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CISG CASE PRESENTATION

Russia 24 July 2006 Arbitration proceeding 40/2005 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/060724r1.html]

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

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Case identification

DATE OF DECISION: 20060724 (24 July 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: 40/2005

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: United States

BUYER'S COUNTRY: France

GOODS INVOLVED: [-]


Classification of issues present

APPLICATION OF CISG: No

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Article 6

Classification of issues using UNCITRAL classification code numbers:

6 [Convention yields to contract; Agreements to apply]

Descriptors: Application of Convention

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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. 26 [217-225]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 40/2005 of 24 July 2006

Translation [*] by Andriy Kril [**]

1. SUMMARY OF RULING

1.1 Construction of the arbitration clause in presence of the established inexactitudes in its wording.

1.2 Despite the fact that parties of the international sales contract are situated in states parties to the Vienna Convention of 1980, this Convention does not apply since the contract contains the reference to the model contract, which expressly excludes application of this Convention.

1.3 Priority is given to the provisions of the parties' contract in comparison with the provisions of the model contract, particularly provisions on the applicable law.

1.4 The [Seller] was obliged to pay the difference in prices of the contract concluded by the [Buyer] with the third party and the contract concluded by the parties. These consequences were provided for by the model contract to which the party referred to in their agreement and by provisions of the applicable material law, chosen by the parties, in case of the fundamental breach of the contract and duly notification of the [Seller] about this fact.

1.5 The Tribunal evaluated [Seller]'s evidences that the contract concluded with the third party (which provided for delivery of a larger amount of goods then the contract between the parties) was in fact the substitute transaction.

2. FACTS AND PLEADINGS

The claim was lodged by the [Buyer], a French firm, against the [Seller], an US organization, in connection with the non-performance by the [Seller] of its obligations under the international sales contract concluded by the parties on 27 July 2004.

The contract provided for delivery of goods manufactured in Russia during the designated period on FOB terms to the Russian port. The [Seller] had an obligation to nominate the port of unloading and notify the other party about the date when the goods will be ready for shipment at least 20 calendar days before the expected date of shipment. By [Seller]'s request the [Buyer] prolonged the shipment period. However, the [Seller] did not fulfill this obligation and consequently there was no chance that the goods would be delivered within the agreed period of time. Considering that the [Seller] was in fundamental breach of the contract, the [Buyer] avoided the contract with the [Seller] and bought the goods from the third party at the price that exceeded the price agreed to by the parties in the contract of sale.

The [Buyer] sought recovery of losses in the amount equal to the difference in price between the deal with the third party and the contractual price agreed by the parties.

The [Buyer] did not present any pleadings under this 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 Court at the Russian Federation Chamber of Commerce and Industry [MKAC] contained the following basic points.

3.1 The competence of the Tribunal

Article 19 of the contract under the title "Arbitration" contains the following provision in Russian:

"All the disputes that may originate out of or in connection with this contract shall be adjudicated in accordance with the rules of the Arbitration Court at the MCCI of the RF".

In the abbreviation "CCI of the RF," letters "CCI" evidently mean "Chamber of Commerce and Industry". But the letter "M" in this abbreviation which, probably, means "Moscow", has little sense in this case, since there is no "Moscow" Chamber of Commerce and Industry of "the Russian Federation". Moreover, the arbitration tribunal which exists at the Moscow Chamber of Commerce and Industry has another name, namely the Arbitration Tribunal at the Moscow Chamber of Commerce and Industry.

Therefore, following the above-mentioned provision of the contract the parties agreed on settlement of disputes by means of arbitration proceedings by the competent Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. This conclusion is proved by the quite clear and defined English variant of the text which speaks precisely about the Arbitration Court of Chamber of Commerce of the Russian Federation.

The Tribunal noted that the Arbitration Court was previously functioning at the Chamber of Commerce and Industry of the USSR. Because the CCI of the USSR was eliminated, the Supreme Soviet of the RF in its Decree of 20 January 1993 established that the Arbitration Tribunal at the CCI continues its activities at the CCI of the RF and empowered the CCI of the RF with functions of the CCI of the USSR to organize arbitration proceedings. By Decree of the Supreme Soviet of the RF dated 7 July 1993 the Arbitration Court at the CCI of the RF was renamed into the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry [MKAC]. According to Art. 4 of the Statute of MKAC, which is appended to the Law of the RF "On International Commercial Arbitration" as Annex 1, the MKAC at the CCI of the RF is a successor of the Arbitration Tribunal at the CCI of the USSR and, among others, has the right to adjudicate disputes on the basis of the arbitration clauses which provides for the adjudication of their disputes in the Arbitration Tribunal of the CCI at the USSR. The MKAC is also competent to adjudicate disputes on the basis of the arbitration clauses to submit disputes for adjudication to the Arbitration Court at the CCI of the RF since, as is stated above, it is the same arbitration body.

The Tribunal also noted that at the date of the conclusion of the contract (as well as at the date when the claim was lodged) the MKAC was the only arbitration tribunal at the CCI of the RF that was competent to adjudicate disputes arising out of international trade and other types of international economic activities where states parties are situated out of the territory of the Russian Federation and the Commonwealth of Independent States.

