Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography
Search the entire CISG Database (case data + other data)

CISG CASE PRESENTATION

Ukraine 15 February 2006 Arbitration proceeding (Coal case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060215u5.html]

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

Case Table of Contents


Case identification

DATE OF DECISION: 20060215 (15 February 2006)

JURISDICTION: Arbitration ; Ukraine

TRIBUNAL: Tribunal of International Commercial Arbitration at the Ukraine Chamber of Commerce and Trade

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Ukraine (claimant)

BUYER'S COUNTRY: Bulgaria (respondent)

GOODS INVOLVED: Coal


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 80 [Also cited: Articles 45 ; 53 ; 61 ; 62 ]

Classification of issues using UNCITRAL classification code numbers:

80A [Failure of performance caused by other party (party causing non-performance): loss of rights]

Descriptors: Failure of performance, other party

Go to Case Table of Contents

Editorial remarks

Go to Case Table of Contents

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): Click here for Russian text of case

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Commentary by Gunesh Bakgalova presented below

Go to Case Table of Contents

Case text (English translation) [second draft]

University of Pittsburgh School of Law case translation

International Commercial Arbitration Court at
the Ukrainian Chamber of Commerce and Industry

Award of 15 February 2006

Translation [*] by Gunesh Bakgalova [**]

The International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry [1] considered the claim of the Ukrainian party (the [Seller]) against the Respondent of Bulgaria (the [Buyer]) for collection of a US $39,764.00 debt. On 28 September 2005 the [Seller] submitted a claim to the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry.

Having considered the case materials and having heard explanations from the representatives of the parties, the Arbitration Court established:

The claims are based on Contract N __ of 6 April 2005. According to this Contract, the [Seller] was obliged to sell and deliver a total of 225,000 metric tons of coal between 6 April 2005 and 6 April 2006 on CPT terms (CPT - Carriage paid to ( named place of destination) according to Incoterms 2000). The [Buyer] was obliged to purchase these goods and to pay the price in US dollars. In case of delay in payment, the [Buyer] was obliged to pay to the [Seller] a penalty at a rate of 1% of the cost of the goods for each day of delay, but no more than 10%, starting five bank days after receipt of the goods and the certificates [of quality] from an independent expert appraisal. The quantity, quality, price, conditions of delivery and method of the payment of the goods are specified in Appendixes that were made an integral part of the Contract.

To execute obligations under the Contract [N __] and Appendix N _ to it, in May 2005 the [Seller] shipped the contractual goods in the quantity of 5,500 tons for the sum of US $195,525.00. The [Buyer] accepted the delivered goods but only paid part of the cost, US $155,761.00. The [Buyer] underpaid by US $39,764.00.

By the decision of the Chairman of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry of 28 September 2005, the Arbitration Court accepted jurisdiction over the case.

On 5 December 2005 the Arbitration Court received a response to the statement of the claim in which the [Buyer] denied the claim and asked that the claim be dismissed because the [Seller] had not carried out the obligations of the contract, because [Seller] delivered coal with the minimum heat of combustion of 5,427 kcal/kg, as proven by the SGS independent expert appraisal [2] (the certificate was dated 19 May 2005).[3] The contract provided that the delivered coal should have the minimum heat of combustion of 5,750 kcal/kg. According to the [Buyer], the coal delivered by the [Seller] had been rejected. Therefore the [Seller] did not have the right to demand payment. Moreover, the [Buyer] argued that the [Seller] should return to the [Buyer] all money received for the coal and had the right to demand the return of the coal from the [Buyer], as the property right to the coal had not passed to the [Buyer].

After preparing this case for hearing and forming the structure of the Arbitration Court, a hearing was set for 17 January 2006.

In the Arbitration Court session of 17 January 2006, [Seller]'s representative did not deny that the delivered coal was of inadequate quality. The [Buyer]'s representative stated that the delivered coal was sold by the [Buyer] to its own customers. During the arbitration hearing, the parties stated that there was the possibility of a settlement between them. In this connection, they petitioned for adjournment of the legal investigation of the case for purposes of considering a settlement.

Considering the petition and being guided by Article 7.5 of the Rules of the International Commercial Arbitration Court [4] at the Ukrainian Chamber of Commerce and Industry, the Arbitration Court postponed the legal investigation to 15 February 2006, and suggested that the [Buyer] present to the Arbitration Court a translation into Russian of the [SGS independent expert appraisal] certificate of 19 May 2005.

On 15 February 2006, at the Arbitration Court session, the parties stated that they had not reached an agreement concerning the lawsuit.

The [Seller]'s representative admitted the fact that the delivered coal was of heat of combustion of 5,427 kcal/kg, while the contract stated that the heat of combustion had to be 5,750 kcal/kg. However the [Seller]'s representative insisted that the requirements for its claim had been met, as the [Buyer] accepted and delivered the specified coal to Bulgaria, and also used it for its own purposes. Besides, according to the [Seller]'s representative, the [Buyer] did not produce any evidence of its own losses in connection with delivery of non-conforming goods.

