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CISG CASE PRESENTATION

Russia 13 April 2006 Arbitration proceeding 105/2005 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060413r1.html]

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

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Case identification

DATE OF DECISION: 20060413 (13 April 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: 105/2005

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Bahamas (claimant)

BUYER'S COUNTRY: Italy (respondent)

GOODS INVOLVED: [-]


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 6 ; 7 ; 8 ; 9 ; 14 ; 25 ; 33 ; 39 ; 49 ; 71 ; 74 ; 77 ; 81 [Also cited: Articles 44 ; 45 ; 55 ; 75 ; 76 ]

Classification of issues using UNCITRAL classification code numbers:

4B [Issues excluded: validity, penalty clauses, burden of proof, effect of contract on property in the goods, other exclusions];

6A [Autonomy of parties: modification of Convention by contract];

7C2 [Gap-filling (recourse to general principles on which Convention is based): good faith, reasonableness, cooperation];

8C [Interpretation of party's statements or other conduct: interpretation in light of surrounding circumstances];

9B ; 9C [Implied agreement on international usages; Practices established by the parties];

14A [Criterion for an offer (basic criterion): intention to be bound];

25B [Definition of fundamental breach: substantial deprivation of expectation, etc.];

33C [Time for delivery (where not fixed or determinable from contract): reasonable time after contract's conclusion]

39A2 [Requirement to notify seller of lack of conformity: buyer must notify seller within reasonable time];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

71A [Suspension of performance (grounds for suspension): apparent that a party will not perform substantial part of obligations];

74A ; 74A1 ; 74C [General rules for measuring damages: loss suffered as consequences of breach; Includes loss of profit; Other problems: causality];

77A [Obligation to take reasonable steps to mitigate damages];

81A ; 81C [Effect of avoidance on obligations: obligations of both parties under Convention; Restitution by each party of benefits received]

Descriptors: Scope of Convention ; Property in the goods ; Penalty clauses ; Validity ; Burden of proof ; Autonomy of parties ; General principles ; Good faith ; Reasonableness ; Cooperation ; Intent ; Usages and practices ; Formation of contract ; Fundamental breach ; Avoidance ; Delivery ; Lack of conformity notice, timeliness ; Suspension of performance ; Damages ; Profits, loss of ; Restitution

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): M.G. Rozenberg, Praktika of Mejdunarodnogo Kommercheskogo Arbitrazhnogo Suda pri TPP Za 2006 g. [Arbitration decisions rendered by the International Commercial Tribunal at the Russian Federation Chamber of Commerce and Industry in 2006], published by "Statut" (2008) No. 15 [129-148]

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

Tribunal of International Commercial Arbitration at the
Russian Chamber of Commerce and Industry

11 April 2006 [Case No. 105/2005]

Translation [*] by Alexander Morari [**]

1. SUMMARY OF RULING

      1.1 The parties agreed to regulate their international sales contract relationship by Russian substantive law. The relationship is, accordingly, regulated by the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG], which is an integral part of the Russian legal system, and by the provisions of the Russian Civil Code as the subsidiary statute [for matters not expressly settled by the CISG]. This reasoning is based on provisions of art. 15(4) of the Constitution of the Russian Federation, art.7(2) of the Russian Civil Code, and by art. 1(1)(b) CISG, taking into consideration that the place of business of one of the parties is in a State that is not a party to the CISG.

      1.2 Considering the optional character of a relevant provision of the CISG (art. 71 CISG), the International Commercial Arbitration Tribunal at the Chamber of Commerce and Industry of the Russian Federation in Moscow [hereinafter referred to as the Tribunal] holds that the contractual provision related to the right to suspend performance of a contractual obligation, which is worded in a broader manner than the CISG provision, is to be applied to the relationship between the parties. Therefore, the restrictions to this right fixed in art. 71 CISG cannot be taken into consideration.

      1.3 The order of extinction of similar liabilities in case of insufficient performance is determined in accordance with the provisions of the Russian Civil Code applicable by analogy of the law (art. 522), and having in mind that the CISG does not contain any provisions on this matter.

      1.4 The document which the parties named a contract was qualified by the Tribunal as an agreement of generally agreed terms for future contracts [i.e., a framework agreement], having in mind that this document lacked essential terms of the contracts. Such essential terms were stipulated by the parties in separate agreements named Supplements to the contract that were prepared later than the date on which the parties signed the document they named a contract.

      1.5 By virtue of art. 491 of the Russian Civil Code, the contractual provision that the [Seller] reserves the title to the goods until the goods are fully paid for by the [Buyer] does not deprive the [Buyer] of its right to dispose of the goods (including using them for manufacturing), if this is justified by the designation and properties of the goods. And subsequent avoidance of the contract by the [Buyer] does not exempt the [Buyer] from the obligation to pay the [Seller] for the used goods.

      1.6 While considering the issue of validity of a Supplement to the contract signed by the parties that was disputed by the [Seller], the Tribunal took into account all relevant circumstances in the relationships between the parties, in particular: the legal character of the document named by the parties a contract and [Seller]'s conduct evaluated in the light of art. 8 CISG.

      1.7 In view of the absence of any provision as to the period of delivery in the Supplement to the contract, it was determined based on provisions of art. 33 CISG.

