract shall be performed within 60 calendar days as of the shipment of goods from the [Seller]'s warehouse;
 
3)  The [Buyer] shall make a prepayment in the amount of 70% of the goods' price after the signing of the contract, and transfer the remaining 30% within 3 banking days after the notification of the [Buyer] by fax about the shipment of goods from the [Seller]'s warehouse.

The first prepayment was made by the [Buyer] on 8 July 2003. In its letter of 26 September 2003 the [Buyer] informed the [Seller] about its readiness to accept the goods and promised to transfer the remaining funds within 3 banking days after the receipt of the invoice. The [Buyer] also notified the [Seller] that currency regulation legislation of Kazakhstan foresees liability for stay of the funds transferred from Kazakhstan abroad for more than 90 days outside of the country and indicated 9 October 2003 as the deadline for receipt of the goods. By letter of 2 October 2003 the [Buyer] demanded immediate return of the funds because of the expiration of 90-day period. On 15 October 2003 the [Buyer] communicated to the [Seller] information necessary for shipment of goods by means of automobile transport from Italy. The goods were sent to the [Buyer].

Statement of claim indicates that on 3 November 2003 the goods were delivered on the customs station in the city of Uralsk and were placed at the temporary storage warehouse (TSW). Since the [Buyer] failed to pay for the remaining part of the goods in time, the [Seller] decided to return the goods to Italy and notified the [Buyer] of its decision on 25 November 2003. However, the [Buyer] performed customs clearance of the goods on 1 December 2003 and left the goods in TSW in Uralsk. The [Buyer] demanded from the [Seller] to deliver the goods to the destination point agreed upon in the contract. In its letter of 11 December 2003 the [Seller] informed the [Buyer] that the goods were placed in TSW and cleared by [Buyer]'s consent. The [Buyer] in its letter of 13 December 2003 objected and noted that it did not give a written consent to the customs clearance and did not conclude a contract with TSW. The [Buyer] also contended that the [Seller] unilaterally changed the final destination point. The parties were in correspondence up to 22 February 2004 when the [Seller] confirmed that it is ready to deliver the goods to the destination point at its own cost within 10 days after the receipt of the confirmation of the payment of the remaining contract price. However, in response to this the [Buyer] filed a complaint on 23 February 2004, stating that because of the late delivery it demands return of the prepayment, payment of the 10% penalty (para. 6.1 of the contract foresees that in case of late delivery the [Seller] return to the [Buyer] the prepayment within 20 banking days as of the date of violation of the delivery terms and pays 10% of the contract price as a penalty) and reimbursement of the expenses on customs clearance of the goods. In addition, the respondent indicated in the complaint that the contract provided for delivery of the goods to the specified railway station and that the [Seller] unilaterally changed the destination point.

The [Seller] stated that the [Buyer] did not transfer the remaining amount of payment for the goods as of the moment of filing of the claim and therefore is subject to fine in the amount of 10% accrued on the underpayment on the basis of para. 6.2 of the contract. In addition, the [Seller] claimed that the [Buyer] has to pay an interest for the use of another's monetary funds at 7% rate under the Italian law.

On 24 June 2005 the Tribunal received [Buyer]'s letter with a counterclaim enclosed. In this letter the [Buyer] sought award of the penalties and damages and demanded offset of the counterclaims. In its counterclaim the [Buyer] indicated that:

-    the [Seller] delayed the shipment for 422 days;
-    the goods delivered lacked documentation necessary for equipment's exploitation;
-    the [Seller] failed to perform its obligation to deliver the goods from the city of Uralsk to the destination point.

The [Buyer] provided the Tribunal with the calculation of the losses incurred by it as a result of [Seller]'s non-performance of its obligations. The [Buyer] demanded recovery of:

-    penalty for violation of the delivery terms;
-    expenses on the storage of the goods in the TSW;
-    expenses on delivery of the goods from Uralsk to the destination point;
-    other expenses related to the delivery;
-    loss of income resulting from the inability to use the equipment form 14 December 2003 to 10 March 2005.

The [Buyer] asked the Tribunal to reject claims of the [Seller] to award interest for the violation of the payment terms and to offset the counterclaims of the parties in the amount of the sustained claims.