The [Buyer]'s representatives presented an addition to the response in which they refused to accept the claim, because, according to the provisions of Contract N __ , the consignment of goods with the minimum heat of combustion below 5,750 kcal/kg could not be accepted for shipment and it was considered rejected. In all certificates of quality accompanying the cargo, indicators of the lowest heat of combustion corresponding to requirements of the contract were specified. When the ship was being loaded with coal between 16 May and 17 May 2005, [Buyer]'s representatives together with [Seller]'s representatives selected samples for the SGS expert appraisal. The ship with the cargo left for its destination on 17 May 2005. Results of the SGS expert appraisal were received by the [Buyer] on 19 May 2005. Thus, at the moment of the departure of the ship, the [Buyer] did not know that the contract obligations were not fully met by the [Seller]. The [Buyer] sent a notice to the [Seller], stating that the delivered coal was of poor quality, and suggested to the [Seller] that the [Seller] take the coal back at the [Seller]'s own expense before August 5, 2005 and reimburse the expenses suffered by the [Buyer]. The [Buyer] asserted that, according to Point 3 of Article 538 of the Civil Code of Ukraine,[5] it had legally suspended the execution of its own obligation to pay all costs for the goods after having learned about the [Seller]'s default.

[The Arbitration Court] considers that:

1. The claim is based on Contract N __ concluded by the parties on 6 April 2005 in the territory of Ukraine.

2. Section 8 of the Contract N __ provides the legal grounds for considering a dispute in the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry. According to Section 8 of Contract N __: "If the parties cannot come to an agreement in an amicable way, then the disagreements should be transferred to the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (Kiev) for their further settlement according to rules and procedures of this court. Its decision is final and obligatory for both parties. The arbitration should resolve any similar disagreement, transferred to it according to provisions of the substantive law of Ukraine."

The arbitrators consider that the inaccurate writing of the name of the court, mistakenly included in the arbitration provision of Contract N __, does not influence the content concerning the place and institution of the arbitration authorized to consider such disputes, as chosen by the consent of the parties.

Considering the above statements, according to Article 8 of Contract N __, Section I of the Rules of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, and Articles 7 and 16 of the Law of Ukraine "On International Commercial Arbitration," the Arbitration Court recognized itself to be competent to consider the present dispute.

3. Having posed a question on applicable law, the Arbitration Court ascertained that the parties in the arbitration provision of Contract N __ stated that the substantive law of Ukraine was applicable.

As Contract N __ does not contain provisions about the non-application of the United Nations Convention on Contracts for the International Sale of Goods [CISG], and pursuant to Article 1 of this Convention, the Convention is applicable to the parties' legal relations.

The Arbitration Court recognized that according to Article 7(2) of the United Nations Convention on Contracts for the International Sale of Goods, questions concerning matters governed by this Convention, which are not expressly settled in it, are to be settled in conformity with the norms of private international law. Hence, Ukrainian law is applied to Contract N __ on a subsidiary basis.

4. By Appendix N _ to Contract N __, the parties agreed to the delivery of 5,500 tons of coal with the lowest heat of combustion of 5,750 kcal/kg at the price of US $35,55.00 per ton, for a total cost of US $195,525.00. By the Appendix, it is provided that the basis of the delivery is Sevastopol (CPT - Carriage paid to ( named place of destination) according to Incoterms 2000).

To fulfill its contractual obligations between 16 April and 30 April 2005, the [Seller] delivered 5,500 tons of coal at a cost of US $195,525.00, as proved by the case records, to the Sevastopol Sea Trading Port to be shipped to the Bulgarian party. On 14 May 2005, the coal was cleared by customs for [Seller] for its further delivery to Bulgaria, as proved by the cargo customs declaration on which there are notations by Ukrainian Customs.

5. According to the provisions of Appendix N _ to Contract N __, the ]Buyer] was obliged to pay 20% as an advance payment per lot of goods and the 80% balance had to be paid within five bank days after the [Buyer] received certificates from an independent expert appraisal of the goods. The [Buyer] partially paid the cost of the coal delivered to it, in the sum of US $155,761.00. Despite numerous demands by the [Seller], as of the present time the [Buyer] has not paid the remaining amount of money that the [Buyer] owes for the goods delivered to the [Buyer].

6. The [Buyer] did not challenge the fact that it received goods with a contract price of US $195,525.00, or that it has not paid US $39,764.00 of that amount.

7. The reasons declared by the [Buyer] for a partial non-payment of the delivered goods (the poor quality of the coal) cannot be taken into consideration by the Arbitration Court because of the following:

Considering the CPT Sevastopol delivery terms provided for in the contract, the obligations of the [Seller] on delivery are considered executed when the coal has been delivered in the port, as specified in the contract. The delivery of the coal from the port to its destination (Bulgaria) was carried out by the [Buyer] independently and at its own expense.

It is provided by Point 3.2 of Contract N __, that the [Buyer] has the right, at its own expense, to conduct a quality check of the coal through the SGS independent control organization at the port of loading, the results of which will be considered final and binding for both parties.

As can be seen from the certificate of the SGS independent expert appraisal presented by the [Buyer] (the certificate dated 27 April 2005 [6]), the minimum heat of combustion of the coal, delivered by the [Seller] at the port, was 5,427 kcal/kg. This is below the quality indicators provided by the contract, which the [Buyer] knew before the moment of the loading of the coal on the vessel.