      1.8 By virtue of the CISG, a fundamental breach of the contract committed by the [Seller] serves as a ground for the [Buyer] to avoid the contract and to claim damages. A discrepancy in the text of the contract in different languages regarding the rights of a party affected by the breach of the contract made it necessary to determine the meaning of this provision by taking into account the conduct of both parties while making and considering the claim.

      1.9 While considering the claim for loss of profit, specific provisions of the CISG and the general principles on which it is based were taken into account. This allowed determination of the amount to be recovered.

      1.10 It is held that, by virtue of art. 39 CISG, the [Buyer] lost its right to rely on non-conformity of the delivered goods (over delivery of individual positions of specification as well as delivery of the goods not mentioned in the specification at all) since [Buyer] accepted these goods, paid for them and subsequently did not make any complaints to the [Seller] (did not send corresponding notifications).

      1.11 In accordance with art. 9 CISG, a practice established by the parties in their relationships was taken into consideration.

2. FACTS AND PLEADINGS

The action was brought by the [Seller], an organization whose place of business is situated in the Bahamas, against the [Buyer], an Italian organization, in connection with non-payment of an invoice issued for goods that were delivered on terms FOB Russian port under a contract dated 26 November 2004. In accordance with the contract, invoice payment were to have been made within three days from the day on which the [Buyer] received the shipping documents and the invoice. The [Buyer] justified the non-payment of the invoice by a contract provision that ]Buyer] interpreted as allowing a party to suspend performance of its obligations without responsibility for delay in payment in situations in which the other party violates the agreed period for performing its obligations. The [Buyer] alleged that there was a significant short-delivery of goods.

      2.1 [Seller]'s claims

      The [Seller] seeks to recover from the [Buyer] the price of the delivered installment of goods and the contractual penalty for violation of payment terms.

      2.2 [Buyer]'s defense and counter-action

      The [Buyer], in its statement of defense, contested the validity of [Seller]'s claims. Without denying its obligation to pay for the delivered installment of goods, the [Buyer] stated that its suspension of performance was duly based on the provisions of the contract as well as art. 71 CISG.

The parties disputed the amount of goods to be delivered. The [Seller] stated that it did not sign one of the Supplements to the contract in the first place, whereas the other Supplement is not valid as it lacks a provision on delivery periods which is an essential term by virtue of the provisions of the contract.

The [Buyer] brought a counter-action in which it claimed:

   -    Avoidance of the contract;
 
   -    Recovery of the loss; and
 
   -    Penalty for delay in delivery; as well as
 
   -    Offset of the claims out of the initial action and counter-action.

Also, both parties claimed recovery of the expenses connected with legal representation and arbitration costs.

The [Buyer] submitted a number of procedural applications:

   -    To invite another Russian organization as a third party to the original action;
 
   -    To invite the same organization as a co-Respondent [along with the Seller] in the counter-action;
 
   -    To make a decision on interim measures of protection in the counter-action;
 
   -    To conduct the arbitral proceedings in Russian and English.

The [Buyer] withdrew its claim for an offset and the [Seller] reduced the claims it submitted by the amount of the penalty for delay in delivery specified by the [Seller].

3. TRIBUNAL'S REASONING

The Award* of the Tribunal contained the following main points.

* One of the arbiters expressed a dissenting opinion to this Award.

      3.1 [Jurisdiction of the Tribunal]

      The Tribunal's jurisdiction to arbitrate this case is based on art. 1(2) of the Law of the Russian Federation "On International Commercial Arbitration", para. 2 of the Tribunal Regulations which is Appendix No 1 to the mentioned Law, and section 1(2) of the Rules of the Tribunal. According to these provisions and based on an agreement between the parties, the Tribunal's jurisdiction covers disputes arising out of contracts and other civil-law relationships in international economic activities if at least one party's place of business is abroad.

The Tribunal considers disputes provided there is a written agreement between the parties to refer to its jurisdiction over an existing or a potential dispute.

The contract concluded by the parties and out of which the dispute arose is a contract for international sale of goods by its nature. The parties to this contract are:

   -    [Buyer], a legal entity and commercial organization whose place of business is in Italy; and
 
   -    [Seller], a legal entity and commercial organization whose place of business is in the Bahamas.

Clause 13.1 of the contract dated 26 November 2004 stipulates that:

"All disputes and differences that can arise out of the present contract or in connection thereof shall be settled by the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry, Moscow, [the Tribunal] in accordance with the Rules of this Court. Awards by this Tribunal shall be final and binding on both parties."

Taking into account the above, the Tribunal declared itself competent to consider the present dispute.

      3.2 [Applicable law]

      The contract concluded by the parties contains a clause 13.2 according to which:

"Relations of the parties that are not settled by the contract shall be governed by the substantive law of the Russian Federation."

Taking into account that Russia is a Contracting State to the CISG, and that the parties did not exclude applicability of the CISG based on art. 6 CISG, the Tribunal, by virtue of art. 1(1) CISG concluded that the CISG is applicable to the relations between the parties.

As far as the subsidiary law applicable to the relations of the parties out of the contract for matters not expressly settled by the CISG and that cannot be settled in conformity with the general principles on which it is based, the Tribunal finds that following art. 28(1) of the Law of the Russian Federation "On International Commercial Arbitration", section 13(1) of the Rules of the Tribunal, and art. 7(2) CISG, such matters shall be settled on the basis of the applicable provisions of the substantive law determined by the agreement between the parties.

