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CISG CASE PRESENTATION

Russia 13 February 2006 Arbitration proceeding 102/2005 (Equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060213r1.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060213 (13 February 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: 102/2005

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Germany (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: Equipment


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 7(2) ; 8(1) ; 49 ; 71 [Also cited: Articles 53 ; 59 ; 61 ; 62 ; 72 ; 74 ; 78 ]

Classification of issues using UNCITRAL classification code numbers:

7C23 [Gap-filling by domestic law: recourse to domestic law to determine rules applicable to performance of obligations];

8A [Interpretation of party's statements or other conduct: intent of party making statement or engaging in conduct];

49A [Grounds for avoidance: loss of right to avoid by inconsistent acts after declaration of avoidance];

71A1 [Grounds for suspension of performance]

Descriptors: Gap-filling ; Intent ; Avoidance ; Suspension of performance

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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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=1331&step=Abstract>

CITATIONS TO TEXT OF DECISION

Original language (Russian): Muranov ed., Text on the CISG, Wolters Kluwer (2007) 195-214

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

Russian Federation arbitration proceeding 102/2005 of 13 February 2006

Translation [*] by Gayane Nuridzhanyan [**]

1. PARTIES TO DISPUTE AND RELEVANT STATUTES AND ISSUES

The Claimant [Buyer] in the present case (Respondent in the counter action) is a joint-stock company located in the territory of the Russian Federation. The Respondent [Seller] (Claimant in the counter action) is located in the territory of Germany.

Legal instruments and issues related to the present dispute:

   -    Determination of the subsidiary law of the transaction governed by the CISG;
   -    Determination of rules for fulfilment of an obligation under German law;
   -    Submission of arguments after completion of the case adjudication;
   -    Implications of the declaration on avoidance of the contract on the subsequent actions of the parties;
   -    Sections 242, 271(1), 286 (1) and 286(2) of the German Civil Code;
   -    Paras. 19, 23 and 24 of the Rules of the MKAC Arbitral Tribunal (hereinafter referred to as the "Tribunal").

2. FACTS AND PLEADINGS

The claim was lodged with the Tribunal by the [Buyer] against the [Seller] for the recovery of ... Euro.

In 2003 the [Buyer] and the [Seller] concluded a Contract pursuant to which (paras. 1.1 and 1.2), the [Seller] undertook to sell and the [Buyer] to purchase on terms DDU Russia, City of N., terminal X (Incoterms 2000) a set of equipment produced by German Company Y (hereinafter referred to as the "Equipment"). The Contract provided that the [Seller] shall carry out delivery, installation, set-up and testing of the Equipment as well as training of the [Buyer]'s staff and delivery of the Equipment in a state of full operational readiness.

According to paras. 3.1.4 and 3.1.5 of the Contract:

   -    Delivery of the complete set of the Equipment shall be carried out by the [Seller] not later than 30 July 2004;
   -    The [Buyer] shall carry out customs clearance of the imported goods and then the [Seller] shall proceed with the installation of the Equipment;
   -    The installation shall be performed, provided both parties are completely prepared for the installation works in accordance with agreed technical specification and installation documentation;
   -    The term of the Equipment installation, set-up and testing shall not exceed 10 weeks under conditions of a two-shift operation and 6-day workweek;
   -    The terms for the provision of the Equipment conformance certificate and Equipment operation permission shall be determined by the agreement on goods certification between the [Seller] and the Russian certification organization and shall not exceed 30 days starting from the completion of the Equipment testing (examination).

According to paras. 4.1 and 4.2 of the Contract:

   -    The delivery date shall be considered the date of the signing by the parties of Bilateral Act # 1, confirming that the [Buyer] accepted receipt of cargo pieces from the [Seller];
   -    The date of the putting of the Equipment into operation shall be considered the date of conclusion by the parties of Bilateral Act # 2, confirming that the [Buyer] accepted the Equipment from the [Seller] completely installed, set-up, tested and ready for operation.

The total price of the Contract, VAT exclusive, constitutes ... Euro and includes the cost of the complete Equipment which, in particular, includes the cost of the technical and maintenance documentation constituting ... Euro and the cost of the services on Equipment installation and set-up and staff training constituting ... Euro (para. 2.1 of the Contract).

In accordance with paras. 5.1 and 5.2 of the Contract, the [Buyer] shall pay the cost of the Equipment and the technical and maintenance documentation in five installments as follows:

   -    20% of this cost shall be paid within 10 bank days starting from the date of the Contract signing;
   -    20% shall be paid within 10 bank days starting from the project approval date;
   -    30% shall be paid within 10 bank days after receipt of the testing protocol;
   -    20% shall be paid within 10 bank days starting from the date of the readiness dispatch notice; and
   -    Final payment of 10% shall be executed within 10 days after the parties sign Bilateral Act # 1.

The [Buyer] shall pay for the services on the Equipment installation and set-up and staff training within 10 bank days after the parties sign Bilateral Act # 2.