Disregarding this fact and violating the conditions of Point 3.2 of the contract, which provided that "the consignment of goods with the minimum heat of combustion below 5,750 kcal/kg cannot be accepted for shipment and is considered rejected," the [Buyer] accepted the coal to be loaded onto the vessel and sent it to Bulgaria. Thus, at the moment of the loading of the coal onto the vessel, the second SGS independent expert appraisal was conducted (the certificate dated 19 May 2005), the results of which confirmed the initial examination, and this became known to the [Buyer] on 19 May 2005 after the arrival of the vessel in Bulgaria.

The parties to the contract have stipulated that in a case where the consignment of goods is rejected and is not accepted for shipment, "within 15 bank days the [Seller] must return the payment that was made for the consignment of the goods along with a penalty payment and within 10 days must put defective goods away from the platform of acceptance." At the same time, the contract provisions do not provide the [Seller] with the duty to retrieve the goods at its own expense, or to transfer the sum paid for them, if the goods were accepted for shipment and shipped to the port of destination. Nevertheless, by the letter-claim dated 21 June 2005, the [Buyer], having informed the [Seller] that the quality of the goods was not correct, suggested to the [Seller] to take back the coal at [Seller]'s own expense before 5 August 2005 and compensate the [Buyer]'s expenses.

The Arbitration Court also considers that according to the statement of the [Buyer]'s representatives, the coal has been sold by [Buyer] to its customers]. In objecting to the [Seller]'s claims, the [Buyer] did not document how much the breach by the quality of the goods affected its cost. The [Buyer]'s statement about the losses suffered in connection with the delivery of the poor-quality goods cannot be taken into account as the [Buyer] did not declare the given sum as an independent counterclaim and did not pay the arbitration fees [7] for it, as Article 5.10 of the Rules of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry provides.

Taking into account what is stated above, the Arbitration Court considers that, according to the United Nations Convention on Contracts for the International Sale of Goods, the [Buyer] had no right to stop performance of its own obligations under the contract. That is, the [Buyer] had no right not to pay for the delivered goods. Having accepted the poor-quality goods for shipment from port, the [Buyer] itself breached the contract, which provided the means for its legal protection from delivery of poor-quality goods. In addition, pursuant to Article 80 of the Convention, a party cannot rely on a default by the other party if this default is caused by acts or omissions of the first party. Also, the [Buyer] did not employ the appropriate remedies provided by Section III [Remedies for breach of contract by the seller] of the Convention. Therefore, the [Buyer]'s defense to the [Seller]'s claim for the collection of US $39,764.00 in debt from the [Buyer] is not proved and the [Buyer] must pay this debt in full.

8. Because [Seller] has established its right to the full sum of the declared claim, according to Point 1 of Section V of the Schedule on Arbitration Fees and Costs,[8] the arbitration costs paid by the [Seller] are assigned to the party against which the decision has been made (that is, against the [Buyer] in this case), and are subject to be collected from the [Buyer].

Being guided by the provisions of Contract N __ of 6 April 2005, Articles 45 to 50, 53, 61 and 62 of the United Nations Convention on Contracts for the International Sale of Goods, Article 31 of the Law of Ukraine "On International Commercial Arbitration", Articles 8.2, 8.4 to 8.9 of the Rules of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, Point 1 of Section V of the Schedule on Arbitration Fees and Costs, the Arbitration Court decided:

To require the [Buyer] immediately after its reception of this decision to pay to the [Seller] US $39,764.00 and that in addition the [Seller] be reimbursed for arbitration costs.

The decision is final.

Go to Case Table of Contents

Case Comment

International Commercial Arbitration Court at
the Ukrainian Chamber of Commerce and Industry

February 15, 2006

Gunesh Bakgalova

This case was brought to the Arbitration Court in Ukraine, a civil law country and resulted in a "dry" application of the United Nations Convention on the International Sale of Goods (CISG) - i.e., the arbitrators did not provide a full explanation for their decision and reasoning. This is a characteristic found not only in the Ukrainian Arbitration Court but also in the courts of the other post-Soviet countries. Unfortunately, we are not able to delve deeply into this case and look through the original contract itself to clarify what exactly brought the Arbitrators to their conclusion regarding their application of the CISG.

According to the case, the coal delivered by the claimant [seller] was of poor quality. There are two certificates by the SGS Group proving this. But at the beginning of the case the Court referred only to the second one, dated May 19, 2005. In addition to this, the Court requested the Russian translation of the second certificate only, effectively ignoring the existence of the first certificate and presenting the second certificate as the only one. On page four of the case, the Court stated that the respondent [buyer] could not know [in actuality the buyer feigned ignorance] that the contractual obligations regarding the coal quality were not met by the seller when the goods were delivered. Thus, at the moment the goods were shipped, the buyer did not know the results of the expert report. The coal samples destined to be examined were chosen on May 16 and 17, 2005, while the goods were shipped on May 17, 2005. The conclusion of the SGS expert appraisal regarding the quality of the coal became known on May 19, 2005. The results of the May 19, 2005 report were presented by the Court as the only assessment of quality of the coal, disregarding a previously conducted test. On page 7 of the case, the Court finally mentions the first expert appraisal, thereby proving that the buyer knew about the poor quality of the coal before its departure from Sevastopol. The acceptance of the goods by the buyer resulted in a breach of contract by the buyer.

