Russia 1 March 2006 Arbitration proceeding 101/2005 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060301r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 101/2005
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Russian Federation (respondent)
BUYER'S COUNTRY: Hungary (claimant)
GOODS INVOLVED: [-]
APPLICATION OF CISG: Yes [Article 1(1)(a)]
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
4B [Scope of Convention (issues excluded): penalty clauses]; 26A1 [Effective declaration of avoidance: notice to the other party required]; 47A [Buyer's right to fix additional period for avoidance]; 49A21 [Buyer's right to avoid contract (grounds for avoidance): seller does not deliver or refuses to deliver within additional period set under art. 47]; 51A1 [Delivery or conformity of only part of goods: rules of arts. 46-50 apply to part missing or non-conforming]; 81C [Effect of avoidance on obligations: restitution by each party of benefits received]
4B [Scope of Convention (issues excluded): penalty clauses];
26A1 [Effective declaration of avoidance: notice to the other party required];
47A [Buyer's right to fix additional period for avoidance];
49A21 [Buyer's right to avoid contract (grounds for avoidance): seller does not deliver or refuses to deliver within additional period set under art. 47];
51A1 [Delivery or conformity of only part of goods: rules of arts. 46-50 apply to part missing or non-conforming];
81C [Effect of avoidance on obligations: restitution by each party of benefits received]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Russian): M.G. Rozenberg, Praktika of Mejdunarodnogo Kommercheskogo Arbitrazhnogo Suda pri TPP Za 2006 g. [Arbitration decisions rendered by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in 2006], published by "Statut" (2008) No. 8 [79-85]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
UnavailableGo to Case Table of Contents
Case text (English translation) [second draft]
Queen Mary Case Translation Programme
Translation [*] by Andriy Kril [**]
1. SUMMARY OF RULING
1.1 Since the parties to the contract are situated in States that are parties to the Vienna Convention of 1980 (Hungary and Russian Federation), this Convention is applicable to the parties' relations. According to the parties' agreement, Russian law was recognized as the subsidiary law.
1.2 An under delivery of the goods by the [Seller], duly established in accordance with the contractual provisions, was qualified as a non-compliance of the goods which appeared due to the [Seller]'s actions and, according to the contract, shall be the basis for the recovery of penalties set for such kind of violation. Therefore, the [Seller] was entitled to recover the price of the shortage and the penalty charge.
Concerning the question of the amount of goods that were not delivered as against the amount agreed in the contract (the goods were already prepaid by the [Buyer] in the contractual amount), the contractual penalty for the delay in delivery shall be applied in an amount which is lower that the amount of penalty foreseen for the non-compliance of the goods.
While making the decision, the Tribunal stated the validity of the simultaneous recovery of the penalty for the delivery of non-compliant goods and the penalty for the late delivery was foreseen by the contract, since these penalties were established for different violations of the contract.
1.3 Letters sent to the [Seller] by the [Buyer] requesting establishment of the final terms of delivery (which were beyond the scope of contractual terms for the performance of obligations) with the warning that in case the [Seller] refused to honor such request the [Buyer] will claim the reimbursement of the purchase price, was qualified as the execution by the [Buyer] of its right provided in the Vienna Convention of 1980 to fix an additional period of time of reasonable length for performance by the [Seller] of its obligations. In case of non-performance of the obligations, the [Buyer] has the right to avoid the contract. This letter was recognized as satisfying the provisions of CISG regarding notification of the declaration of avoidance of the contract (Article 26).
2. FACTS AND PLEADINGS
The claim was lodged by the [Buyer], a Hungarian firm, against the [Seller], a Russian organization, in connection with the violation of the international sales contract concluded by the parties on 27 October 2004. According to the contract, the goods were to be fully prepaid. They had to be delivered during December 2004 by separate consignments with the delivery terms fixed at before 31 December 2004. The [Buyer] fully prepaid for the goods. The [Seller] delivered only two consignments which lacked the agreed amount of goods. The other consignments were not delivered at all. The total amount of non-delivered goods made up to 60% of the amount established by the contract.