Therefore, the CISG shall be applied to the settlement of the present dispute, whereas provisions of the Russian substantive law are applicable to the matters not regulated by the CISG.

      3.3 [Equality of the parties]

      While arbitrating the present dispute, the Tribunal is guided by a fundamental procedural principle of international commercial arbitration (art. 18 of the Law of the Russian Federation "On International Commercial Arbitration"), according to which the parties shall be treated with equality and each party shall be given a full opportunity to present its case.

      3.4 [Procedural applications by the Buyer]

      Having considered [Buyer]'s procedural applications, the Tribunal came to the following conclusions.

            3.4.1 [Language of the arbitration]

            The Tribunal cannot grant [Buyer]'s application to conduct the hearings in two languages (Russian and English) since the [Seller] did not give its consent to that and such a consent is required by virtue of para.10 of the Rules of the Tribunal to which there is a reference in the arbitration clause agreed by the parties. At the same time, for the purpose of procedural economy, the Tribunal considers it possible to grant [Buyer]'s application to consider the case in both Russian and English, having in mind that the contract is concluded in two languages and that, in accordance with the contract (clause 15.4), all messages, declarations and claims are to be communicated in English.

            3.4.2 [Invitation of a third party]

            [Buyer]'s application to invite a named Russian organization as a third party to the original action cannot be granted since, based on art. 35 of the Rules of the Tribunal, a third party may only join in the arbitral proceedings with the consent of the parties in dispute. At the hearings, the [Seller] objected to participation of this organization in the arbitration as a third party.

            3.4.3 [Application to bring a co-respondent into the arbitration]

            In connection with [Buyer]'s application to invite a Russian organization as a co-respondent in its counter-action, the Tribunal explained that granting this application will require postponement of the hearings since materials of the case have not been handed to this organization. The question of this organization's participation in the arbitration as a co-respondent in the counter-action will be considered by the Tribunal after the materials of the case are handed over to this organization and after it expresses its position on this application in accordance with provisions of the Rules of the Tribunal and the Law of the Russian Federation "On International Commercial Arbitration" related to the Tribunal's jurisdiction. Receiving these explanations, the [Buyer] recalled the application.

            3.4.4 [Application for interim measures of protection]

            In accordance with section 30 of the Rules of the Tribunal, [Buyer]'s application for interim measures of protection in respect of its counter-action shall not be granted since the [Buyer] failed to submit evidence of [Seller]'s possible insolvency. Besides, what the [Buyer] offered was not provision of appropriate security in connection with interim measures of protection in the counter-action but rather security in the original action in which the [Seller] did not make an application for interim measures of protection.

      3.5 [The merits of the case]

      Having considered the merits of the claims of the [Seller] in the original action, the Tribunal established that:

In accordance with clause 6.2.1 of the contract, the [Buyer] is obligated to pay 100% of the invoice by way of a bank transfer to [Seller]'s account within three working days from the day on which the [Buyer] receives by fax the copies of shipping documents and the invoice.

It follows from the materials of the case that the [Seller] delivered to the [Buyer] an installment of goods and on 1 June 2005 faxed to the [Buyer] a copy of invoice No. 013-5-5 dated 31 May 2005. However, copies of shipping documents, stipulated by clause 6.2.1 of the contract, and namely:

   -    Commercial invoice;
 
   -    A complete set of original clean on-board bills of lading;
 
   -    Certificate of origin certified by the Russian Chamber of Commerce;
 
   -    Phytosanitary Certificate with indication that the goods underwent thermal treatment; and
 
   -    Packing list

were submitted to the [Buyer] no sooner than 13 June 2005.

In accordance with clause 14.2 of the contract, a party has the right to postpone performance of its obligations, without responsibility for delay, in the event that the other party violates the agreed periods of time for performing its obligations. A party suffering from such a violation has the mentioned right by virtue of the contract, which is independent of the right to claim the penalty and the loss also stipulated by the contract (clause 14.1). While considering the issue of [Buyer]'s right to apply this provision of the contract, the Tribunal takes into account art. 28(3) of Law of the Russian Federation "On International Commercial Arbitration" in accordance with which in all cases the Arbitral Tribunal shall decide in accordance with the terms of the contract.

Having examined the circumstances of the case and supplementary materials submitted by the parties in the hearings, the Tribunal concluded that on 16 June 2005, when, according to clause 6.2.1 of the contract, [Buyer]'s obligation to pay 100% of the invoice arose, the [Seller] committed a delay in performing its contractual obligation to deliver the goods.

The [Buyer] alleged, and the [Seller] failed to refute, that the eventual shortage in the delivery under contract Supplement 3 of 9 December 2004 amounted to 73 per cent of the quantity stipulated by it and, if one takes into account the total quantity of non-delivered goods under Supplement 3 of 9 December 2004 and Supplement 4 of 27 January 2005, the shortage of delivery amounted to 26 per cent of the total quantity stipulated in these Supplements. At the time the arbitration commenced, this delay [in delivery] had not been remedied.

The Tribunal takes into consideration clause 1 of the contract, which allows the [Seller] to deliver the goods:

"with a margin of more or less than 10 per cent of the total quantity and 20 per cent on sizes and types, at [Seller]'s discretion."

However, the Tribunal cannot agree that the deviation committed by the [Seller] lies within the tolerance in total quantity stipulated by the contract.