The above-mentioned evidence that the [Buyer]'s reference to the MKAC is a reference to the proper arbitration tribunal, in conformity with the parties' will, expressed in the arbitration clause.

Proceeding from the arbitration agreement, concluded by the parties, and taking into account absence of any objections from the [Seller]'s side, following Art. 16 of the RF Law "On International Commercial Arbitration" and Art. 1(5) of the Rules and Procedures of the MKAC, the Tribunal acknowledged the MKAC competent to adjudicate this dispute.

3.2 Composition of the Tribunal

Concerning the question of formation of the Tribunal's composition the Tribunal established that the Secretariat of the MKAC in 2005 repeatedly tried to hand notification about the arbitration proceeding and copy of the claim papers by mail at the [Seller]'s address indicated in the contract and designated by the [Buyer] in the statement of claim (including the address with a specified mailbox index, included in the [Seller]'s letter dated 29 July 2005). Defendant has indicated in the contract the address to which documents and notices relating to the present case (both as the location address of the seller (Art. 1) and as its bank details at the end of the contract). In the same way this address was listed by the [Seller] in the Appendix No 2 to the contract dated 23 September 2004. The same address was listed on the [Seller]'s form letter to the [Buyer] dated 23 September 2004.

Because of the impossibility of handing of documents at the indicated address, as well as the lack of information about the other addresses of the [Seller], the [Buyer] in its letter dated 16 September 2005 requested the MKAC to consider claim papers as delivered to the [Seller] at its last known location.

According to Art. 12(5) of the Rules and Procedures of the Tribunal, "any written communication is deemed to have been received if it is delivered to the addressee personally or if it is delivered at his place of business, habitual residence or mailing address. If none of these can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee's last-known place of business, habitual residence or mailing address by registered letter or any other means which provides a record of the attempt to deliver it". Following the given position, and considering the [Seller] as a party which did not choose the arbitrator and substitute arbitrator within the period prescribed by the Rules and Procedures of the Tribunal, the President of the MKAC in his Resolution of 21 September 2005 made the appointment for the [Seller].

Despite the fact that the Tribunal in accordance with the Rules and Procedures of the Tribunal had all reasons to believe that the requirements of the Rules and Procedures concerning sending and delivery of documents to the [Buyer] were properly fulfilled, the Tribunal offered the Secretariat of the MKAC to send relevant documents to a new mailing address and to the [Seller]'s principal place of business, which was further indicated by the [Buyer] during the hearing dated 1 March 2006. The MKAC in its letter dated 9 March 2006 sent to the new address of the [Seller] the second notification of this arbitration, indicating the composition of the Tribunal formed to consider the case. This notice was handed to the [Seller] on 13 March 2006. At the date of the hearing of 31 May 2006 the [Seller] did not present any objections to the procedure of formation of the Tribunal's composition.

The Tribunal considered that after receiving notification of the MKAC with an indication of the Tribunal's composition for the consideration of the case the [Seller] had sufficient period of time to present objections to the procedure of Tribunal's formation and its composition. To determine the period during which the [Seller] had to present his objections to the MKAC, the Tribunal considered as applicable provisions of Art. 19(3) of the Rules and Procedures of the Tribunal: "within thirty days from the date of the receipt of the statement of claim the defendant shall indicate names and surnames of the arbitrator and substitutive arbitrator, chosen by it, or to solicit for appointment of the arbitrator and the substitutive arbitrator by the President of the MKAC on its behalf".

The Tribunal concluded that on 13 April 2006 the term expired, during which the [Seller] could have stated its objections to the procedure of formation of the Tribunal's composition and notified about its desire to select another arbitrator and substitute arbitrator instead of appointed on [Seller]'s behalf by the President of the MKAC in its decision of 21 September 2005.

The Tribunal noted that, without stating within required period of time its objections to the procedure of formation and to the formed composition of the Tribunal, the [Seller] has thus confirmed the competence (mandate) of the previously formed Tribunal to conduct this arbitration and to pass the decision.

Based on the above-mentioned, the Tribunal acknowledged that the formation of the composition of the Tribunal was made in compliance with the applicable provisions of the Rules and Procedures of the MKAC and that the arbitral tribunal was competent (had a mandate) to conduct this arbitration and to render a decision.

3.3 Absence of the [Seller]'s representatives

Due to the absence of the [Seller]'s representatives at the oral hearing of the case, proceeding from the facts and arguments outlined in paragraph 3.2 hereby the Tribunal concluded that the [Seller] was duly notified about the time and place of the hearing held on 31 May 2006. 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 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. Such a request in writing was not submitted by the [Seller]. Representative of the [Buyer] suggested the possibility of a hearing in the absence of the [Seller]'s representatives.

Given the above-mentioned and following Art. 28(2) of the Rules and Procedures of the MKAC, the Tribunal concluded that the defendant's absence does not interfere with the proceedings and making of an award.