The [Buyer] sought:
|-||Recovery of the prepayment for the goods that were not delivered;|
|-||Payment of the penalty for the improper performance of obligations;|
|-||Penalty payment for the delay in delivery.|
The [Buyer] did not present any pleadings under its claim and its representatives did not participate in the Tribunal's session.
3. TRIBUNAL'S REASONING
The award of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry [MKAC] contained the following basic points.
3.1 The competence of the Tribunal
Article 8 of the appendix to the contract provides as follows:
"8.3. In case of failure to settle the dispute or disagreement, the disputed issue shall be submitted for
adjudication at the International Commercial Arbitration Court at the CCI of the RF (MKAC), in
accordance with the Rules and Procedures of the Tribunal. The award of the MKAC at the CCI of
the RF shall be binding on the both parties.
8.4. The parties agreed that the dispute shall be adjudicated by a sole arbitrator.
8.5. The parties agreed that the sole arbitrator shall be selected by the President of the MKAC at the CCI of the RF. The language of the arbitration shall be Russian."
The dispute between the [Seller] and the [Buyer] refers to the category of disputes that arise from the contractual relations that appear during the conduct of foreign-trade activities. This category of disputes is covered by the MKAC jurisdiction according to Article 2 of the Statute of the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry (Annex I to the Law of RF "On International Commercial Arbitration") and Article 1(2) of the Rules and Procedures of the MKAC.
Taking into account the arbitral agreement reached by the parties and the absence of any objections from any party concerning the hearing of the case by the MKAC, the Tribunal ruled that it is competent to arbitrate this dispute. The Tribunal also established that the arbitration proceedings were conducted in accordance with the arbitration agreement: the dispute was adjudicated by a sole arbitrator, selected by the President of MKAC.
3.2 Absence of the [Seller]'s representatives
Considering the [Seller]'s absence during the oral hearings of the case, the Tribunal established that the [Seller] was duly notified about the time and date of the hearing. According to Article 28(2) of the Rules and Procedures of the MKAC, "failure by a party properly notified of the time and place of the hearing to appear at the hearing shall not interfere with the proceedings and the making of an award, unless the defaulting party has requested in advance in writing that the hearing of the case be adjourned for a good reason." The Tribunal received no motions from the [Seller] to remand the hearings of the case.
Representative of the [Buyer] agreed during the hearing to continue the proceedings despite the [Seller]'s absence.
Based on the above and following Article 28(2) of the Rules of the Tribunal, the Tribunal concluded that the absence of the [Buyer]'s representatives does not hamper the proceedings in the case and the handing down of the award.
3.3 Applicable law
Article 8.1 of appendix No. 1 to the contract contains the following provision:
"In all other issues that are not governed by this contract and Incoterms 2000, the Parties shall follow the provisions of law of the Russian Federation".
Since the commercial enterprises of the [Buyer] and the [Seller] are located in States party to the Vienna Convention of 1980 and it does not follow from the contract that the parties excluded the applicability of the CISG, the Tribunal ruled that according to Article 1(1)(a) of the CISG, the relationships between the parties shall be regulated by its provisions.
According to Article 7(2) of the CISG, 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.
The Tribunal noted that the [Buyer] and the [Seller] agreed on the applicable law basing on the principle of autonomy of the parties. This principle is one of the widely recognized rules of international private law and was codified, particularly, in Article 1210 of the CC of the RF. Therefore, taking into consideration the existing agreement of the parties on the selection of the law, the Tribunal ruled that Russian law shall be applied to the parties' relations as the subsidiary substantive law.
3.4 Payment of debt
Considering the [Buyer]'s claims for the payment of the debt (prepayment for the non-delivered amount of goods), the Tribunal ruled that the [Buyer] fulfilled its obligations to perform 100% prepayment for the goods. The fact of prepayment is proved by the copies of the payment orders dated 12 November and 22 December 2004.