Also, the Tribunal cannot agree with [Seller]'s arguments that the short delivery under Supplement 3 of 3 December 2004 is compensated for by the over-deliveries under Supplements 1 and 2 to the contract as well as by the reference to Supplement 5 of 21 March 2005.

Moreover, the Tribunal draws attention to the fact that the total shortage in delivery under the contract (see para. 3.6 of the present Award) significantly exceeds the above-mentioned amounts of non-delivery (delay in delivery) committed by the [Seller].

             3.5.1 [Extinction of similar liabilities in case there is insufficient performance]

            Since the CISG does not contain any provisions with regard to extinction of similar liabilities in case there is insufficient performance, the Tribunal made recourse to provisions of Russian civil legislation. By virtue of art. 522 (1) of the Russian Civil Code,

"In cases where goods of the same name are delivered by the supplier to the buyer at once under several contracts for delivery and the quantity of delivered goods is insufficient for the extinction of the supplier's liabilities under all contracts, the delivered goods shall be counted towards the execution of the contract to be indicated by the supplier when he delivers goods or immediately after this delivery."

As recognized in the [legal] literature (see: Commentary to the Russian Civil Code, Part Two, [], Edited by O.N. Sadikov, 2006, p.111), this approach by analogy of the law (art. 6 of the Russian Civil Code) can also be applied to cases where similar liabilities exist under one and the same contract and the performed part is not sufficient for the extinction of these liabilities. It is clear from the materials of the case that, while loading the goods, the [Seller] made its own decisions as to under which of the Supplements it was delivering. Having expressed its will, the [Seller] is not entitled to maintain afterwards that the over-delivery under a Supplement can cover the shortage in delivery [of the goods] under other Supplements.

Since the contract of 26 November 2004 concluded between the [Seller] and the [Buyer] does not contain essential terms that are required for a contract to be considered concluded (art. 14 CISG and with due account of provisions of arts. 55 and 4 CISG and arts. 485, 424 and 432 of the Russian Civil Code) and such essential terms are determined in corresponding Supplements to the contract, the Tribunal comes to the conclusion that this contract is merely a set of generally agreed terms for future contracts [i.e., a framework contract], whereas each of the Supplements to the contract is, by its nature, an independent contract for delivery to which the mentioned generally agreed terms are to be applied. The Tribunal takes into consideration the fact that most of the Supplements to the contract were signed after 26 November 2004, that is, after the day on which the parties signed the document which they named a contract.

Therefore, [Seller]'s right to deliver the goods "with a margin of more or less than 10 per cent of the total quantity and 20 per cent on sizes and types at [Seller]'s discretion" that is stipulated by clause 1 of the contract cannot be applied to all valid Supplements to the contract simultaneously. The Tribunal believes that the mentioned margin should be calculated individually for each of the Supplements to the contract, having in mind the total quantity of the goods indicated in a specific Supplement.

As far as the over-delivery by the [Seller] under Supplements 1 and 2 to the contract, the excess in delivery falls within the margin of more than 10 per cent stipulated by the contract.

Based on that reasoning, the Tribunal holds that the [Buyer] justifiably applied its right to suspend the performance of its obligation to pay invoice No. 013-5-5 of 31 May 2005 in accordance with clause 14.2 of the contract. By virtue of the same provision of the contract, the [Buyer] is not responsible for the delay in paying the invoice.

Taking this into account, [Seller]'s claim for recovery from the [Buyer] of a penalty for delay in paying the above-mentioned invoice shall not be granted.

At the same time, the Tribunal notes that [Buyer]'s reference to art. 71 CISG as an additional ground for suspension of the obligation to pay for the delivered goods cannot be considered as well-founded. Art. 71 CISG is not applicable to situations where an obligation is performed by one of the parties and the other party, anticipating the future failure to perform, suspends its obligation to pay for the goods already delivered as an interim measure for protection of its future claims. By their legal nature, such actions are a kind of retention mentioned in art. 359 of the Russian Civil Code. However, as recognized in Russian legal literature and the Tribunal's practice, in accordance with Russian civil legislation, retention of monetary funds as a measure ensuring performance of obligations (except situations provided by the law or contract) is not allowed at all (see: Practice of the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry in 2003 [], p. 182-185).

Having in mind art. 81(2) CISG, which provides for the consequences of contract avoidance and according to which the party that has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract, the Tribunal states that [Seller]'s claim for recovery from the [Buyer] of the price of the goods delivered by the [Seller] (less the amount by which it reduced this claim in connection with the delay in delivery of a part of the goods committed by it) is to be granted having in mind that the Tribunal grants [Buyer]'s claim for avoidance of the contract on the basis of arts. 25 and 49 CISG (see para. 3.6 of this Award).

While examining the legal meaning of the contractual provision (clause 7.1) according to which the property in the goods is transferred to the [Buyer] only after it pays 100 per cent of the price of the goods, the Tribunal kept in mind the following points:

First, art. 4(b) CISG expressly provides that it does not cover the effects which the contract may have on the property in the goods sold. Pursuant to art.7(2) CISG, this issue is to be settled on the basis of the Russian law applicable as the subsidiary statute.

Second, in accordance with art. 491 of the Russian Civil Code, the buyer shall not have the right to alienate the goods or dispose of them in any other way before the transfer of the right of ownership to it unless, in particular, the contrary follows from the designation and property of the goods. Taking into account this straightforward provision of the Russian civil legislation, it should be concluded that the [Buyer] was entitled to use the goods meant for processing, which was known by the [Seller] a priori.

