Russia 30 June 2006 Arbitration proceeding 81/2005 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060630r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 81/2005
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Russian Federation (respondent)
BUYER'S COUNTRY: Switzerland (claimant)
GOODS INVOLVED: [-]
APPLICATION OF CISG: Yes, but the contract provided that the parties were to look first to the Russian Commercial Code and only to the CISG where it contradicts that
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
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. 22 [193-203]
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 Following the principle of autonomy of the parties and the provisions of the Vienna Convention of 1980 (Art. 6), that allow parties to exclude the application of this Convention or derogate from or vary the effect of any of its provisions, the Tribunal concluded that the agreement of parties to the international sales contract, commercial enterprises of which are situated in States parties to the Vienna Convention of 1980, that calls for the application to the dispute of the substantive law of the Russian Federation [RF], and in cases of its contradiction with the rules of international law, the applicability of CISG, shall be understood to mean that the basic statute that regulates the parties' relations in connection with this contract shall be the Civil Code [CC] of the RF but, in case of discrepancies between the CC of the RF and the CISG, the rules of the CISG shall be applied.
1.2 Having established that the [Buyer] was in fundamental breach of the contract, the Tribunal recognized the unilateral refusal of the [Seller] to execute the contract. Therefore, [Buyer]'s claim that the [Seller] was obligated to deliver the goods was not sustained.
1.3 Since the [Buyer] did not present satisfactory evidence to support [Buyer]'s allegation that [Seller]'s notice of unilateral avoidance of the contract was handed to an unauthorized person, the Tribunal concluded that [Buyer] received this notice and consequently the contract was terminated.
1.4 However, taking into account the provisions of the CC of the RF, the [Seller]'s withholding of goods subject to one contract as security of the performance of obligations under another contract was not considered reasonable.
2. FACTS AND PLEADINGS
The claim was lodged by the [Buyer], a Swiss firm, against the [Seller], a Russian organization, on the basis of the international sales contract concluded by the parties on 22 March 2005.
The [Buyer] asked the Tribunal to require [Seller] to execute the contractual obligations to deliver the goods purchased for the sum indicated in the statement of claim.
The [Buyer] based its claims on the fact that it prepaid for the goods but the [Seller] did not delivered the goods.
In the statement of defense, the [Seller] contested the [Buyer]'s claims. [Seller] alleged:
First, the contract that is the basis for the claim already expired.
Second, during the life of the contract the [Seller] reasonably withheld delivery. In accordance with Article 359 of the CC of the RF, the [Seller] withheld the goods because the [Buyer] had not paid in full for goods involved in another contract between these parties.
Third, since the [Buyer] committed a fundamental breach of its contractual obligations that are grounds for this claim. The [Seller] lawfully avoided the contract and therefore cannot be compelled to perform delivery. The [Buyer] was notified of the [Seller]'s unilateral avoidance of the contract.
The [Buyer] presented an answer to the [Seller]'s statement of defense in which it did not agree with the allegations of the [Seller]. The [Buyer] contended that it did not violate the contractual provisions and that therefore the [Seller] groundlessly avoided the contract. Moreover, the [Buyer] alleged that it was not duly informed about [Seller]'s intention to avoid the contract: the person who signed for receipt of the avoidance notification at the moment of notification's delivery was not an official of the [Buyer]'s firm. The [Buyer] noted that the [Seller] groundlessly referred to Article 359 of CC of the RF following which the [Seller] withheld the goods.
Representatives of the [Buyer] did not participate in the Tribunal's sessions. During the hearing, the representatives of the [Seller] objected to all the counts of the [Buyer]'s statement of claim and the [Buyer]'s written answers to the [Seller]'s statement of defense.
3. TRIBUNAL'S REASONING
The award of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (hereinafter MKAC) contained the following basic points.
3.1 The competence of the Tribunal
The sole arbitrator stated that in Article 14 of the contract concluded by the parties they agreed on the following:
"Any disputes, disagreements or claims that may originate from or in connection with the following contract, including its execution, violation, termination or invalidity shall be submitted for adjudication at the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry in accordance with the Rules and Procedures of the Tribunal in the City of Moscow, by a sole and reserve arbitrators in the Russian language."
According to Article 1 of the RF Law "On International Commercial Arbitration" this Law is applicable to international commercial arbitration if the place of arbitration is situated on the territory of the RF. The international commercial arbitration court may adjudicate disputes arising out of contractual or other civil law relationships connected with foreign trade and other kinds of international business where the place of business of at least one of the parties is located abroad, if this was agreed by the parties.