According to para. vi and vii of the contract, the goods were to be delivered by the [Seller] by separate shipments before the 31 December 2004. In fact, the [Seller] only performed the delivery of the following two consignments:
|-||Gondola car No. 65043234, railway bill of lading No. 9917473, date of departure - 15 December 2004, date of delivery to the storehouse of the consignee - 7 January 2005, amount of goods according to the specification and invoice of the [Seller];
|-||Gondola car No. 6273402, railway bill of lading No. 7917522, date of departure - 6 December 2004, date of delivery to the storehouse of the consignee - 14 January 2005, amount of goods according to the specification and invoice of the [Seller].|
According to para. 4.4 of appendix No. 1 to the contract,
"In case of disclosure of any non-compliance of the amount, quality, completeness, labeling of the goods delivered or their packing with the requirements of the standards, technical specifications, engineering drawings, models (etalons), contract, or with the data specified in the labeling and accompanying documents, certifying the quality of the goods (para. iii of the abovementioned contract and 3.4 of the abovementioned appendix), authorized representative of the [Buyer] (consignee) shall withhold the further deliveries. An authorized representative of the [Buyer] (consignee) shall also call for the participation in the further acceptance of goods by an engineering process expert from the consignee's country and, together with him, draw up a formal expertise statement and immediately notify the [Seller] about the sending of the copy of this statement to him."
In accordance with the abovementioned provisions of the contract the [Buyer] presented expertise statements No 1-25 dated 8 January 2005 and No 1-56 dated 17 January 2005, drawn up by experts of the Chamber of Commerce and Industry of Turkmenistan. These statements recorded the following discrepancies of the amount of goods with the data stated in accompanying documents:
|-||Shortage of goods in gondola car No. 65043234;|
|-||Shortage of goods in gondola car No. 6273402.|
The [Seller] did not present any evidence refuting the fact of shortage of goods in the two consignments, nor did the [Seller] provide evidence of the delivery of any other consignments within the scope of the contract. Taking into account the abovementioned, the sole arbitrator considered the fact of only partial delivery of the goods by [Seller] as established.
The materials of the case contain the copy of [Buyer]'s letter to the [Seller] in which the [Buyer] requested the [Seller] to provide the [Buyer] with the final date of shipment of the goods which had to be set before 10 March 2005, indicating that, in case of the ungrounded refusal by the [Seller] to perform its contractual obligations, the [Buyer] will claim the repayment of the money to its account. The Tribunal considered that such a letter can be qualified under Article 47 of the CISG as the notification of the [Seller] about the fixation of additional period of time of reasonable length for performance by the [Seller] of its obligations to deliver the goods.
In a letter dated 22 March 2005 the [Buyer] requested the [Seller] solely to return the prepayment, not covered with the performed deliveries of the goods. As it follows from the Article 81(2) of the CISG, the return of payment for the goods is the legal consequence of the avoidance of the contract. According to Article 49(1)(b) of the CISG, the buyer may declare the contract avoided if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47. Article 51(1) of the CISG establishes that if the seller delivers only a part of the goods or if only a part of the goods delivered is in conformity with the contract, articles 46 to 50 of the CISG apply in respect of the part which is missing or which does not conform. Taking into account the abovementioned, the sole arbitrator qualified the [Buyer]'s letter dated 22 March 2005 as the notification of the avoidance of the contract in its part concerning under delivered goods as foreseen by Article 26 of the CISG.
Having taken into consideration the above stated provisions of the contract, the validity of the fact of the prepayment, and the under delivery of the goods and lawful avoidance of the contract, the Tribunal ruled that [Buyer]'s claims for the recovery of the debt from the [Seller] are reasonable and should be sustained.