I will comment only on the case issues regarding the CISG and its application. In deciding this case, the Court referred to Articles 1, 7, 45-50, 53, 61, 62 and 80 of the Convention.

The contract referred to is a contract regarding the sale of goods (coal) between parties whose places of business are in different countries (Ukraine and Bulgaria), both of which are Contracting States to the Convention. The contract between the parties did not contain provisions providing for non-application of the CISG, and pursuant to Article 1 of the Convention, the Arbitration Court decided that the CISG was applicable to the dispute.

This is the only decision of the Ukrainian Arbitration Court with which I fully agree. Bulgaria ratified this Convention on July 9, 1990, and it was entered into force on August 1, 1991. Ukraine ratified it on January 3, 1990, and the Convention entered into force in February 1, 1991. And, as a quick note, I would also add that the contracting goods are coal, which is not listed in the Article 2 of the Convention. Therefore the CISG is applicable in our case.

However, the Arbitration Court referred to domestic law as well. The Court recognized that some of the issues in the case were governed by the CISG, but not expressly settled by it, and therefore should be settled in conformity with the rules of private international law. The Court came to this decision pursuant to Article 7(2) of the CISG. Thus, on a subsidiary basis, Ukrainian law was applied to this case.

"Ukrainian law is applied to this case, because case matters are not expressly settled in the CISG" - this is a standard phrase present in almost all cases, considered by the Ukrainian Arbitration Court. In most cases, the application of Article 7(2) of the CISG appears exactly like this, without explanation of the decision and without taking into account many circumstances of the governed case.

"Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law."[9] Article 7(2) CISG.

The Convention does not refer directly to the application of domestic law. Article 7(2) of the CISG requires two steps before it refers to the application of private international law [domestic law]. First, the Court must look to the general principles of the Convention and only in the absence of a solution within these principles can the problem be governed by the rules of private international law.

The phrase in Article 7(2), "General principles on which it is based," perhaps seemed to the arbitrators of the Ukrainian Court to be too broad and uncertain. This thus prompted a superficial survey of the rules of the Convention, and ordered the application of the rules of domestic law instead.

Article 7(2) states that a problem governed by this Convention but not "expressly settled in it" should be solved in accordance with the CISG "general principles." If compliance with these statements is impossible then the problem can be or should be solved in accordance with domestic law. This CISG provision is very clear: the solution must be found within the Convention itself regardless of if there is something that is not precise or any other ambiguities or obscurities in the text of the Convention. If it is not possible to find an answer within the rules of the CISG to a problem governed by the CISG, then we are dealing with "gaps" of the Convention. If such "gaps" are discovered, the Court could refrain from addressing any other legal source and do all that is necessary to find a solution within the Convention itself. Thus the CISG provision suggests looking for a solution not only within the text, but also within the general principles of the Convention. Courts that find that the issues are not within the scope of the CISG are referred to the competence of private international law. Contrary to the CISG, private international law is non-unified and has no general character. If uniform law cannot find a solution, it cannot be regarded as a gap, but just a consequence of the Court decision.[10]

If the Court decided to apply the CISG to the disputes, as in our case, it should find a settlement in the Convention itself without referring to domestic law. This would be the first step. In addition, only if it is not possible to implement the first step should the next step be considered: the Court can refer to private international law, in this case, Ukrainian domestic law. But reference to domestic law should only occur in very exceptional and rare situations when the Court fails to find a solution in the text or "general principles" of the Convention.

Different Contracting States commonly agreed that a solution should be found in the principles and rules of the CISG. If it is impossible to find a solution, then the CISG "gaps" should be filled. In these circumstances, referring to domestic law is not only admissible, but even obligatory.[11]

There is also another way of finding a solution within the CISG: the analogical application of specific provisions by other courts. Most probably this approach is not for a civil law system. However it is worth mentioning that the Ukrainian Arbitration Court applies this CISG provision analogically to almost all cases. Arbitrators in civil law countries customarily do not refer to other cases for their decision; although this is a customary common law practice. Furthermore, in civil law "customary practice" means practice within the territory [in our case the territory is Ukraine], not within the scope of the case [which can lead beyond the territory and to cases in courts of other countries].

Arbitrators can use Article 7(2) as a potentially powerful tool specifically to turn a decision to reflect their own interests and represent it as a "gap" in the literal CISG text.

"By locating a relevant CISG 'general principle' for the resolution of a matter 'governed but not settled' by the Convention text, decision-makers can remain within the four comers of the treaty in situations where they otherwise would need to revert to other (usually domestic) rules of law."[12]

The Ukrainian Arbitration Court did not attempt to find a solution within the Convention nor in an analogical application of the CISG.

The parties to the contract could have opted out of the Convention pursuant to Article 6 of the CISG, but they decided not to. If they had, the Court would not have mentioned the CISG at all.