According to Article 2 of the Statute of the International Commercial Court at the Russian Federation Chamber of Commerce [MKAC] which is appended to the Law of the RF "On International Commercial Arbitration" as Annex 1, and Article 1(2) of the Rules and Procedures of the MKAC, the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the RF may adjudicate disputes arising out of contractual or other civil law relationships connected with foreign trade and other kinds of international business where the place of business of at least one of the parties is located abroad. According to Article 2 of the Rules of the MKAC it may settle disputes subject to an agreement in writing between the parties to refer a dispute that has arisen, or may arise, between them to the MKAC.
Since this dispute arose from a foreign economic deal the parties to which are situated in different countries (Switzerland and the Russian Federation) and having taken into account that [Buyer] submitted the claim to the Tribunal, that the [Seller] did not object to the competence of this Tribunal and that [Buyer] on 16 May 2006 sent an answer to the [Seller]'s the statement of defense, the arbitrator following Articles 1, 7, 10 and 16 of the RF Law "On International Commercial Arbitration" and Article 1(5) of the Rules of the MKAC, ruled that this Tribunal is competent to arbitrate this dispute.
3.2 Absence of the [Buyer]'s representatives
Considering the issue of absence of the [Buyer]'s representatives during the hearing of 17 May 2006, the arbitrator established that the [Buyer] was duly notified of the place and time of the hearing. Notification about fixing a case for adjudication on 17 May 2006 was sent to the [Buyer] in a timely manner in accordance with the provisions of Article 23 of the Rules and Procedures of the MKAC. The [Buyer] did not request an adjournment of the hearing of the case.
According to Article 28(2) of the Rules 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 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. Since such a request for the hearing of 17 May 2006 was not submitted by the [Buyer], the Tribunal continued the arbitration proceedings despite the absence of the [Buyer]'s representatives.
[Buyer] had requested to adjourn the hearing of the case initially fixed for the 30 March 2006 because of the illness of its representative and preparation of additional documents for this case. This request was sustained on the basis of Article 36 of the Rules of the MKAC and that hearing was fixed for 17 May 2006.
Therefore, the [Buyer] was presented with the opportunities for the representation and protection of its interests foreseen in the RF Law "On International Commercial Arbitration" and Rules of the MKAC.
3.3 Applicable law
According to Article 28 of the RF "On International Commercial Arbitration" and Article 13(1) of the Rules of the MKAC, the Tribunal shall settle disputes in accordance with the rules of law which the parties have chosen to apply to the subject matter of the dispute and, in case of failing such reference by the parties, the Tribunal shall apply a law determined by the conflict of laws rules which it deems appropriate.
Following the principle of the autonomy of the parties provided in Article 1210 of the CC of the RF, the parties in Article 14.3 of their contract specified that the substantive law of the RF shall be applied for the adjudication of the disputes, but in case of its contradiction with the rules of international law, the CISG shall be applied.
Enterprises of the [Buyer] and the [Seller] are situated in States party to the CISG (Switzerland and Russian Federation), therefore they can exercise the right set forth in Article 6 of the Convention to exclude its applicability or derogate from or vary the effect of any of its provisions. In Article 14.3 of their contract, the parties have agreed to apply the substantive law of the RF, and then the CISG.
Consequently, the substantive law of the RF, i.e., the CC of the RF, is applicable for the adjudication of this dispute, and in case of contradiction between its provisions and provisions of the CISG, Vienna Convention of 1980 shall be applied.
Applicability of one or another provision of the CC of the RF, as noted in Professor M.G. Rosenberg's "International sales of goods: Commentary to legal regulation and practice of dispute resolution" (2nd ed., Moscow: Statut, 2004, p. 10-11), is determined by the type of the contract. Since this particular contract corresponds with the features of a supply contract, as provided in Article 506 of the CC of the RF, the relationships of the parties shall be, first of all regulated by the rules contained in paragraph 3 of chapter 30 ("Delivery of goods"), and the issues, not established otherwise by this paragraph, by the rules of paragraph 1 of the same chapter ("General provisions on purchase and sale"). General provisions of the CC of the RF on obligations shall also be applied to the international sales contract (supply contract) as provided by Article 420(3) of the CC of the RF. This interpretation is supported by the parties' exchange of pleadings in which they refer to corresponding provisions of CC of the RF, and then to the provisions of the CISG.