Any other interpretation of this contractual provision would contradict the nature of the relationship between the parties. However, usage by the [Buyer] of the goods delivered to it by the [Seller] does not exempt it from the obligation to pay for the delivered goods.

      3.6 [Buyer's counter-action]

      As follows from the circumstances of the case and explanations provided by the parties, signing of Supplements to the contract took place by way of exchange of the documents by fax. The Supplements to the contract were prepared the following way:

   -    The [Seller], making itself familiar with the manufacturer's sales plan for the coming quarter, would put together a plan and submit it for [Buyer]'s review.
 
   -    Based on the plan obtained from the [Seller], the [Buyer] would compose a specification indicating the desired assortment and quantity of the goods and send it to the [Seller].
 
   -    Further, the [Seller] after having agreed on the terms of the planned delivery with the manufacturer would draw a legally significant Supplement to the contract in the agreed form, indicating the price of the goods and the terms of delivery, and would send a version to the [Buyer], whereupon the [Buyer] would sign the Supplement and return it to the [Seller] by fax.

At the arbitration hearings, the [Seller] alleged that Supplement 5 of 11 March 2005 was never sent by the [Seller], was not composed in the form specified by the [Seller], and contained a distorted stamp, which, in the [Seller]'s opinion, suggests that the contested document was actually falsified.

At the same time, on page 8 of the statement of defense, the [Buyer] states that:

"Having agreed upon the prices and the specification, the [Buyer] received from the [Seller] signed and sealed Supplement 5 of 11 March 2005."

At the hearing, the [Buyer] explained that the indicated signed and sealed Supplement was obtained from the [Seller] on 18 March 2005.

However, it follows from the fax receipt on Supplement 5 of 11 March 2005 submitted by the [Buyer] that this document was received by the [Buyer] on 18 March 2005 at 4:11 p.m., whereas the confirmation of the receipt of the indicated document submitted by the [Seller] indicates 9:36 a.m. and has no information as to the date of receipt.

At the same time, the Tribunal cannot disregard the fact that the [Seller] itself admitted (in a fax sent to the [Buyer] dated 20 June 2005) that it was willing to arrange with the new owner of the manufacturer everything necessary for the delivery to the [Buyer] of the balance in the total quantities of goods that included the quantity indicated in Supplement 5 of 11 March 2005.

With this in mind, the Tribunal rules that, even if Supplement 5 of 11 March 2005 was concluded in unclear circumstances, [Seller]'s subsequent conduct proves the existence of its obligation to deliver the goods as performance under this Supplement. This reasoning by the Tribunal corresponds to the provisions of art. 8 CISG and the principle of good faith in international trade on which the CISG is based.

Having considered the parties' arguments as to the validity of Supplement 5 of 21 March 2005, the Tribunal came to the following conclusions:

      -   This Supplement 5 does not contain any terms of delivery of the goods. At the same time, clause 5.1 of the contract provides that delivery and acceptance of the goods shall be executed in accordance with the schedule and terms fixed in Supplements to the contract. The [Seller], without denying the fact that both parties signed Supplement 5 of 21 March 2005, submits that it is merely a draft and does not create any obligations for the [Seller] by virtue of clauses 5.1, 15.1, and 15.3 of the contract, since this Supplement lacks any information as to the period of delivery which is an essential term in accordance with the contract. [Seller] alleges that, when signing the Supplement in question, [Seller]'s representatives acted with that assumption in mind.

      -   According to art. 4 CISG, the CISG does not cover the validity of a contract or of any of its provisions or of any usage; therefore, to come to a conclusion in this respect, the Tribunal deems it necessary to make recourse to the subsidiary statute, that is, the Russian Civil Code. By virtue of art. 432 (1) of the Russian Civil Code, essential terms are all those in respect of which an agreement is to be reached upon request of at least one of the parties. Indeed, with this provision in mind, a contract, in which there is no agreement between the parties regarding all essential terms, is not considered concluded.

However, a number of points characteristic of this specific case should be taken into account.

      First, as indicated above (see para. 3.5 of this Award), the contract between the parties of 26 November 2004 is merely a set of generally agreed terms for future contracts [i.e., a framework agreement], whereas each of the Supplements to the contract is, by its nature, an independent contract for delivery to which the mentioned generally agreed terms are to be applied. This means that in case of any discrepancies between a Supplement and the contract, the terms of the Supplement have priority over the terms of the contract. In this connection, clause 15.3 of the contract, to which the [Seller] refers, cannot be interpreted as prohibiting parties from including in a Supplement terms different from those in the text of the contract. It follows from clause 15.3 of the contract that only amendments and modifications to the contract are to be carried out as settled in it.

      Second, if a Supplement contains a reference to the contract, then the conditions of clause 15.1 of the contract are met and there is no requirement to specifically indicate in the Supplement that it is an integral part of the contract.

      Third, pursuant to art. 8 CISG, statements made by and other conduct of a party are to be interpreted according to its intent where the other party knew or could not have been unaware what that intent was. If this other party did not know and could not know the intent of the party that made a statement, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. Criteria for defining what this understanding by a reasonable person actually are specified in art. 8(3) CISG.