We know that the contract has a choice of forum provision. The parties agreed to settle disputes in the Ukrainian Arbitration Court. But nothing said about a choice of law clause. The court decided to apply the CISG, and then Ukrainian law on a subsidiary basis. Reference to the domestic law was a choice of the arbitrators, not the parties in the contract.

Such an action by the Ukrainian Arbitration Court was wrong because the dispute could have been fully solved by the Convention itself, without referring to the domestic law of Ukraine. There are no "gaps" in the Convention which allow the Court to go to another source of law for a solution.

Important case facts:

Below there is an overview of the CISG provisions related to our case that were disregarded by the Ukrainian Arbitration Court. The Court wrongly presented that the Convention has "gaps" regarding the solution of the case.

The following Articles of the Convention would have been sufficient to solve the dispute between the parties:

  1. Article 35(1) of the Convention stipulates that the seller must deliver goods that are of the quality required by the contract. In our case, the seller violated this provision of the Convention. And the seller is responsible for this breach subject to Article 35(3): "The seller is not liable... for any lack of conformity of the goods if at the time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity." However, in this case, the seller is liable because facts show that the buyer did not know about this breach at the time of the conclusion of the contract. The inadequate quality of the coal became known later, with the first SGS expert appraisal.

  2. Liability of the seller is also established under Article 36(1): "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." Non-conformity of the goods existed at the time when the risk passed to the buyer and eventually this non-conformity became obvious when the risk passed to the buyer (the first SGS expert appraisal) and after that time (the second SGS expert appraisal), when the buyer used goods for its own purposes. This, however, does not play an important role here. Further use of the non-conforming goods by the buyer does not relieve the seller from the responsibility for delivering non-conforming goods.

  3. Article 39(1) provides the buyer with an assurance of the lack of conformity of the goods but only when the buyer gives notice to the seller about the non-conformity of the goods within a reasonable time. The issue here is what constitutes a reasonable time.

  4. If the buyer fails to give notice according to Article 39(1), he can still look for remedies, by referring to Article 44: "Notwithstanding the provisions of paragraph (1) of article 39... the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice."

  5. It is also possible to apply Article 46(2) if the breach by the seller is fundamental: "If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter." In this case the seller breached the contract, but it is my opinion that the breach committed by the seller was not a fundamental one for the reason that the goods were used by the buyer.

  6. The seller did not argue about the poor quality of the delivered coal, and the buyer breached the contract by accepting non-conforming goods. There are two issues being weighed: breach of the Convention provision by the seller and breach of the contract provision by the buyer. The guidelines of the Convention provide an answer for this dilemma in Article 50: "If the goods do not conform with the contract and whether or not the price has already been paid, 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."

The CISG is a good and fair legal source in the dispute resolution of this case.

The Ukrainian arbitrators most probably saw "gaps" in the following:

   -    The notice requirement; and
 
   -    The breach of the contract by the buyer.

With these "gaps" "in mind" the Court formed its own decision. The key part of the case for the Ukrainian Arbitration Court was that the buyer knew about the low quality of the coal accepted it when delivered to its destination, regardless of its non-conformity. The buyer also used the coal for its own purposes, violating the contract itself. The buyer's awareness regarding the poor quality of the coal before its use was the main factor in the decision made by the Ukrainian Arbitration Court. Furthermore, the buyer alleged that he could not have known that the heat of combustion of the coal was of poor quality [see page 4 of the case]; here the Court states that the SGS expert appraisal conducted on May 16-17 was actually the second assessment conducted and the results of it confirmed the initial examination [of April 27, 2005].

The decision of the case would be easier had the first SGS certificate not appeared and the second SGS certificate been the only one presented. In this situation, it is obvious that the buyer could not have known about the breach of the contract by the seller and the buyer could look for remedies not only in the CISG but also in the contract itself.

The first SGS expert appraisal certificate provides evidence that the buyer was aware of the low quality of the coal. The buyer breached the contract [Point 3.2 of the contract] by accepting the low quality coal. Thus, according to the contract, the buyer cannot rely on the contract provision as a remedy. It seems that it was a contractual obligation [see page 8 of the case] not to accept non-conforming goods. Breaching this contractual obligation, the buyer gave up one of the remedies. If the contract is breached by one of the parties, another party can sue for this breach. In these circumstances, the seller has the right to sue the buyer for accepting non-conforming goods. This seems odd! It was a failure on part of the buyer to agree to such a contract provision that it lost one of the remedies that served as legal protection.

In this situation, the Ukrainian Arbitration Court applied Article 80 of the Convention: "A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission." This resulted in the case being decided in favor of the seller.

Article 80 releases a party from its obligations if the other party fails to perform its own obligations.

"If the buyer frustrated performance, such as by not providing drawings required for production or by not procuring an import permit, he can neither demand specific performance nor declare an avoidance. He also may not reduce the price for defects caused by mistakes in the drawings he provided."[13]

Was the Ukrainian Arbitration Court correct in its application of Article 80 of the Convention? No. It is true that the buyer breached the contract provision and the seller did as well, but the buyer tried to rely on the seller's non-performance. But was the seller's failure caused by the buyer's act or omission? No. Who breached the contract first: the seller or the buyer? If the seller was responsible, how could the buyer's wrong act cause this breach?