4. IMPOSITION OF OBLIGATION ON THE [SELLER] TO DELIVER THE GOODS
Having considered [Buyer]'s claim to require [Seller] to deliver the goods, the Tribunal ruled as follows.
4.1 In [Buyer]'s opinion, it duly executed its contractual obligations. [Buyer] alleged that, according to article 11.1 of the contract, it transferred the required amount of money in US dollars as a 100% prepayment for the first period of delivery. Since the abovementioned article foresees the prepayment only for the first period of delivery, [Buyer] acquired the right to pay for the rest of the goods by payment orders. Therefore, the [Seller] is obliged to deliver the goods for the amount which is not disputed by the parties.
However, the [Seller] alleges that: The first delivery period under the contract was April to June 2005. The [Buyer] asked to have the specified amount of goods delivered in April and it made a prepayment in an amount equal to the duty to deliver approximately one-third of the goods indicated in that request. According to the next request, the [Buyer] asked the [Seller] to deliver in May 2005 goods in an amount that exceeded the April request 1.66 times. The invoice sent by the [Seller] for the prepayment of those goods was not paid by the [Buyer], which was granted additional terms (until 6 May 2005, until 3 June 2005).
For the resolution of the dispute that arose between the parties, primary importance shall be given to the determination of the following:
|-||Were there grounds for regarding the [Buyer]'s breach of the contract as fundamental?; and if so
|-||Did the [Seller] lawfully avoid the contract as the result of [Buyer]'s fundamental breach?|
In accordance with Article 450(2) of the CC of the RF, fundamental breach is recognized as such a violation of the contract by one of the parties, which entails for the other party losses that, to a considerable extent, deprive it of what it could have counted upon when concluding the contract. According to Article 523(3) of the CC of the RF, the infringement of the contract for delivery by the buyer may be substantial in cases of repeated breach of the terms of payment for goods.
The contract foresees the following procedure for its execution: first, according to Article 6.4 of the contract, the [Buyer] shall pay for the goods subject to delivery under the contract and, according to Article 11 of the contract, "shall perform 100% prepayment for the first period of delivery according to amount agreed." As it follows from the materials of the case, the [Buyer] did not make the payment in full, later the [Seller] fixed an additional period of time to make the prepayment, during which the prepayment of the corresponding part was not made.
Since the contract foresaw 100% prepayment for the first delivery period and it was not made within the time limit established by the contract, nor was it made within the terms fixed by the [Seller], it could be recognized that the terms of payment agreed by the parties were not complied with, i.e., there was a violation of Article 523(3) of the CC of the RF.
Since the [Buyer] does not contest that it repeatedly violated the terms of payment for the goods for the first delivery, it could be established that the [Buyer] was indeed in fundamental breach of the contract. This conclusion can also be made on the basis of Articles 25 and 64 of the CISG.
The procedure of unilateral waiver to execute the supply contract is foreseen in Article 523(4) of CC of the RF. According to this Article, a contract for delivery shall be deemed to be altered or avoided since the time of receipt by one party of the notification of the other party about the unilateral waiver to execute the contract in full or in part, unless a different term of cancelling or modifying the contract is provided by the notification or defined by the agreement of the parties.
In the [Seller]'s opinion, noted in its statement of defense, dated 19 January 2006, a corresponding notification was sent by it to the [Buyer] in [Seller]'s letter dated 13 January 2006. [Seller] alleges that this notification was received by the [Buyer] on 18 January 2006 and that acknowledgement of the receipt was signed by the Executive Director of the [Buyer]'s firm.
In answer to the [Seller]'s statement of defense dated 16 May 2006, the [Buyer] alleged that until the date, indicted in the answer, i.e., until 16 May 2006, the [Buyer] did not receive such a notification from the [Seller], and [Seller] did not indicate in its statement of defense when and by whom [Seller]'s notification of unilateral avoidance of the contract was received on behalf of the [Buyer]. Therefore, the [Buyer] alleges that the [Seller] is precluded from making references to termination of the contract. The [Buyer] also attached decision No 2 of the sole shareholder of the [Buyer]'s firm, dated 30 September 2005, stating that the person that signed the acknowledgement of the receipt of the [Seller]'s letter of 13 January 2006 had been dismissed from the position of [Buyer]'s Executive Director as of 30 September 2005.