Analysis of the circumstances of the present case
brings the Tribunal to the following conclusions:

Having received from the [Seller] Supplement 5 of 21 March 2005 signed by it, the [Buyer] did not know and could not know that the [Seller] did not believe that this offer by the [Seller] was not deemed to create obligations for the parties. Thus, [Seller]'s intent, to which it refers in this dispute, even if it was what the [Seller] claims it to have been, cannot be taken into account by the Tribunal.

To determine the understanding of a reasonable person acting in the same quality as the [Buyer] and in the same circumstances, the Tribunal took into account the following:

      -   The parties conducted negotiations regarding a price increase in Supplement 5 and agreed to an increased price that was fixed in the mentioned Supplement on 21 March 2005.

      -   [Seller]'s subsequent conduct proves that [Seller] itself treated its obligations under Supplement 5 of 21 March 2005 as existing and valid. To illustrate this, the Tribunal notes Invoice No. 013-5-5 issued by the [Seller] for an installment of goods which contains a reference to the fact that these goods are delivered to the [Buyer] under a number of Supplements including, among others, Supplement 5 of 21 March 2005. Besides, from the materials submitted by the [Buyer], it is clear that the [Seller], in fact, performed delivery of a part of the goods corresponding to the specification contained in Supplement 5 of 21 March 2005 and those goods were accepted by the [Buyer].

      -   As indicated above, in connection with Supplement 5 of 11 March 2005, the [Seller], in the fax of 20 June 2005, acknowledged its obligation to deliver the balance of the total quantities of goods that included the quantity indicated in Supplement 5 of 21 March 2005.

Therefore, the Tribunal holds that Supplement 5 of 21 March 2005 cannot be considered not concluded and is in fact a legally significant obligation binding both [Seller] and [Buyer] despite the fact that this Supplement lacks information regarding periods of delivery.

Absence of the provision regarding periods of delivery in a binding and valid obligation to deliver under Supplement 5 of 21 March 2005 leads to applicability to the relations between the parties of art. 33 CISG, according to which the [Seller] is to deliver the goods within a reasonable time after conclusion of the contract. Taking into account the circumstances of the present case, the Tribunal defines such a reasonable time as the period starting from 1 April 2005 and ending on 30 July 2005.

            3.6.1 [Avoidance of the contract and recovery of the loss of profit]

            Turning to the issue of avoidance of the contract [], the Tribunal holds that, in accordance with art. 49(1) CISG, the [Buyer] had reasonable grounds to declare the contract avoided since [Seller]'s significant failure to perform its obligation to deliver goods under Supplement 5 of 11 March 2005 and Supplement 5 of 21 March 2005 amounted to a fundamental breach of contract as provided in art. 25 CISG.

With this in mind, the Tribunal grants [Buyer]'s claim to avoid the contract concluded between the [Seller] and the [Buyer], thereby discontinuing all non-performed obligations of the parties arising from the provisions of this contract.

While considering [Buyer]'s claim for recovery of the loss of profit as a result of [Seller]'s failure to perform its obligations, the Tribunal's ruling is based on the following provisions of the CISG.

By virtue of art. 81(1):

"Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due."

According to art. 74 CISG:

'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."

Art. 77 CISG provides that:

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If it fails to take such measures, the party in breach may claim a reduction in the damage in the amount by which the loss should have been mitigated."

The Tribunal did not consider the applicability of arts. 75 and 76 CISG which provide how to determine the damage upon avoidance of the contract since the [Buyer] did not refer to these provisions and based its claim on the provisions of art. 74 CISG.

Moreover, in accordance with art. 7(2) CISG, the Tribunal took into account the general principles on which the CISG is based, and in particular:

   -    Adherence to good faith in international trade;
 
   -    Reasonableness of the parties' conduct; and
 
   -    Cooperation while performing mutual obligations.

Having examined the facts of the case, the Tribunal found that while performing the contract, the [Seller] not only committed numerous over-deliveries in respect of individual items mentioned in the specifications contained in the Supplements to the contract, but also delivered goods that were not covered by these specifications at all.

Since these goods were duly accepted and paid for by the [Buyer] and the latter did not make any complaints to the [Seller] in this respect, the [Buyer], in accordance with art. 39 CISG, lost its right to rely on a lack of conformity of the delivered goods with the provisions of Supplements to the contract.

By virtue of art. 9 CISG, such a practice established between the parties is binding on both parties. Consequently, all the goods delivered by the [Seller] and accepted by the [Buyer] are to be taken into consideration while calculating the total amount of goods delivered by the [Seller] under the contract. In this connection, [Buyer]'s representatives made a statement at the hearings not to take into account the goods delivered in the quantity and of the type not fixed in the specifications contained in the Supplements to the contract. The Tribunal does not consider this statement well-founded.

While examining [Buyer]'s claim for recovery of the damages, the Tribunal noted a discrepancy in the Russian and English versions of clause 14.1 of the contract. The Russian version provides that the party that did not duly performed its obligations under the contract shall recover from the other party "[Russian text not reproduced]" (literally, "all possible damages") whereas the English version contains this wording: "all possible expenses."

[Buyer]'s representatives alleged that the Russian version should be taken into account. [Seller]'s representatives referred to the absence of causality between the damages claimed by the [Buyer] and [Seller]'s conduct which [Seller]'s representatives further alleged did not lead to any breach of the contract. In addition, [Seller]'s representatives confirmed [Buyer]'s fundamental right for recovery of "all possible damages" as indicated in the Russian version of the contract. This, in their opinion, proves that the parties have coinciding interpretations of the notions of the two versions of the contract. The Tribunal notes that the CISG mentions the notion of "damages" (art. 74) whereas exclusion of the right to claim the loss of profit is provided only for a specific situation (art. 44 CISG).