3.5 Payment of penalty for the improper performance of obligation to deliver the goods
The [Buyer] claimed payment of the penalty for the improper performance of obligation to deliver the goods according to Article 6.2 of appendix No. 1 to the contract. As it follows from the statement of claim, while calculating the amount of penalty the [Buyer] relied on the general price of the non-delivered goods. But Article 6.2 directly foresees that the fixed penalty shall be applied in relation to the violation set forth in article 4.4 of the appendix 1 to the contract:
"In case of improper execution of the obligation to deliver the goods (violation set forth in Article 4.4 of this appendix), the [Seller] shall pay the [Buyer] a penalty of 5% of the price of the good, in relation to which the violation of this contract were occurred."
As established in Section 3.4 of this decision, the [Seller] violated the provisions of Article 4.4 of appendix No. 1 to the contract by not delivering the goods in the amount indicated in the accompanying documents. The [Buyer] did not proved the existence of any other violations listed in Article 4.4 of appendix No. 1 to the contract. Therefore, the price of the goods which are subject to violation by the [Seller] as set in Article 4.4 of appendix No. 1 to the contract, had to be calculated in relation to the duly established amount of goods that were not delivered.
The CISG does not regulate the payment of penalties. According to Article 7(2) of the CISG, such claims shall be regulated by subsidiary law -- the civil law of the Russian Federation, in this case. According to Article 330(1) of the CC of the RF the penalty (fine) is as determined by law or contract, the amount of money which shall be paid by the debtor to the creditor in case of the non-performance or improper performance of the obligations, particularly in case of late performance.
Taking into consideration the above, the Tribunal found that the [Buyer]'s claims for payment of penalties shall be sustained, but in a reduced amount.
3.6 Payment of penalty for the delay in delivery
In addition, the [Buyer] claims the payment of a penalty for the delay in delivery, amounting to 1% of the price of the non-delivered goods. This claim is lodged by the [Buyer] on the grounds of Article 6.3 of appendix No. 1 to the contract:
"The [Seller] shall pay to the [Buyer] penalty in the amount of 0.1% of the price of the non-delivered goods for each calendar day of delay, but not more than 1% of the price of the non-delivered goods."
According to Article 521 of the CC of the RF, the penalty established by law or by contract for the non-delivery or for the delay in delivery of goods shall be paid by the [Seller] before the factual performance of his obligation to complete the goods' delivery in the foregoing periods of delivery unless otherwise established by the law of by the contract.
The Tribunal noted that the penalty foreseen by Article 6.3 of appendix No. 1 to the contract is not covered by the penalty under Article 7.2 of appendix No. 1 to the contract, since these civil penalties are established for the different violations of the contract which determine the acceptability of their simultaneous payment. It must be taken into account that the contract establishes the upper limit of the amount of penalty and that such a limit was reached within only 10 days of the delay in goods' delivery (0.1% per day x 10 days = 1%).
Having taken into account that the contract foresees an obligation of the [Seller] to deliver the goods before 31 December 2004 and that the notification about the avoidance of the contract was sent by the [Buyer] only on 22 March 2005, the Tribunal found the [Buyer]'s claims for the penalty payments for the violation of the delivery terms reasonable and ruled that they must be sustained in full.
3.7 Payment of the arbitration fees
The [Buyer] asks the Tribunal to oblige the [Seller] to reimburse the [Buyer]'s expenditures for payment of the arbitration fees. Article 6(2) of the Regulations on Arbitration Fees and Expenses (Supplement to the Rules of the Tribunal) establishes:
"If a claim is granted in part, the arbitration fee shall be charged to the respondent in proportion to the amount of the granted claims, and the claimant shall bear the arbitration fee in relating to the amount of the claim that have been dismissed."
Taking into account that the claims of the [Buyer] were partially sustained the [Seller] must pay the arbitration fees and expenses of the [Buyer] in proportion to the claims sustained.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Respondent of the Russian Federation is referred to as [Seller] and Claimant of Hungary is referred to as [Buyer].
** Andriy Kril, student at National University "Kyiv-Mohyla Academy", paralegal at the law firm Kushnir, Yakymyak and Partners Attorneys & Counselors at Law, Kyiv, Ukraine.Go to Case Table of Contents