Documents enclosed to the [Buyer]'s letter of 24 June included Acceptance Certificate dated 7 February 2005 that confirmed delivery of the equipment from Uralsk to the [Buyer]'s address.

The first hearing of the case was appointed to 28 June 2005; however, on 27 June 2005 the Tribunal received a pleading from the [Buyer] in which it asked the Tribunal to adjourn the proceedings. The [Buyer] indicated that its representative cannot be present at the hearing because there is no available mean of transport that arrives to the venue on time.

By its ruling of 28 June 2005 the Tribunal with the consent of the [Seller] adjourned the hearing and appointed the new hearing on 14 September 2005 and offered to the [Buyer] to pay arbitration fees for its counterclaim stating that without the due payment the Tribunal will not consider the counterclaim.

On 28 July 2004 the Tribunal received [Buyer]'s statement of defense. In its statement the [Buyer] alleged that the [Seller] violated the delivery terms established by para. 2.5 of the contract. Further, it stated that in the fax dated 14 October 2003 the [Seller] informed the [Buyer] that in spite of the contractual provision requiring delivery of the goods by railway the [Seller] decided to deliver the goods by motor transport. Because of the delay in shipment the financial situation of the [Buyer] had worsened. The [Buyer] also indicated that the [Seller] unilaterally changed the destination point of the goods. On the basis of Art. 71 CISG it suspended further performance of its obligation to pay and informed the [Seller] about its decision in the fax of 13 December 2003. Since the actions of the [Seller] contradicted provisions of both the CISG and the contract, the [Buyer] asked the Tribunal to deny claims of the [Seller] and to oblige it to reimburse expenses of the [Buyer] connected with storage of the goods in the TSW in Uralsk.

On 31 August 2005 the Tribunal received the [Buyer]'s letter in which it asked the Tribunal to send its bank details necessary for transfer of the arbitration fees. Necessary information was furnished to the [Buyer] in Tribunal' letter of 31 August 2005 as well as in the fax copy of the letter sent to the Buyer.

In its ruling of 14 September 2005 the Tribunal adjourned the hearing due to the absence of the parties and appointed a new hearing of the case on 9 November 2005.

3. TRIBUNAL'S REASONING

The award of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry [MKAC] contained the following basic points.

On 16 September 2005 the Tribunal received [Seller]'s letter of 14 September 2005 in which the [Seller] asked the Tribunal to postpone the hearing for the indefinite term since the parties have reached an agreement. The [Seller] indicated that the [Buyer] was transferring the outstanding debt to the [Seller]'s account.

On the date of the hearing of 9 November 2005 the Tribunal received the [Buyer]'s motion to postpone the proceedings. In the motion the latter stated that in September 2005 the [Seller] sent an offer to the [Buyer] to amicably settle the dispute. After the respective documentation for the equipment was delivered to the [Buyer] the parties entered into additional agreement to the contract in which the price of the delivered goods was reduced by the [Buyer]'s loss. In accordance with this agreement the parties determined the amount of the outstanding debt. In [Buyer]'s opinion, its losses resulting from the violation of the terms of time and place of the delivery significantly exceed losses of the [Seller] suffered by it due to the late transfer of payment. Therefore, the [Buyer] reduced the outstanding amount of the debt by the amount of fine (10% of the prepayment) and transferred the remaining part of the prepayment to the [Seller]'s account. After the transfer the [Buyer] suggested to terminate the proceedings. The [Seller] did not comment on this suggestion. The [Buyer] asked the Tribunal to postpone the hearings and give it the opportunity to transfer the amount of the arbitration fee for consideration of the counterclaim.

In turn, the [Seller] during the hearing of 9 November 2005 presented a letter sent to the [Buyer] on 28 July 2005. The letter contained offer of the [Seller] to resolve the issue of payment for the delivered goods: the Seller promised to send the [Buyer] necessary documentation for the equipment together with the translation of it into Russian and offered the [Buyer] to transfer the amount of debt to the [Seller]'s account within 5 business days after the receipt of documentation.