Based on clause 14.1 of the contract and arts. 45, 74 and 81 CISG, the Tribunal acknowledges [Buyer]'s right to recovery of the damages. At the same time, the Tribunal does not consider proved the amount of the loss of profit suffered by the [Buyer] as the result of the breach of the contract committed by [Seller] for the following reasons:

In the counter-action, the [Buyer] did not present evidence that it bought goods as a substitute fot the goods that were not delivered by the [Seller] and does not claim:

   -    To recover from the [Seller] of the difference between the contract price and the price of the substitute transaction which is allowed by art. 75 CISG; or
 
   -    To be paid the difference between the price of the goods under the contract and the current price in the place where the delivery ought to have been carried out (i.e., in Russia, having in mind that the delivery was based on the terms of FOB Russian port), which is allowed by art. 76 CISG.

In this connection and based on art. 76(2) CISG, the calculation of the loss of profit presented by the [Buyer] cannot be taken into account since it could not have resold the contractual goods at market price fixed by Milan Chamber of Commerce in Italy that is correspondingly published.

While considering balance sheet reports presented by the [Buyer] as evidence of the loss of profit (proving, in [Buyer]'s opinion, the lost profit as a result of [Seller]'s failure to perform), the Tribunal notes the following:

      First, the [Buyer] was aware of the fundamental breach of contract committed by the [Seller] as early as June 2005 (that is when the delivery period under Supplement 5 of 11 March 2005 and Supplement 5 of 21 March 2005 was not over yet). However, the [Buyer] failed to prove that it took all reasonable measures to mitigate the loss as required by art. 77 CISG.

      Second, the [Buyer] did not contest [Seller]'s statement that the level of prices on the Russian market did not change. The Tribunal had a rather critical opinion of this statement made by the [Seller] having in mind that the [Seller] itself put the question of price modifications in the contract Supplements referring to an increase in price. However, based on section 34 of the Rules of the Tribunal, the Tribunal states that the burden of proof lies with the party making a claim.

      Third, decrease of profit could have been due to other reasons that were not caused by [Seller]'s violations. The evidence presented by the [Buyer] does not prove causality in inflicting the total amount of losses. Yet, the Tribunal has no doubt that the non-delivery by the [Seller] did inflict damages.

Under such circumstances, granting [Buyer]'s right for recovery of the loss of profit not obtained as a result of [Seller]'s violations of its obligations, the Tribunal refers to art. 74 CISG which, as noted above, provides that recoverable 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 it then knew or ought to have known, as a possible consequence of the breach of contract. Art. 9(2) CISG expressly provides that, unless otherwise agreed, the parties are considered to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned. Application of trade usages while considering international commercial disputes is expressly provided by the Law of the Russian Federation "On International Commercial Arbitration" (art. 28(2)) and the Rules of the Tribunal (section 13(1)). Such usages include Incoterms 2000 recognized as a trade usage in force in Russia and to which there is a reference in the contract between the parties (clause 1).

In accordance with Incoterms 2000, in a sale of goods on the basis of CIF the minimum insurance must be the price of the goods plus 10 per cent (i.e., 110 per cent of the price of the goods). As indicated in ICC Guide to Incoterms 2000, the additional 10 per cent are supposed to cover the profit anticipated by the [Buyer] from the sale of the goods.

Based on that provision of customary law, the Tribunal states that the average profit margin of an organization, irrespective of the area of activity, amounts to 10 per cent, which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract as a possible consequence of the breach of contract. Yet, the contract between the [Seller] and the [Buyer] provides that the delivery is to be performed based not on CIF terms, which require the [Seller] to contract for carriage, but rather on FOB terms, which require the [Seller] to deliver the goods to a carrier specified by the [Buyer]. With this in mind, the Tribunal states that the calculation of the loss of profit should be based on the contractual price of the non-delivered goods as well as the cost of freight of the said goods to [the named port in] Italy.

Taking into consideration that:

   -    Clause 1 of the contract allows the [Seller] to deliver the goods "with a margin of more or less 10 per cent of the total amount;" and
 
   -    While calculating the amount of penalty and loss of profit, the parties are using a summary settlement of accounts based on the total quantity of the non-delivered goods,

the Tribunal rules that, while calculating the amount of the loss of profit, the quantity of goods non-delivered by the [Seller] is to be decreased by 10 per cent of the total quantities of the goods sold under the contract.

It is widely acknowledged in international commercial practice that a party is allowed to use the margin which is based on the total quantity of goods. As evidence of this, the Tribunal refers to Uniform Customs and Practice for Documentary Credits (art. 39 thereof), which confirm existence of a generally recognized practice used in international trade.

Based on the materials of the case, the Tribunal reached its determination regarding:

   -    The margin specified by the contact;
 
   -    The total quantity of the goods that were to be delivered under all Supplements to the contract; and
 
   -    The total quantity of the goods actually delivered according to the invoices submitted by the [Seller]; and, finally,
 
   -    The quantity of non-delivered goods.