Paras. 6.1 and 6.2 of the Contract provide for:

   -    Seller's delay. In case of delay in putting the Equipment into operation by the date set forth in para. 3.14 where the delay is due to the [Seller]'s fault, the [Seller] shall pay the [Buyer] a penalty in the amount of 0.06% of the total price of the Contract for each day of delay.
   -    Buyer's delay. In case of delay in payment, the [Buyer] shall pay the [Seller] a penalty in the amount of 0.06% of the payment sum for each day of delay.

According to para. 6.3 of the Contract, in case of deficient or incomplete delivery, the [Seller] is obliged to carry out replacement of deficient units of the Equipment and delivery of the non-delivered goods. If the delivery or installation terms are violated, the penalties set forth in para. 6.1 of the Contract shall apply.

Pursuant to paras. 6.4 and 6.5 of the Contract, the size of the penalties under paras. 6.1 and 6.2 of the Contract shall not be altered by an arbitration and these penalties shall be paid out upon the first request of the [Buyer] and the [Seller]. However, if a payment request is not submitted within 20 days, the penalties under paras. 6.1and 6.2 shall constitute 0% for each day of delay.

In accordance with the Contract:

   -    On 21 November 2003, the [Buyer] carried out the first payment to the [Seller] in the amount of ... Euro constituting the advance payment of 20% of the cost of the Equipment and documents.
 
   -    On 9 February 2004, the [Buyer] carried out the second (subsequent) payment under the Contract in the amount of ... Euro which constituted another advance payment of 20% of the cost of the Equipment and documents.

Further, as it follows from the materials of the case, correspondence between the parties testifies that:

   -    As of August 2005, delivery of the Equipment by the [Seller] to the [Buyer] was not carried out.
 
   -    The [Seller] acknowledged that the goods would be delivered with a delay of two months and contended that the putting of the Equipment into consideration with due regard to the installation term (10 weeks) shall take place in November 2004.

In that case, it was [Seller]'s position that the delay in putting of the Equipment into operation under conditions of proper work organization shall constitute no more than one month. According to the [Seller], para. 6.1 of the Contract provides for the penalty specifically for the delay in putting the Equipment into operation, and the penalty shall be calculated based on the sum factually paid by the [Buyer] and not based on the total price of the Contract.

At same time, the [Seller] asked the [Buyer] for the allotment of a platform for the Equipment installation. The [Buyer] in its letters to the [Seller] drew the [Seller]'s attention to the fact that the [Seller] had violated the Equipment delivery terms.

On 24 September 2004, the parties signed Additional Agreement # 1 to the Contract.

   -    Additional Agreement # 1 partially amended the delivery terms, in particular, it provided for delivery "DDU Russia, City of N."
   -    It also amended the payment terms envisaged by para. 5.1 of the Contract, namely:30% was to be paid within 10 bank days from the moment of signing of Additional Agreement # 1;
20% within 10 bank days from the date of dispatch readiness notice; and
The final payment of 10% within 10 bank days from the moment of signing of Bilateral Act # 2.

Para. 12.6 of the Contract stated:

"Within one day after receipt of the Equipment completed under para. 4.1 of the Contract, the Equipment, divided in major components, shall be transferred to the [Seller] for the installation."

On 7 October 2004, the parties signed Acceptance-Delivery Act # 1 of the Equipment in Major Components for the Installation. It follows from this Act # 1 that, under para. 12.6 of the Contract:

   -    The [Seller] accepts the Equipment cargo pieces for the installation; and
   -    The examination of the completeness of the received Equipment and the commencement of the installation shall be as set forth in a separate agreement signed by the [Seller], the [Buyer] and Unitary Enterprise Z.

Pursuant to its obligations under the Contract, the [Buyer] carried out the third payment on 7 October 2004 in favor of the [Seller] in the amount of ... Euro (advance payment of 20%) and the fourth payment on 8 October 2004 in the amount ... Euro (advance payment of 30%).

In its complaint of 14 October 2004, the [Buyer] claimed the payment by the [Seller] of the penalty for the Equipment delivery delay for the period from 31 July till 6 October 2004 (68 days) in the amount of ... Euro.

In its letter of 1 December 2004, the [Buyer] stated that the [Seller] having accepted the Equipment for installation under the Act of 7 October 2004 had not yet proceeded with the fulfillment of its obligations with regard to installing the Equipment, which according to the Contract, shall be carried our within not more than 10 weeks and that it became obvious to the [Buyer] that the installation of the Equipment would not be completed within the terms provided for by the Contract.

In view of that, the [Buyer] declared the Contract avoided on the basis of art. 49(1)(b) and art. 72 of the Vienna Convention of 1980 starting from 3 December 2004.

On 20 December 2004, the parties signed an Examination Act for the Completeness of the Compliance of the Delivered Equipment with the Contract Conditions. This Examination Act testifies to the lack of conformity of the delivered set with Supplement # 1 of the Contract ("Specification"), in particular, 26 items were missing.

On 28 January 2005, another Examination Act fixed conformity of the Equipment set to the Contract conditions.