To determine whether Article 523(4) of the CC of the RF was observed, particularly whether there was an acceptance of the [Seller]'s notification by the [Buyer] about termination of the contract, and the official position of the signatory of the acknowledgement of the receipt in the [Buyer]'s firm, it is necessary to examine the founding documents of the [Buyer] that were provided by it together with its statement of claim: shareholder's agreement and charter. The documents evidence that the company was formed by three founders, one of whom signed the acknowledgement of the receipt of [Seller]'s notification dated 13 January 2006. This person, as indicated in the power of attorney dated 8 June 2004, certified by a notary of the City of Geneva, is a sole Managing Director of the company. The power of attorney indicates that this person, acting as a sole Managing Director of the company, appointed for the position of director (directeur) another person, who is authorized (inter alia) on behalf and at the expense of the company to perform sales and purchases of different goods, to represent the company in institutions of justice, to appear as a plaintiff or respondent, to perform all procedural actions or all precautionary or executionary measures, to bring action before tribunals, to enter into amicable agreements and to appoint arbitrators. Indeed, the statement of claim and other documents from [Buyer]'s side were signed by this second person with indication of the position - "President".
The [Buyer] submitted decision No. 2 dated 30 September 2005 of the sole shareholder of the company. This document indicates that the signatory of the statement of claim is the sole shareholder of the firm. This decision No. 2 was not drawn up on the letterhead of the [Buyer]'s firm and was not notarized. It is not clear according to which statutory documents of the [Buyer] the decision to dismiss the person that signed the acknowledgment of receipt of the [Seller]'s letter dated 13 January 2006 from the position of Executive Director was passed.
Having considered this, the arbitrator concluded that the [Buyer] failed to provide satisfactory evidence that the person who on 18 January 2006 received the notification of the [Seller] on avoidance of the contract was not duly authorized to perform such actions. Moreover, provision of such document only on 16 May 2006 during the hearing of the case does not comply with the principle of good faith that is a basic principle of commercial operations according to the CISG and the UNIDROIT Principles of International Commercial Contracts. Thus, the [Seller]'s notification of avoidance can be regarded as having been received by the [Buyer].
Since the [Seller] avoided the contract in accordance with the provisions of the CC of the RF because of the [Buyer]'s fundamental breach of it, the contract was validly terminated.
4.2 Contract's expiration term
The parties also disagree on the term of expiration of the contract. Article 15.8 of the contract provides that the contract is valid until 31 December 2005, and with respect to payments - until they will be made in full.
According to the parties' contract, the [Buyer] and the [Seller] undertook reciprocal obligations. As it follows from Article 328 of the CC of the RF, the reciprocal discharge shall be recognized as the discharge of the obligation by one of the parties, which in conformity with the agreement has been stipulated by the discharge of its obligations by the other party. The contract foresees the following procedure of discharge: first, according to Article 6.4 of the contract, the [Buyer] shall pay for the goods subject to delivery under the contract, and according to Article 11 of the contract "shall perform 100% prepayment for the first period of delivery according to the amount agreed", after which the goods shall be delivered.
As it followed from the material of the case and was not contested by the [Buyer], the [Buyer] did not execute its obligations to make this prepayment. According to Article 328(2) of the CC of the RF, in case of the obliged party's failure to discharge the obligations stipulated by the agreement, the party onto which the recourse discharge has been imposed, shall have the right to suspend the discharge of its obligation or to refuse to discharge this obligation, and to claim the compensation of the losses (that is not the matter of this dispute). Therefore the [Seller] acquired the right to suspend the discharge of its obligations.
As it follows from Article 15 of the contract, the parties agreed that "the contract is valid until 31 December 2005, and with respect to payments - until they will be made in full." Therefore according to Article 511 of the CC of the RF, the [Seller] was not obliged to deliver the goods after the expiration of the contract.
4.3 Withholding of goods by the [Seller]
The parties did not agree on the withholding by the [Seller] of goods subject to one contract as security for the performance of [Buyer]'s obligations under another contract.
During the validity period of this contract, the parties exchanged the drafts of an agreement on regulation of the issues connected with mutual settlements and delivery of goods under these two contracts. In [Buyer]'s draft dated 1 June 2005, it offered to reckon reminders of the prepayment for delivery of goods under the contract subject to this hearing towards the debt for the delivery of other goods under the other contract. Thus, both parties agreed to regulate the procedure of their mutual settlements under these two contracts but they did not agree on the procedure for its performance.