During the hearing of 9 November 2005 the [Seller] also presented the [Buyer]'s letter of 2 September 2005 received in response to the [Seller]'s letter of 28 July 2005. In this letter of 2 September 2005 the [Buyer] agreed to accept the [Seller]'s offer and promised to make the payment. In its letter of 20 September 2005 the [Buyer] notified the [Seller] about the receipt of the documentation for the equipment and informed the [Seller] that it plans to subtract from the remaining debt the amount of fine.

In the hearing of 9 November 2005 the [Seller] refused to postpone the hearing of the case once again stating that the [Buyer] had enough time to file a counterclaim. The [Seller] waived all its previous claims and asked for the recovery of the amount withheld by the [Buyer] in violation of the parties' amicable agreement. The [Seller] also claimed that it is ready to approve the agreement in the court and ask for its enforcement.

3.1 The competence of the Tribunal

The Tribunal is competent to decide the case on the basis of para. 6.2 of the contract concluded by the parties. According to para. 6.2, if the parties are unable to settle their disputes the case should be submitted for consideration to the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry. The Tribunal recognized its competence to adjudicate this case on the basis of this arbitration clause, art. 1 (1), 1 (2) and 1 (3) of the Rules of the MKAC.

3.2 Absence of the [Buyer]'s representatives

Considering the possibility of consideration of the case in absence of the [Buyer]'s representative, the Tribunal stated that pursuant to art. 28 (2) of the Rules of the MKAC failure by a party properly notified of the time and place of hearing to appear at the hearing shall not interfere with the proceedings and making of an award, unless the defaulting party has requested in advance in writing that the hearing of the case be adjourned for a good reason. The Tribunal noted that the hearing was adjourned at the [Buyer]'s request of 27 June 2005. The Tribunal also took into account that the hearing was adjourned for the second time because of the parties' failure to appear in the hearing. The [Buyer] filed a request for adjournment of the proceedings on 9 November 2005 and motivated its request by its desire to pay arbitration fee for the consideration of the counterclaim. The Tribunal decided that the [Buyer] was granted sufficient amount of time to pay the arbitration fee: by its ruling of 28 June 2005 the Tribunal offered the [Buyer] to pay the arbitration fee by 1 August 2005; however, the [Buyer] did not transfer the funds. Taking into account the aforesaid, the Tribunal refused to grant the request to the [Buyer]. The Tribunal noted that [Buyer]'s claims may become the subject of a separate hearing subject to [Buyer]'s compliance with the requirements set forth in Rules of the MKAC.

3.3 Applicable law

Considering the merits of the case, the Tribunal stated that relations of the parties follow from the sales contract of 11 December 2002. This contract was concluded by the [Seller], located in Italy, and the [Buyer], incorporated in Kazakhstan; on the basis of this the Tribunal concluded that contract of 11 December 2002 is a contract for international sales of goods.

According to art. 28 of the Law of the Russian Federation "On International Commercial Arbitration" which is applicable in arbitration proceedings held on the territory of Russia (art. 1.1), as well as according to art. 13 of the Rules of the MKAC, the Tribunal shall resolve disputes on the basis of law recognized as applicable to the merits of the dispute by the parties; in absence of the parities' agreement on the applicable law the tribunal shall apply the law which the tribunal considers to be applicable to the dispute.

In the present case the contract does not define the applicable law. Though the parties to the contract are situated in Italy and Kazakhstan and the goods were delivered from Italy to Kazakhstan, the contracts indicated that it was concluded in the city of Moscow, the goods were transported through the Russian territory, and the parties agreed to submit their disputes to the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry in the city of Moscow. The arbitrators considered as appropriate to apply Russian legislation that regulates conflicts of laws matters. According to art. 1211 of the Civil Code of the RF (section VI "International Private Law"), the contract shall be subject to the law of the country with which the contract has the closest relation, namely the law of the country where the party responsible for the performance of crucial significance for the contract has its place of residence or main place of business, unless otherwise ensues from the law, the terms or substance of the contract or the group of circumstances of the case in question (art. 1211 (1) and 1211 (2)). None of the parties referred to presence of any specific legislative provisions, peculiarities of the terms or substance of the contract of 11 December 2002, or the circumstances of the case. Therefore, the Tribunal turned to the law of the country where the party responsible for the performance of crucial significance for the contract has its place of residence or main place of business.