On 27 April 2005, the parties signed Acceptance-Delivery Act # 2 of the Equipment Ready for the Operation. By this Act, the parties testify to the putting of the Equipment into operation in the state of complete readiness and the presence of the grounds for the execution of the final payment by the [Buyer] to the [Seller] under para. 5.2 of the Contract and para. 7 of the Additional Agreement.

[Buyer]'s position

The [Buyer] alleges that the term for putting the Equipment into operation is well-defined and should be calculated from the date by the expiry of which the [Seller] was to deliver the Equipment -- 30 July 2004 -- by means of addition of the customs clearance term not defined by the Contract, and of the installation, setting up and testing term which shall not exceed "more than 10 weeks", and of the term of delivery of certificate and permission constituting not more than 30 days.

In the [Buyer]'s view:

   -    Since the Equipment customs clearance term is not defined by the Contract it should not be taken into consideration.
 
   -    The installation term constituting 10 weeks should be calculated from the delivery date to which the certificate delivery term of 30 days shall be added.
 
   -    Considering the above, the deadline for putting the Equipment into operation was 7 November 2004.
 
   -    In fact, the putting of the Equipment into operation did not take place until 29 April 2005 when the directors of both parties approved Act # 2.

Based on para. 6.1 of the Contract:

   -    The [Buyer] claims recovery from the [Seller] of the penalty in the amount of 0.06% of the total price of the Contract for each day of delay of 172 days starting from 7 November 2004 till 29 April 2005 in the amount of ... Euro.
 
   -    Furthermore, the [Buyer] claims to recover from the [Seller] expenses on payment of the arbitration fee and expenses for the legal protection of its interests in the proceedings before the Tribunal.

[Seller]'s position

The Tribunal has received the [Seller]'s statement of defense in which the [Seller] did not acknowledge [Buyer]'s action claims. Referring to para. 6.1 of the Contract, the [Seller] stated that:

   -    This paragraph of the Contract provides for a penalty for the delay of the putting of the Equipment into operation date against the date set forth in para. 3.1.4 of the Contract.
 
   -    However, para. 3.1.4 sets forth not the date for putting the Equipment into operation, but the term of delivery of the complete Equipment, whereas the term for putting the Equipment into operation is not defined.

The [Seller] contends that:

   -    The 10 week Equipment installation term under para. 3.1.5 of the Contract should be calculated from the moment when the parties are fully ready to carry out the installation works.
 
   -    By means of the Equipment Acceptance-Delivery for the Installation Act of 7 October 2004, the parties agreed to define the installation commencement term in a separate agreement between the parties to the Contract and Unitary Enterprise Z. However, such an agreement has not been concluded.

Thus, in [Seller]'s opinion, delay in putting the Equipment into operation did not take place and the claims of the [Buyer] should be left without satisfaction.

The Tribunal also received a counterclaim from the [Seller] against the [Buyer] for the recovery of ... Euro. The essence of the [Seller]'s counterclaim is:

   -    The parties have concluded the aforementioned Contract and Additional Agreement # 1 to the Contract. The Additional Agreement altered the payment procedure provided by the Contract. The parties defined that final payment by the [Buyer] of the Equipment cost in the amount of ... Euro and of the installation cost in the amount of ... Euro; in total, ... Euro payment should be carried out within 10 days after the parties had signed Bilateral Act # 2 testifying to the putting of the Equipment into operation. This act was signed on 27 April 2005.
 
   -    In its letter of 29 April 2005, the [Seller] sent the [Buyer] two invoices for the payment of the sums provided for in the Additional Agreement. The deadline for the payment of the invoices expired on 18 May 2005, however, the [Buyer] has not paid those invoices.
 
   -    In its complaint of 18 May 2005, the [Seller] asked the [Buyer] to pay off the debt by 19 May 2005 and subsequently sent the [Buyer] letters also requesting payment of the penalty for late payment provided by the Contract.
 
   -    The [Seller] claims recovery from the [Buyer] of the main sum in arrears of ... Euro and a penalty in the amount of 0.06% of the delayed payment sum for each day of delay based on 6.2 of the Contract which, as of the date of the counterclaim, constituted ... Euro. In total the [Seller] claims recovery of ... Euro as well as recovery of the expenses for the arbitration fee and for the legal protection of its interests in the proceedings before the Tribunal.

Further responses of the parties

The Tribunal has not received [Buyer]'s statement of defense in response to the counterclaim of the [Seller].

At the hearings before the Tribunal, the [Buyer]'s representatives maintained the initial action claims and submitted copies of the documents confirming expenses on the legal services payment.

The [Seller]'s representatives contested the [Buyer]'s claims on the grounds expounded in its statement of defense having stated that, in view of Section 286(3) of the German Civil Code, the [Seller] agreed that the penalty for the payment delay should be calculated on the expiry of 30 days after the payment deadline. The [Seller]'s representatives submitted copies of the documents confirming expenses for payment of legal services.

The [Buyer] acknowledged the [Seller]'s claim in full as to the issue of the main sum in arrears and in part with the deduction of penalty for 30 days after the payment deadline based on Section 286(3) of the German Civil Code regarding penalties.