In its statement of defense dated 19 January 2006 and during the hearing dated 17 May 2006, the [Seller] stated that it followed the provisions of Article 359 of the CC of the RF, when it withheld goods as security against the other contract under which the [Buyer] did not execute its obligations.
The [Buyer] contested the withholding of the goods as a security against the other contract under which the [Buyer] did not perform its obligations to pay in the amount acknowledged by it on the basis of Article 359 of CC of the RF. As it was stated in [Buyer]'s answer to the [Seller]'s statement of defense dated 16 May 2006, Article 359 of the CC of the RF provides that the creditor has the right to withhold the objects that shall be transferred. Consequently, only concrete things that can be identified as objects that are going to be transferred to the debtor can be subject to withholding. Having taken into account the interpretation of the term "object" in Article 128 of the CC of the RF and the term "products" in Article 136 of the CC of the RF, the [Buyer] thought that abstract products cannot be considered as objects that are going to be transferred to the debtor. It was indicated in the explanations that it is possible that Article 359 of the CC of the RF allows a creditor to withhold the products made in the presence of warehouse's receipt, indication of the batch number, date of production, place of storage and other identifications, but first, this statement is not indisputable and, second, the [Seller] did not refer to any documents that allow one to identify the goods withheld as the products that were going to be transferred to the [Buyer].
As is stated in the Commentary on the CC of the RF, part two (Editor-in-Chief Professor Sadikov O.N., Moskow: Infra-M, 2005), it follows from the general rule (Article 359(1)(1) and 359(3) of the CC) that there may be a withholding subject to three prerequisites:
|-||First, the subject to be withheld is an object that belongs to the debtor and shall be transferred to
it by the creditor;
|-||Second, the withholding is to secure the obligation under which the debtor shall pay for the object
itself or reimburse losses or expenses connected with it (for instance, for storage of the object,
maintenance of an animal, etc.);
|-||Third, the obligation secured by withholding was not executed by the debtor in time.|
There is an exception for parties that acted as entrepreneurs: the restriction on the content of the obligation is not applicable to them. Therefore, in relations between entrepreneurs, withholding may be used as a security against any obligations, including ones that are not connected with the payment for the object, reimbursement of expenses or other losses connected with it. Other conditions of withholding are applicable to such relations. The Commentary on the Article does not contain any limitations on the object of the withholding; this means that any object that is not res extra commercium may be withheld.
The next issue concerns a creditor's right to withhold an object that is at his disposal until payment of the debt under threat to turn this object into a pledge under one or several agreements. Answer to this question depends on the interpretation of the term "obligation". According to Article 307(1) of the CC of the RF, by force of an obligation, one person (the debtor) shall be obliged to perform in favor of another person (the creditor) a certain action. The structure of the obligation's relationships is that one debtor is opposed by one creditor. In Article 307(2) it is established that obligations shall arise, particularly, from an agreement that is an agreement of two or several persons on establishment, change or discontinuation of civil relations. However, there is no answer to the question whether there can be obligations arising from two or more agreements.
Therefore, from a legal point of view, being given the provisions of the CC of the RF, withholding of the goods subject to one contract as security for the performance of obligations under another contract cannot be considered as reasonable. However, from the economic point of view, it is understandable how complicated relations can be between seller and buyer that are bonded by obligations to deliver the goods (the seller) and pay for the goods delivered (the buyer) under two contracts when there are negotiations on regulation of settlements between them.
Having considered the abovementioned, the [Seller] is not under an obligation to deliver the goods for the amount claimed by the [Buyer]. This conclusion corresponds with the provisions of Article 28 of the CISG that establish that "a court is not bound to enter a judgement for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention." As it follows from the abovementioned provisions of the CC of the RF, unilateral waiver of the execution of the contract for delivery shall be allowed in case of a fundamental breach of the contract by one of the parties thereto.
5. Payment of the registration and arbitration fees
According to Article 6(1) of the Regulations on Arbitration Fees and Expenses the [Buyer] shall pay the arbitration fees since the award was made against it. Since the case was examined by a sole arbitrator according to Article 4(1) of the Regulations arbitration fee was reduced by 15%, therefore the overpayment was returned to the [Buyer].
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Switzerland is referred to as [Buyer] and Respondent of the Russian Federation is referred to as [Seller].
** Andriy Kril, student at National University of "Kyiv-Mohyla Academy", paralegal at the law firm Kushnir, Yakymyak and Partners Attorneys & Counselors at Law, Kyiv, Ukraine.Go to Case Table of Contents