The Tribunal believes that the average price of the goods non-delivered by the [Seller] can be calculated based on the average price of the goods sold under the contract as a quotient of the price of the total quantity of the goods sold under the contract and the total quantity of the goods sold under the contract. In accordance with calculations submitted by the [Buyer], the Tribunal determined the average freight cost per unit of goods [to a specified port in] Italy. Based on that, the Tribunal determined the contractual price of the goods non-delivered by the [Seller], which included freight costs. The Tribunal was unable to take into account the insurance cost (also included into the CIF price) since the [Buyer] did not mention in the calculations its average insurance cost as long as it bore such cost.

On these grounds, the Tribunal deems it possible to grant [Buyer]'s claim for recovery of the loss of profit in the amount of 10 per cent of the contractual price of the goods non-delivered by the [Seller] increased by the cost of the freight of the goods to [the named port] in Italy.

However, having in mind that:

   -    Deliveries were discontinued as early as end of May 2005;
 
   -    It was clear to the [Buyer] that the deliveries would not be renewed; and
 
   -    [Buyer]'s conduct by not making use of its right to avoid the contract on the basis of arts. 25 and 49 CISG and to buy goods to substitute the non-delivered goods, which constitutes a violation of such general principles on which the CISG is based as reasonableness and cooperation between the parties,

the Tribunal considers it possible to apply art. 77 CISG providing that:

"A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach."

Based on that, the Tribunal reduces the amount of lost profit to be recovered by the [Buyer] from the [Seller] by 25 per cent.

            3.6.2 [Recovery of the penalty]

            Having considered [Buyer]'s claim for recovery from the [Seller] of the penalty for delay in delivery in accordance with clause 1.4.1 of the contract, the Tribunal came to the following conclusions.

In accordance with clause 14.1 of the contract, if a party to the contract fails to properly perform its obligations under the contract and/or breaches the contract, the latter shall reimburse the other party all possible damages as well as pay the penalty in the indicated amount. Since the CISG does not settle the question of penalties and this question cannot be settled on the basis of the general principles on which the CISG is based, the Tribunal deems it possible to refer to the provisions of the Russian substantive law applicable as the subsidiary statute. Based on art. 394(1) of the Russian Civil Code, the Tribunal comes to the conclusion that the parties stipulated in the contract a situation when damages can be recovered in full and in addition to the penalty, i.e., the penalty is punitive in nature.

In accordance with clause 14.1(a) of the contract, the penalty is recoverable, in particular, for a delay in delivery of a part or total quantity of goods as a result of [Seller]'s failure to meet the delivery terms indicated in the contract. The deliveries under Supplements concluded in the second quarter of 2005 were due by 1 August 2005 and, according to clause 14.1(a) of the contract, the penalty to be paid is fixed at 0.1 per cent for each day of delay but no more 4.5 per cent. Therefore, it is obvious that the penalty to be paid reached its maximum possible level by mid-September 2005.

While determining the amount of penalty, the Tribunal took into account the quantity of the goods delivered with delay and those non-delivered at all (less the contractual margin) and the average price per unit of goods that were to be delivered under the contract. The amount so determined is larger than the amount of the claim made by the [Seller].

Keeping in mind that the recovered amounts cannot exceed the amounts of the claims, the Tribunal granted [Buyer]'s claim for recovery of the penalty within the amount of the claim.

Here, the Tribunal took into account also the fact that the [Seller] reduced the amount of its claim in the original action by the amount of the penalty for delay in delivery to be recovered by the [Buyer].

      3.7 [Application for an offset]

      Despite the fact that at the hearings of 14 February 2006, the [Buyer] recalled its application for an offset of claims made by the [Seller] in the present case and claims made by the [Buyer] in the counter-action for recovery of the losses, the Tribunal, guided by the principle of procedural economy, in particular while executing the present Award, found that the amounts granted to the parties in this case are to be offset.

      3.8 [Arbitration fee]

      According to sections 6 and 7(5) of the Schedule of Arbitration Fees and Costs (Appendix to the Rules of the Tribunal), the arbitration fee in the original action and the counter-action is apportioned between the parties in proportion to the amounts of granted and dismissed claims.

      3.9 [A particular apportionment of the arbitration fees]

      In accordance with sections 9 and 10 of the Schedule of Arbitration Fees and Costs, the successful party may request the reasonable expenses incurred by it in the course of the arbitral proceedings, in particular, the expenses made to protect its interests through legal representatives yet, taking into account the circumstances of this case, the Tribunal may order a different apportionment of the arbitration fees.

Both parties submitted evidence of the incurred expenses made to protect their interests through legal representatives in the present dispute.

Taking into account the circumstances of this particular case, the Tribunal comes to the conclusion that it is fair and reasonable to decide that the parties owe each other approximately identical amounts as reimbursement of expenses for attorneys' fees. Since the dispute arose out of the contract in connection with breaches of the contract committed by both parties, the Tribunal holds that each of the parties must bear its own expenses for legal representatives individually.


FOOTNOTES

* This is a translation of data on Proceeding 105/2005 of 11 April 2006 of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in: Rozenberg ed., Arb. Praktika, published by "Statut" (2008), No. 15 [129-148]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Bahamas is referred to as [Seller]; Respondent of Italy is referred to as [Buyer].

** Alexander Morari, born in the Republic of Moldova, currently an international business consultant based in Warsaw, Poland.

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Pace Law School Institute of International Commercial Law - Last updated September 8, 2009
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