3. TRIBUNAL'S REASONING

Having examined the facts of the case and having heard the parties' representatives, the Tribunal concluded as follows.

3.1 The competence of the Tribunal

As to the Tribunal's competence to adjudicate the present dispute, the Tribunal refers to art. 1(2) of Law of Russian Federation "On International Commercial Arbitration" of 7 July 1993 # 5338-I, para. 2 of the Regulation on ICA Tribunal which is Supplement # 1 to the aforementioned Law and para. 1(2) of the Rules of the Tribunal, according to which, by the agreement of the parties, disputes arising out of contractual and other civil and legal relationships originating out of international economic ties may be submitted for adjudication by the Tribunal, provided that the place of business of at least of one of the parties is located abroad. The Tribunal acknowledges the written agreement between the parties on the submission of disputes which have already arisen or which may arise for adjudication by the Tribunal.

The parties to the Contract are the [Buyer], a legal entity whose place of business is located in the territory of the Russian Federation, and the [Seller], a legal entity whose place of business is located in the territory of the Federal Republic of Germany. Paras. 14.2 and 14.3 of the Contract provide that:

"All disputes and disagreements arising out of the present Contract shall be adjudicated at the International Commercial Arbitral Tribunal at the Chamber of Trade and Commerce of the Russian Federation in accordance with the Rules of the Tribunal ...The Tribunal's award shall be final for the parties."

Therefore, the Tribunal finds that it is competent to adjudicate the present dispute.

3.2 The applicable law

The Contract concluded by the parties does not contain provisions on the law which is to be applicable thereto. Since Russia and Germany are parties to the Vienna Convention of 1980 (CISG), it shall be applicable to the relations of the parties to the Contract by virtue of the provisions of art. 1(1)(a) of the CISG.

As to the subsidiary law applicable to the relations of the parties, in relation to the issues directly not regulated by the Vienna Convention of 1980:

   -    The Tribunal refers to art. 28(1) of the Law of the Russian Federation "On International Commercial Arbitration", para. 13(1) of the Rules of the Tribunal according to which the dispute shall be settled on the grounds of the applicable substantive law determined by the agreement of the parties and, in the absence of such agreement, in accordance with the law determined by the arbitral tribunal based on the applicable conflict of laws norms. In that case, the Tribunal takes into consideration that, pursuant to the provision of art. 1210, paras. 1-3 of the Civil Code of the Russian Federation, the parties to the contract may choose the law which shall be applicable to their rights and obligations under the contract during the conclusion of the contract or later; the agreement of the parties on choice of the applicable law shall be express or shall clearly follow from the contract provisions or from the totality of the circumstances of the case; the choice of the law carried out after conclusion of the contract shall have retroactive force and shall be regarded as valid without prejudice to third parties' rights starting from the conclusion of the contract.
 
   -    In its action claim, the [Buyer] following the conflict of laws norm of art. 1211(3) of the Civil Code of the Russian Federation, referring to the law of the [Seller]'s country, contends that the Contract should be governed by the German law. In its statement of defense, the [Seller] also states that, by virtue of art. 1211 of the Civil Code of the Russian Federation, the German law shall apply to the present dispute as the law of the country with which the contract is the most closely linked. In its counterclaim, the [Seller] as well refers to the provisions of the German law. The same standpoint was endorsed by the parties at the hearings before the Tribunal.
 
   -    Based on the aforesaid, the Tribunal holds that the parties to the Contract after its conclusion have reached the agreement as to the applicability of German law to the Contract and this agreement shall be valid starting from the conclusion of the Contract.

The Tribunal holds that the Vienna Convention of 1980 shall apply to the adjudication of the present dispute and issues not regulated by the Convention shall be governed by the provisions of German substantive law.

3.3 Merits of the case

The claims of the [Buyer]

Considering claims of the [Buyer] on the merits, the Tribunal stated following.

Para. 6.1 of the Contract envisages that, in case of the delay in the putting the Equipment into operation due to the [Seller]'s fault, against the term set forth in para. 3.1.4 of the Contract, the [Seller] shall pay the [Buyer] a penalty in the amount of 0.06% of the total price of the Contract for each day of delay.

Para. 3.1.4 sets forth the term of the Equipment delivery but not the term for putting the Equipment into operation. However, as was maintained by the [Buyer] as well as the [Seller] at the Tribunal's hearings, the reference to para. 3.1.4 in the Contract was erroneous since the parties indeed meant to set forth the penalty for the delay in putting the Equipment into operation.

The [Buyer] in its action claim and at the hearings of the Tribunal clarified that the [Buyer] had concluded the Contract for the purchase of the Equipment not for personal use but for the further transfer of the Equipment to Unitary Enterprise Z under a lease contract concluded earlier. The materials of the case contain a copy of the operative lease contract concluded between the [Buyer] as lessor and Unitary Enterprise Z as lessee.

   -    In accordance with para. 1.1 of the operative lease contract, the lessor undertakes to purchase property specified by the lessee from the seller (supplier) specified by the lesee and to grant the lessee this property (leased object) into temporary possession and use for its business purposes.
 