In his research work, John Honnold used the following example as a test for the application of Article 80 of the CISG:

"A contract called for Seller to deliver goods to Buyer in State X. State X required sellers to obtain a license for the importation of such goods. Seller made an appropriate application but Buyer persuaded the officials of State X to deny the license; as a result Seller could not deliver the goods. Buyer, in a remarkable display of nerve, sued Seller for damages for failure to deliver."[14]

In this example we see that the seller's failure was caused by the act of the buyer. The seller can refer to Article 80 as a remedy.

Our case cannot pass this test. The seller's failure was that it delivered coal of poor quality and the buyer could not in any way influence this failure committed by the seller. The seller could only have been influenced by this failure if, hypothetically, the buyer had chosen the coal in person and the choice was based on the color or appearance of the coal - a situation that was very unlikely to have happened. The buyer's breach of the contractual obligation or any of its other acts did not affect the seller's breach. The seller's breach was caused by its own bad faith regardless of Article 7(1) of the Convention. That is why I disagree with the Court decision. Article 80 of the Convention is not applicable here.

It is interesting to note that this odd application of Article 80 by the Ukrainian Arbitration Court occurred in other cases as well. As an example, there is another case dated February 13, 2006 where the claimant [buyer] was a party from the United Kingdom (UK) and the respondent [seller] was a party from Ukraine. In that case, the seller had to deliver goods to the buyer in the quantity provided by the contract, but failed to do so. The UK buyer opted to sue for damages. he Ukrainian Arbitration Court handed down an award in favor of the seller (the Ukrainian party), because its failure to deliver a lesser quantity of goods "was caused by the act of the buyer." The buyer did not send a separate request in advance indicating the quantity of the goods. The contract, however, already indicated the quantity of the goods to be shipped.

It is probable that the problem arises from the misunderstanding of Article 80 by the Ukrainian arbitrators. However, the meaning of Article 80 of the Convention is retained across the translation between the [English and Russian] languages.

Nevertheless, in our case, the Ukrainian Arbitration Court applied Article 80. Can the buyer recover damages? Can the buyer rely on the lack of conformity of the goods?

According to Article 39(1) of the CISG, the buyer has the right to rely on the lack of conformity of the coal as it informed the seller about this lack within a reasonable time.

"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."[15]

The Ukrainian Arbitration Court disregarded this provision entirely.

This "notice requirement" is an interesting issue to discuss. In which way should this "notice" be applied in order to satisfy this provision?

First of all, I would like to discuss the results obtained by the appraisal conducted by the SGS Group. The first SGS expert appraisal was conducted before the goods were shipped to the buyer. The second appraisal was carried out after the buyer accepted, loaded, and shipped the goods to their destination. It is general practice to present copies of the results of any expertise to third parties.

In addition to general practice, the SGS Group has a similar provision in its contract with clients:

"... Client hereby irrevocably authorizes the Company to deliver Reports of Findings to a third party where so instructed by Client or, at its discretion, where it implicitly follows from circumstances, trade custom, usage or practice."[16]

The buyer most probably requested the SGS Group to inspect the goods in accordance with trade usage rules, thus authorizing the SGS Group to send copies of the inspection results to the seller as well. The seller should have then known about its own failure from the first SGS expert appraisal. Is this enough to satisfy the notice requirement stated in Article 39(1)? There is no doubt that the SGS expert appraisals contained specifications regarding the lack of conformity of the goods. There is also no dispute that notice was given within a reasonable time. But is it appropriate if the notification was given by the SGS Group as a third party but not by the buyer itself?

Any notice should be sent by the appropriate means and specified to reach the seller.[17]

What are the means of communication? There are direct means of communication (Internet, telephones) and indirect (post offices). Can the SGS Group be considered as an indirect means of communication? Is it appropriate given the circumstances for the SGS Group to send such a notice?

Article 39(1) does not specify in exactly what form and how the notice should be provided, but according to established practice the buyer generally must follow up with a written notice to the seller.[18]

In the event the SGS expert appraisals do not satisfy the notice requirement stipulated by the Convention, there is another fact to consider: the buyer informed the seller about the non-conforming goods by a separate notification [June 21, 2009]. This notification provided by the buyer was approximately two months after the first SGS expert appraisal and one month after the second appraisal. Pursuant to Article 39(1), the timing from the first SGS expert appraisal should be taken into account because at this time the lack of conformity was discovered and became known to the buyer. Was the seller given notification within a reasonable time?

Article 39 does not specify what constitutes a reasonable time. Everything depends on the circumstances. A reasonable time can be considered as varying from one week to one month. The courts of countries like Germany, Austria and Switzerland have accepted the "noble month" approach. A benchmark for reasonable time for notice in such countries is apt to be one month after the time the defect was discovered.[19]

The notification provided by the buyer was a month late after the second SGS expert appraisal and two months late after the first one. The Ukrainian Arbitration Court did not recognize the notification of the buyer dated June 21, 2005, because this notification was not brought to the Court as a separate claim. Under the CISG, there is no rule that requires that the notification be documented, brought as a separate claim and be paid by court fees. But there is such a rule under the forum. According to the Ukrainian Arbitration Court, the respondent buyer should declare any losses suffered in connection with the delivery of poor quality coal as an independent counterclaim, bring this claim to the Arbitration Court and pay for its arbitration fees. [If a suit is brought to the Court as a separate claim, separate registration fees are required.] So, the buyer lost the option of receiving any remedies.