Since the contract of 11 December 2002 is a sales contract, pursuant to art. 1211 (3) of the Civil Code of the RF the seller is the party whose performance is of crucial significance for the contract. Again, the arbitrators noted that neither of the parties referred to any specific legislative provisions, peculiarities of the terms or substance of the contract of 11 December 2002, or to the circumstances of this case, including circumstances related to conclusion or performance of the contract. Consequently, the arbitrators concluded that material law of Italy shall be applicable to the case as the law of the country where the principal place of seller's business is situated.

It should be noted that the [Buyer] in its written explanations presented to the Tribunal referred to the Vienna Convention of 1980. However, such a reference would not mean that the parties agree to apply the CISG to their relations even in presence of the [Seller]'s agreement.

The CISG has specific rules that determine its applicability. The Convention does not provide for a possibility of its application based solely on agreement of a party (or even both parties) to apply the CISG. In other words, in this respect the principle of the party's autonomy is not applicable, despite the fact that such principle is recognized by art. 28 of the Law of RF "On International Commercial Arbitration" and art. 1210 of the Civil Code of the RF.

However, the arbitrators proceed from the following. Italy is a state party to the CISG, which is applicable to relations between parties whose places of business are in different states when the States are Contracting States (art. 1 (a)) or when the rules of private international law lead to the application of the law of a contracting state (art. 1 (b)). Since at the moment the Kazakhstan is not a party to the CISG, this Convention cannot be applied on the basis of art. 1 (a). However, as was already noted, according to the provisions of the Russian international private law the arbitrators recognized Italian substantive law as applicable. Since Italy is a contracting state, the CISG is applicable on the basis of art. 1 (b) of the Convention. Therefore, the arbitrators recognized that the CISG is a primary law applicable to the dispute between the parties.

3.4 Reimbursement of the underpayment by the [Seller]

According to para. 4 of the contract, the [Buyer] had an obligation to made a prepayment in the amount of 30% of the contractual price within 3 days after the receipt of the notification that the goods are shipped from the [Seller]'s warehouse. However, the [Buyer] failed to make the said prepayment which resulted in initiation of the proceeding by the [Seller].

As it follows from the materials of the case, during the transportation of the goods the transporting truck has broke down. This resulted in delay of the delivery and led to the renewal of negotiation of the contractual terms between the parties. Negotiations of the parties closed only during the conduct of arbitration proceedings on terms fixed in [Seller]'s letter of 28 June 2005 and [Buyer]'s letter of 2 September 2005.

According to these terms the [Seller] undertook to deliver the documentation for the equipment translated into Russian to the [Buyer], and limited its claims to the remaining unpaid price of the goods. The [Seller] reduced the remaining price by the expenses of the [Buyer] and requested the [Buyer] to transfer the payment within 5 days after the receipt of the documentation. In turn, the [Buyer] confirmed its acceptance of the [Seller]'s offer and promised to transfer the remaining amount to the [Seller]'s account within 4 business days after the receipt of the documentation.

However, the [Buyer] did not pay the whole amount to the [Seller]. In fact, the [Buyer] reduced the remaining amount alleging in its letters of 20 September and 9 November 2005 that [Buyer]'s losses exceeded the losses of the [Seller].

The Tribunal did not agree with the [Buyer]'s position. The [Seller] claims recovery of the remaining amount not paid by the [Buyer] because of the above-mentioned reduction. The [Buyer] promised to pay the whole amount, but transferred only half of the remaining amount agreed upon by the parties. An obligation of the buyer to pay for the goods delivered by the seller follow both from provisions of the contract of 11 December 2002 and the CISG. The latter foresee that "[t]he buyer must pay the price for the goods" (art. 53 CISG), and in case it fails to pay "[t]he seller may require the buyer to pay the price" (art. 62 CISG).

Since the [Seller]'s claims are limited to the recovery of the underpayment for the delivered goods, the Tribunal sustained these claims in full.


FOOTNOTES

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

** Andrii Kril is a graduate of the Kyiv-Mohyla University (Kyiv, Ukraine), currently working towards his LL.M. degree at the University of Pittsburgh (Pittsburgh, USA).

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Pace Law School Institute of International Commercial Law - Last updated December 2, 2011
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