   -    The lessee undertakes to accept the leased object, to pay the lessor the lease payments in order and within the terms provided for by this contract and to purchase the leased object based on the sale and purchase contract.

The [Buyer] contends that the moment of putting the Equipment into operation was of significance to the [Buyer] since it enabled the [Buyer] to fulfill its principal obligation under the lease contract.

In its letters of 18 and 20 August 2004, the [Buyer] states that the penalty in para. 6.1 of the Contract is envisaged in respect to the delay in putting the Equipment into operation and the reference in para. 6.1 to para. 3.1.4 was made by the parties mistakenly. The [Buyer]'s representatives have expressed the same opinion at the hearings before the Tribunal.

Taking into consideration the aforementioned, following art. 8(1) of the Vienna Convention of 1980, the Tribunal finds that during the conclusion of the Contract, the parties indeed intended to foresee a penalty for the delay in putting the Equipment into operation, the term of which is governed by para. 3.1.5 of the Contract.

Under para. 3.1.5 of the Contract, the [Buyer] shall carry out the customs clearance of the imported goods. Afterwards, the [Seller] shall commence the installation. The installation shall be carried out under conditions of the full readiness of the parties to performance of the installation works in accordance with the technical conditions and installation documentation. The Equipment installation, setting up and testing term shall not exceed 10 weeks with a two-shift operation workweek. The Equipment Conformity Certificate and the Equipment Operation Permission delivery term shall be determined by the production certification agreement concluded between the [Seller] and the Russian certificate organization and shall not exceed 30 days from the termination of the Equipment testing (examination).

Under such circumstances, the Tribunal cannot declare that the terms for putting the Equipment into operation are well-defined. Moreover, the Tribunal cannot take into consideration the calculation of this term presented by the [Buyer] in its action claim since the completion of the installation and the term for putting the Equipment into operation defined by the parties as 10 weeks depends on a number of conditions related not only to the [Seller] but to the [Buyer] as well.

   -    In particular, the installation of the Equipment could have been commenced after performance of the customs clearance by the [Buyer], the term of which in para. 3.1.5 of the Contract is not specified by the [Buyer], and after preparation of all necessary conditions for the beginning of installation.
 
   -    At the same time, the Tribunal acknowledges that the Contract does not define the installation works commencement term solely.
 
   -    However, the term for putting the Equipment into operation is well-defined and constitutes 10 weeks starting from the moment when the [Seller], under the provisions of the Contract and applicable law, was to commence the fulfillment of the aforementioned obligation.

As if follows from the circumstances of the case, the Equipment delivery under para. 4.1 of the Contract took place on 7 October 2004 when the parties signed Acceptance-Delivery Act # 1 for the Equipment cargo pieces.

On the same day, 7 October 2004, the parties signed the Acceptance-Delivery Act of the Equipment in Major Parts for the Installation. It follows from this Act that the [Seller], in accordance with para. 12.6 of the Contract, accepted the Equipment cargo pieces for the installation. It is stipulated in the act that "examination of the completeness of the received Equipment in comparison to the cargo specification and packing list shall be carried out in the presence of the chief installer of the K. firm at the beginning of installation", "the commencement of the installation shall be determined by an additional agreement between the firm of the [Seller], open joint-stock company L and Unitary Enterprise Z".

Since the Vienna Convention of 1980 does not contain any provisions on the determination of obligation performance terms, the Tribunal refers to the legislative acts of the subsidiary substantive law, i.e., the German Civil Code and German Commercial Code.

According to Sections 242 and 271(1) of the German Civil Code, the debtor is obliged to fulfill its obligations in good faith as is required by business practice. In case the fulfillment term is not determined and cannot be determined based on the circumstances, the creditor is entitled to demand immediate fulfillment and the debtor is obligated to fulfill the obligations immediately.

In its letter of 1 December 2004, the [Buyer] stated that the [Seller] after 7 weeks from the receipt of the Equipment for the installation under the act of 7 October 2004 in violation of the Contract:

   -    Had not insured the Equipment;
   -    Had not commenced the fulfillment of its obligations as to the Equipment installation;
   -    Had not appointed the organization to carry out the installation; and
   -    Had not concluded the installation agreement.

Based on the aforesaid, the [Buyer] believes that it is obvious that the installation will not be completed within the term which constitutes 10 days as provided for by the Contract. In view of that, the [Buyer] declared the avoidance of the Contract based on the Vienna Convention of 1980.

The [Seller] refers to the fact that the installation term may not be regarded as well-defined since the contract between the parties and Unitary Enterprise Z has not been signed which shall be the ground for the installation works. The [Seller] further alleges that it was not able to commence the installation because the installation platform of the [Buyer] was not ready until the middle of January 2005.