   -    "The buyer consequently can no longer require the seller to cure the lack of conformity under Article 46, avoid the contract under Article 49, claim for damages under Articles 74 to 76, nor reduce the price under Article 50. In this connection, however, ...under Article 36(1), the seller is liable, in the absence of a special contractual stipulation such as a guarantee of fitness for a certain period, only for those non-conformities which did exist at the time when the risk passed to the buyer although it is not necessary that they were apparent at that time (as to when the risk passes, see Articles 66-69)."[20]

What do we have now? The buyer breached the contract by not "properly" providing the seller with a notice concerning the non-conforming goods. What about the breach of the contract committed by the seller? Moreover, the seller knew about the poor quality of the coal.

Under these circumstances the only remedy for the buyer is the price reduction provision pursuant to Article 50. This provision does not consider damages, and as such it is not a measurement for damage. It is a remedial measure for the buyer in case the seller delivered non-conforming goods. Even if the seller is not liable, the buyer can still reduce the price of the goods. This is the primary application of Article 50 of the Convention.

"If the goods do not conform to the contract and whether or not the price has already been paid, 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."[21]

Article 50 is based on proportion: the reduction in price is the difference between the value of the conforming goods and the value of non-conforming goods.

The buyer had the right to request a reduction in the coal price, but the Arbitration Court disregarded this request. Actually, the buyer could file a suit against the seller requesting a reduction in the price. The buyer must pay arbitration fees regardless of whether it files a counterclaim or an independent claim.[22]

In addition, the seller recognized the fact that the delivered coal was of poor quality. Regardless of this admission, the Court did not penalize the seller for its breach of the contract; the seller even obtained the price of conforming quality coal, when it delivered non-conforming goods.

It is worth mentioning again that the penalty for the seller could have been found in Article 50 of the Convention: reduction of the price of the non-conforming coal, but the Ukrainian Arbitration Court disregarded this Article.

And last but not least: an interesting issue on attorneys' fees. The fees were reimbursed by the buyer. It is true that the parties are both from civil law countries, where "loser pays" is the rule that always applies. But as far as the CISG applies, Article 74 of the Convention states:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."[23]

The courts outside of the US interpret Article 74 as permission for the winning party to recover damages obtained by attorneys' fees. This is the opposite of what occurs in US court decisions. However, there is no court decision that expressly rejects the recoverability approach.[24]

Attorneys' fees under the CISG is a disputable issues within the Convention. Professor H. Flechtner [University of Pittsburgh, PA] is of the opinion that in this case the attorneys' fees are recoverable, because of the forum. I agree with Professor Flechtner, because the parties bound to the contract agreed to the forum, and thus are bound to its rules. In addition "attorneys' fees" can be considered as a foreseeable loss in case a suit is brought to the Ukraine Arbitration Court.

I agree with the Court that the buyer was aware of the breach before the delivery of the coal. The buyer used coal for its own purposes. That is why the buyer should pay for the coal according to Article 53 of the CISG.

The quality of the coal was however poor. Why did the seller deliver non-conforming goods and at the end obtain the price corresponding to coal of good quality? The buyer can request a reduction in the price of the coal (as discussed above Article 50 has such provisions). The price could also be reduced proportionally according to the damages.

As a conclusion I have compiled a table regarding the main issues of this case.

The Ukrainian Arbitration Court vs. My Opinion:

Issues The Ukrainian Arbitration Court My opinion
The notification on breach of the contract No No (regardless the SGS expert appraisals; Letter of June 21, 2005). Article 39(1) of the CISG - the "reasonable time" requirement was not met
The seller's awareness on breach No Yes (the SGS expert appraisals)
The buyer's awareness on breach before further delivery of the coal Yes Yes (the first SGS expert appraisal)
The remedies for the buyer No Yes; Articles 45, 46, 50 of the CISG
The penalty for the seller No Yes; Articles 50, 74 of the CISG
The attorneys' fees Yes Yes (because of the forum).
There is also the possibility to argue under Article 74 of the CISG.

FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Ukraine is referred to as [Seller]; Respondent of Bulgaria is referred to as [Buyer]. Amounts in the currency of the United States (dollars) are indicated as [US $].