However, the Tribunal does not agree with these arguments:

   -    First of all, since regardless of the absence of the aforementioned agreement, the [Buyer] insisted on fulfillment of the installing obligations by the [Seller]. The [Seller] having concluded agreement for the installation works performance on 29 November 2004 with joint-stock company M., commenced the installation works performance on 15 January 2005 and completed it in April 2005, as it follows from the explanations given at the hearings. It follows from the aforementioned that parties initially did not regard themselves bound by this arrangement.
 
   -    Moreover, it follows from the Equipment Acceptance-Delivery Act for the Installation of 7 October 2004 that the examination of the completeness of the received Equipment will be carried out "at the beginning of the installation" and, on 20 December 2004, the parties concluded the Act of such examination which fixed the lack of conformity of the delivered set to Supplement # 1 to the Contract, in particular 26 items of the necessary units were missing. Based on that, the Tribunal believes that this examination was directly connected with installation works.

The [Seller] has not presented any evidence confirming its inability to commence installation works due to the non-availability of the installation platform for the installation works. Moreover, the revealed improper completing of the delivery on 20 December 2004, and eliminated only on 28 January 2005 about what respective act was signed by the parties, refutes the [Seller]'s arguments that delay of the putting the Equipment into operation took place due to the [Buyer]'s fault.

The Tribunal as well cannot take into consideration [Seller]'s letter with enclosed copy of the Installation Commencement Act of 19 January 2005 since that letter was sent to the Tribunal after the hearings terminating the case examination were completed and the parties were notified thereof. The Tribunal also takes into account that the [Seller] has not informed it of the existence of such Act of 19 January 2005 either in its statement of defense or at the Tribunal's hearings. Taking into consideration paras. 19, 23 and 34 of the Rules of the Tribunal, the copy of that Act may not be accepted as evidence by the Tribunal.

The [Seller] has not denied the content of the [Buyer]'s letter of 1 December 2004 received by the [Seller] on the same day according to the handwritten note on the letter copy. In that letter, the [Buyer] reminds the [Seller] of the latter's obligation to perform installation of the Equipment. Regardless of the statement on the Contract avoidance contained in that letter, the [Buyer] did not maintain that statement, the [Seller] has not given its consent to it and the parties continued to perform their obligations under the Contract. The parties have not raised the issue of the Contract avoidance anymore. In view of that, the Tribunal believes that the statement on the Contract avoidance is not of any legal significance.

At the same time, the [Buyer]'s aforementioned letter of 1 December 2004 contains the indication on the existence of the obligation of the [Seller] to the [Buyer] under the Contract and statement on the fact that out of the 10 week installation term foreseen by the Contract, 7 weeks have already expired and that the [Buyer] expected fulfillment of the [Seller]'s obligation within 10 weeks from the Equipment acceptance for the installation on 7 October 2004.

In the Tribunal's opinion, the aforementioned indicates that on 1 December 2004 the [Buyer] was ready for the installation. Taking into consideration that the [Seller] has not responded to the aforementioned letter and that shortly afterward the [Seller] started the installation works, the Tribunal believes that it is possible to regard the date of 1 December 2004 as the date when the [Buyer] presented its claims in accordance with Section 271(1) of the German Civil Code on the immediate fulfillment of the [Seller]'s obligation as to the installation of the Equipment and putting it into operation, the starting day of which was not previously determined by the parties.

Since installing the Equipment and putting it into operation in the state of complete readiness term in accordance with para. 3.1.5 of the Contract constitutes 10 weeks, the Tribunal believes that, to properly fulfill its obligations, the [Seller] was obliged to complete its execution not later than 9 February 2005. However, in fact, the [Seller] did not complete its execution until 27 April 2005 when the parties signed the Act of Acceptance-Delivery of the Equipment Ready for Operation according to para. 4.2 of the Contract.

Examining the issue of the existence of the delay by the [Seller] in regard to fulfillment of its obligation to put the Equipment into operation, the Tribunal follows Sections 286(1) and 286(2) of the Civil Code of Germany. According to these provisions of German law, the debtor shall be regarded as having delayed fulfillment of its obligation if it does not perform its obligation after creditor's reminder carried out after expiry of the obligation fulfillment term. However, the reminder is not required if the calendar term of the obligation fulfillment is set or if fulfillment shall be preceded by certain event and the term for fulfillment of the obligation is determined so that it shall be calculated as a calendar term from the moment of the specified event or, if the debtor has irreversibly and strongly refused to fulfill the obligation, or if according to the evaluation of mutual interests, immediate occurrence of delay is justified by the special circumstances.

Considering the facts of the present case, the Tribunal finds that since, in accordance with Section 271(1) of the German Civil Code, the [Buyer] demanded immediate fulfillment of the obligation as to the installation commencement by the [Seller], the terms of which were not set. However, the term of the installation to be completed by the putting of the Equipment into operation is determined by the calendar term of fulfillment constituting 10 weeks, and the [Seller] shall be regarded as having delayed obligation fulfillment starting from the day following the expiry of this term, i.e., 10 February 2005.

The Tribunal finds that the moment of complete and proper fulfillment of the obligation of the [Seller] to putting the Equipment into operation is 27 April 2005 since, in accordance with para. 4.2 of the Contract, the date of the putting of the Equipment into operation is the date of conclusion by the parties of Bilateral Act # 2 confirming acceptance by the [Buyer] from the [Seller] of the Equipment totally installed, set up, tested and ready for operation. It follows from the content of the Act that it is signed by the authorized representatives of the parties on 27 April 2005 and as of the moment of the signing of the Act, the Equipment was put into operation in the state of complete readiness for operation. Therefore [Buyer]'s statement that the date of signing of the Act shall be regarded the date of its approval by the directors of the parties shall not be of any significance.

Thus, the delay period constitutes 77 days from 10 February till 27 April 2005.

According to paras. 6.1 and 6.4 of the Contract, in case of the delay of date of putting the Equipment into operation, the [Seller] shall pay the [Buyer] a penalty in the amount of 0.06% of total price of the Contract for each day of delay and the amount of that penalty shall not be subject to amendment in the course of arbitral procedure. Section 343 of the German Commercial Code allows for the reduction of the penalty on debtor's petition if it is disproportionately large. However, Section 348 of the German Civil Code does not permit reduction of a penalty which was guaranteed by the businessman carrying out its business activity on the basis of Section 343 of the German Commercial Code.

The Tribunal finds that the [Buyer] has fulfilled the requirements of para. 6.5 of the Contract obliging it to claim the penalty payment within 20 days; in confirmation thereof the [Buyer] presented letter of 29 April 2005 and claim of 16 May 2005 addressed to the [Seller].

The Tribunal takes into consideration Section 341(3) of the German Civil Code according to which a creditor having accepted the fulfillment is entitled to claim a penalty for improper fulfillment of the obligation in case the creditor reserved this right while accepting the performance. However, since the law does not stipulate any certain form of such reservation and conclusion of the acceptance-transfer act due to the general practice is only a part of fulfillment acceptance procedure, the Tribunal proceeds from the fact that such reservation could have been done in any form concurrently with the acceptance of the fulfillment or immediately after acceptance.

Equipment Acceptance-Delivery Act # 2 was signed by the representatives of the parties on 27 April 2005 and, was subject under the Contract to non-obligatory approval by the parties' directors on 29 April 2005. It follows from the letter of 29 April 2005 presented at the hearings of the Tribunal that, on the same day 29 April 2005, the [Buyer] sent the [Seller] a letter in which, referring to the Acceptance-Delivery Act, it demanded from the [Seller] payment of the penalty having reserved a right not to carry out obligation as to the payment for the last stage of the works performance under the Contract until the [Seller] pays the penalty or until the conclusion of the agreement on the set-off of mutual debts.

At the Tribunal's hearings, the [Seller] did not acknowledge the receipt of such letter from the [Buyer]. However, according to the [Buyer] and the facts of the case, the signing and approval of Act #2 and issuance of invoices for the residual payments took place concurrently and at that moment the [Buyer] made a statement on the necessity to settle the penalty issue and the suspension of the [Buyer]'s payments until such settlement. Consequently, the [Buyer] did not pay the [Seller]'s bills. Hence, the [Buyer] believes that fulfillment of Section 341(3) of the German Civil Code ensues from the conduct of the parties to what the Tribunal agrees.

Based on the aforementioned, [Buyer]'s claim for recovery of the penalty is subject to partial satisfaction for the delay period of 77 days in the amount of ... Euro.

[Seller]'s counterclaims

Examining the counterclaims of the [Seller] on the merits, the Tribunal held as follows.

In accordance with Additional Agreement # 1 of 24 September 2004, which altered the payment procedure set forth in para. 5.1 of the Contract, the final payment in the amount of 10% of the Equipment cost was to be carried out within 10 days after signing the Bilateral Act # 2. By virtue of para. 5.2 of the Contract not being modified by the Additional Agreement, the [Buyer] was obliged to pay for the installation services, set-up of the Equipment and staff training in the amount of ... Euro within 10 days after the signing of the Bilateral Act # 2 by the parties.

In its letter of 29 April 2005, received by the [Buyer] according to the handwritten note, the [Seller] issued two bills to be paid by the [Buyer]. In particular, # 1 in the amount of ... Euro and # 2 in the amount of ... Euro, in total to the amount of ... Euro which the [Buyer] has not paid.

At the Tribunal hearings, the [Buyer] confirmed that it had not paid these bills since there existed an unsettled penalty issue in view of which the [Buyer] retained the payment due to the [Seller].

According to articles 53, 59, 61, 62, 74 and 78 of the Vienna Convention of 1980, the [Buyer] is obliged to pay the cost of the goods on the day which is set forth or can be determined in accordance with the contract or the Vienna Convention of 1980. In the event the [Buyer] fails to fulfill this obligation, the [Seller] may claim from the [Buyer] payment of the cost and compensation of the losses caused by the violation of the contract. In case of the delay in payment of the cost and other sums, the [Seller] may claim interest to be paid on the delayed sum.