** Gunesh Bakgalova, attorney Turkmenistan <bakgalova@yahoo.com>.

1. Translator's footnote. "International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry (ICAC at the UCCI) is an independent permanent arbitration institution (third-party tribunal) which activities are regulated by the Law of Ukraine On International Commercial Arbitration of 24 February, 1994 and the Rules of the International Commercial Arbitration Court at the UCCI. ICAC at the UCCI takes into consideration disputes according to its jurisdiction only in case of the presence of written agreement of the parties to refer to it all or certain disputes arising in connection with any concrete relationships nevertheless of their contractual or non-contractual character. Arbitration agreement could be made as arbitration clause in the contract or as separate agreement. Law of the Ukraine "On International Commercial Arbitration." International Commercial Arbitration Court at the CCI." <http://www.ucci.org.ua/arb/icac/en/icac.html>

2. Translator's footnote. "SGS is the world's leading inspection, verification, testing and certification company. Recognized as the global benchmark for quality and integrity, SGS employs over 55,000 people and operate a network of more than 1,000 offices and laboratories around the world. SGS Group." <http://www.sgs.com/about_sgs/in_brief.htm>

3. Translator's footnote. The second SGS independent expert appraisal results.

4. Translator's footnote. Approved by the Decision of the Presidium of the Ukrainian Chamber of Commerce and Industry of April 17, 2007. <http://www.ucci.org.ua/arb/icac/en/rules.html>

5. Translator's footnote. Civil Code of Ukraine - No. 435-IV dated January 16, 2003, as amended.

6. Translator's footnote. The first SGS independent expert appraisal results.

7. Translator's footnote. "1. "Registration fee" - shall mean a fee paid when a Statement of Claim is filed with the ICAC to cover the costs to be incurred in connection with commencement of the arbitral proceedings. The registration fee shall be a part of the arbitration fee. 2. "Arbitration fee" - shall mean a fee payable by the [Seller] for each claim filed with the ICAC to cover the costs of the ICAC to be incurred in connection with the arbitration of a case. Arbitration fee includes arbitrators' fees for examination and settlement of a dispute and an administration fee payable to cover the costs of organization and conduct of arbitral proceedings, including general business expenses made by the ICAC. Section 1. The Ukrainian Schedule on Arbitration Fees and Costs." <http://www.ucci.org.ua/arb/icac/en/fees.html>

8. Translator's footnote. Appendix to the Rules of the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry. <http://www.ucci.org.ua/arb/icac/en/fees.html>

9. United Nations Convention on Contracts for the International Sale of Goods [CISG]. Article 7(2).

10. Michael Joachim Bonell, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987). Page 74. <http://www.cisg.law.pace.edu/cisg/biblio/bonell-bb7.html> Comments on Article 7 by Michael Joachim Bonell [Italy] in 1987 Bianca-Bonell Commentary on the International Sales Law

11. Michael Joachim Bonell, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 65-94. Pages 81-82. <http://www.cisg.law.pace.edu/cisg/biblio/bonell-bb7.html> Comments on Article 7 by Michael Joachim Bonell [Italy] in 1987 Bianca-Bonell Commentary on the International Sales Law

12. Joseph Lookofsky. Article 7. Convention Interpretation. <http://www.cisg.law.pace.edu/cisg/biblio/loo7.html>

13. Excerpt from Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods. Univ. Prof. Dr. Peter Schlechtriem. Manz, Vienna: 1986. Page 105. <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-80.html>

14. John O. Honnold, Article 80 Failure of Performance Caused by Other Party. Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 496. Kluwer Law International, The Hague. <http://cisgw3.law.pace.edu/cisg/biblio/ho80.html>

15. United Nations Convention on Contracts for the International Sale of Goods [CISG]. Article 39(1)

16. SGS Group. General Conditions of Services (1)(c). <http://www.sgs.com/terms_and_conditions_service.htm>

17. Excerpt from Uniform Sales Law - The UN-Convention for the International Sale of Goods. Univ. Professor Dr. Peter Schechtiem. Page 69. Manz, Vienna: 1986. <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-39.html>

18. UNCITRAL Digest of Article 39 case law. <http://www.cisg.law.pace.edu/cisg/text/digest-art-39.html#p5>

19. UNCITRAL Digest of Article 39 case law. <http://www.cisg.law.pace.edu/cisg/text/digest-art-39.html#p15>

20. Sono, in Bianca-Bonell Commentary on the International Sales Law. Page 308. Giuffrè: Milan (1987). <http://www.cisg.law.pace.edu/cisg/biblio/sono-bb39.html> Page 308. Article 39

21. United Nations Convention on Contracts for the International Sale of Goods [CISG]. Article 50. <http://www.cisg.law.pace.edu/cisg/text/e-text-50.html>

22. Appendix to the Rules of the International Commercial Arbitration Court at the Ukrainian Chamber
of Commerce and Industry. <http://www.ucci.org.ua/arb/icac/en/fees.html>

23. United Nations Convention on Contracts for the International Sale of Goods [CISG]. Article 74. <http://www.cisg.law.pace.edu/cisg/text/e-text-74.html>

24. Recovering Attorneys' Fees as Damages under the U.N. Sales Convention: A Case Study on the New International Commercial Practice and the Role of Case Law in CISG Jurisprudence, with Comments on Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co. Page 133. Harry M. Flechtner. <http://www.cisg.law.pace.edu/cisg/biblio/flechtner4.html>

Go to Case Table of Contents
Pace Law School Institute of International Commercial Law - Last updated September 8, 2009
Comments/Contributions
Go to Database Directory || Go to CISG Table of Contents || Go to Case Search Form || Go to Bibliography