The Tribunal accepts the [Seller]'s claim for recovery of the main sum in arrears in the amount of ... Euro and taking into consideration that the [Buyer] has a counterclaim against the [Seller] in the amount of ... Euro which is acknowledged to be legitimate. The Tribunal carries out a set-off of mutual claims and obliges the [Buyer] to pay the [Seller] the main sum in arrears in the amount of ... Euro.

According to paras. 6.2, and 6.5 of the Contract, in case of untimely payment, the [Buyer] shall pay the [Seller] a penalty in the amount of 0.06% of the payment sum for each day of delay. The penalty shall be subject to payment provided that the respective claims were submitted within 20 days. The [Seller]'s letters of 31 May and 1 July 2005 contain such claims.

Considering Section 286(3) of the German Civil Code and the [Seller]'s payment claim, the debtor shall be regarded as having delayed the payment if it does not carry out the payment within 30 days after the commencement of the payment term and delivery of the invoice or equal payment document.

Taking into consideration that the [Buyer] received the [Seller]'s invoices on 29 April 2005, the term of 10 bank days with due regard for off days and holidays at the payment place expires on 18 May 2005 and in view of the mutual agreement of the parties to exclude from the penalty charge period 30 days term on the basis of Section 286(3) of the German Civil Code, the Tribunal charges the penalty starting from 20 June 2005.

Since, as of the commencement of the payment term, the [Buyer] had a counterclaim against the [Seller] acknowledged by the Tribunal in the amount of ... Euro and which the [Buyer] requested the [Seller] to set-off on account of the payments due to the [Seller], the penalty due from the [Buyer] shall be accrued not on the total amount of the main sum in arrears but on the sum in arrears decreased by the penalty payable to the [Buyer], i.e., on the sum of ... Euro from 20 June till 25 October 2005 (128 days) which constitutes ... Euro.

In total, the main sum in arrears and penalty in the amount of ... Euro without counterclaims set-off and in the amount of ... Euro, taking into consideration the counterclaims set-off, shall be recovered from the [Buyer] in favor of the [Seller].

3.4. Payment of arbitration fee

In accordance with paras. 6 and 7(5) of the Regulations on Arbitration Expenses and Fees (Supplement to the Rules of the Tribunal), if the parties have not agreed otherwise, the arbitration fee is imposed on the party against which the arbitral award was passed. If the action is satisfied partially, the arbitration fee is imposed on the Respondent in proportion to the satisfied claims and on the Claimant in proportion to the part of the claim left without satisfaction.

In its action, the [Buyer] claimed ... Euro. The arbitration fee as to that sum shall constitute US $ ... Since these claims are satisfied only in part, in the amount of ... Euro, the [Seller] shall be obliged to compensate the arbitration expenses to the [Buyer] in the amount of US $ ....

The amount of the [Seller]'s counterclaim is ... Euro. The arbitration fee for a claim of that amount constitutes US $... The [Seller] also incurred expenses in the amount of 10,000.00 Russian rubles for the traveling and accommodation of the Arbiter O. who was chosen by the [Seller] and who has his place of permanent residence elsewhere than where the Tribunal's sittings took place. Since [Seller]'s counterclaims are satisfied in part in the amount of ... Euro, the [Buyer] shall be obliged to compensate the arbitration expenses to the [Seller] in the amount of US $ ....

By means of the set-off of the mutual claims as to the arbitration fee, the Tribunal obliges the [Buyer] to pay to the [Seller] the sum of US $...

3.6 Payment of expenses for legal services

In accordance with paras. 9 and 10 of the Regulations on Arbitration Expenses and Fees, the party in favor of which the decision was awarded may claim to have imposed on the other party reasonable expenses incurred due to the arbitration proceeding, in particular, expenses for the protection of its interests through legal representatives. The Tribunal, in view of the circumstances of the case, may decide for a different distribution of the expenses between the parties.

According to the contract concluded by the [Buyer] with closed joint stock company F. in respect to the representation of the [Buyer]'s interests before the Tribunal, the [Buyer] is to pay for the services 360,000 Russian rubles. To confirm the payment of this sum, the [Buyer] presented a payment order of 10 June 2005.

It follows from the contract with the law firm S presented by the [Seller] that for the representation of its interest, the [Seller] has been obliged to pay US $4,000, in particular US $2,000 before the beginning of the proceedings before the Tribunal, and US $2,000 after the receipt of the Act of Execution.

Having acknowledged that, with due regard for the circumstances, the expenses claimed are reasonable, the Tribunal takes into account that under conditions of the proportionate assignment of these expenses based on the amount of the satisfied claims, the parties will owe each other approximately equal sums. Since the dispute arose from the Contract and in connection with its violation by both parties, the Tribunal finds it justified for each party to bear its own expenses on the payment of legal representatives' services.

THE AWARD

Based on the aforementioned and following paras. 38-41 of the Rules of the Tribunal, the Tribunal resolves as follows:

To require the [Buyer] to pay to the [Seller] the main sum in arrears of ... Euro, a penalty in the amount of ... Euro, and expenses on the arbitration fee in the amount of US $...


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Russian Federation is referred to as [Buyer] and Respondent of Germany 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 June 18, 2008
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