3.4 Applicable law

In Art. 19 of the contract the parties stipulated that "the substantive law of Russian Federation shall be applied during the settlement of disputes."

Commercial enterprises of the parties are situated in the states - parties to the Vienna Convention of 1980, namely, in France and in the United States of America. Under the rules of international private law (a widely accepted principle of party autonomy, which is reflected in Art. 1210 of the Civil Code of the RF) the law of the Russian Federation is also applicable. However, Art. 20(14) of the contract defines that "all other terms, conditions and rules that are not in conflict with the foregoing shall be in accordance with the GAFTA 49". The above-mentioned Model Contract GAFTA 49 in Art. 25 establishes that "to this contract does not apply ... the UN Convention of 1980 on Contracts for the International Sale of Goods." According to Art. 6 CISG, parties to a contract of sale may exclude application of the Vienna Convention.

During the hearing of 19 January 2006, the [Buyer]'s representative explained that because of the reference to the Model Contract GAFTA 49 application of the Vienna Convention should be considered explicitly excluded by the parties' agreement. At the same time, the [Buyer]'s representative noted that according to the contract the Russian law is chosen as the applicable law; therefore, the provision of the Model Contract GAFTA 49 on the application of the English law should be excluded.

Being given this, the Tribunal concluded that, by virtue of the provisions of Art. 19 and Art. 20(14) of the contract, as well as the provisions of the Model Contract GAFTA 49 (which is applicable to the extent of not being inconsistent with the terms of the contract), the present dispute shall be settled on the basis of the substantive law of the Russian Federation without application of the CISG provisions.

4. MERITS OF THE CASE

Having considered the merits of the case, the Tribunal concluded the following.

4.1 Unilateral termination of the contract

In accordance with Article 9 (2) of the contract the [Seller] was obliged to nominate a port of shipment and notify the [Buyer] of the date when the goods are ready for shipment at least 20 calendar days before the expected start of the loading. In Additional Agreement to the contract No 2 dated 23 September 2004 the parties established a deadline for the shipment, 30 November 2004. Thus, the [Seller] had an obligation to nominate the port of shipment and notify the applicant of the date when the goods are ready for delivery no later than 10 November 2004. The [Buyer] claimed that this obligation was not fulfilled by the [Seller], and the [Seller] did not refute such allegations.

The Tribunal agreed with the [Buyer] that failure to perform specified obligations within the established period constitutes a fundamental breach of the contract by the [Seller] within the meaning of Article 450(2) (4) of the Civil Code of the RF, since the [Buyer] had chartered ships for the carriage of goods and had its own contractual obligations to third parties - the final recipients of the goods, was bearing costs which largely deprived the [Buyer] of what it was entitled to expect as the result of the conclusion of the contract. The [Seller] informed the [Buyer] about this, in particular, in a letter dated 25 November 2004.

According to Article 523 (1) of the Civil Code of the RF, unilateral refusal to perform the contract of supply (in whole or in part) is permitted in the case of a fundamental breach of the contract by one party (Art. 450 (2) (4)). Being given that, the Tribunal found that [Seller]'s letter of 26 November 2004, which should be considered as a notification of refusal to execute the contract, was sent to the [Buyer] lawfully and resulted in early termination of the contract by the [Buyer] as a result of [Seller]'s fundamental breach of its contractual obligations.

4.2 Substitute purchase

The [Buyer] presented evidences that instead of the goods to be supplied to it under a contract, subject to review in this case (and other contract between the [Buyer] and the [Seller] dated 26 July 2004), the [Buyer] on 26 November 2004 purchased and paid under the replacement contract the same amount of goods from the third party. Taking into account all the circumstances of the case (including the date of the replacement contract, its subject matter and the basis of delivery), the Tribunal considered it possible to recognize a replacement contract as a substitutive transaction made by the [Buyer] in order to replace the goods in quantity which had to be supplied under the contract from 27 July 2004.

Article 20 of the Model Contract GAFTA 49 provides that in default of fulfillment of contract by either party, the following provisions shall apply:

(a)    The party other than the defaulter shall, at their discretion, have the right, after serving notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.
(b)  If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.
(c)  The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods on the date of default established under (b) above.
(d)  In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter's breach of contract, but shall in no case include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.
(e)  Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favor of the mean contract quantity.

These provisions of the Model Contract GAFTA 49 correspond with the provisions of Article 520(1) and Article 524(1) of the Civil Code of the RF. According to Article 520(1) of the CC of the RF, if the supplier has failed to deliver the quantity of goods, stipulated by the contract for delivery, the buyer shall have the right to acquire undelivered goods from other persons and to charge all the necessary and reasonable expenses to the supplier for their acquisition. According to Article 524(1) of the CC of the RF, if within the reasonable period of time after the cancellation of the contract due to the infringement of the obligation by the seller the buyer bought goods from another person at higher but reasonable price instead of goods specified by the contract, the buyer may make to the seller his claim for the compensation of losses in the form of the difference between the contractual price and the price under the deal made instead.

4.3 Payment of damages

The contract provided for delivery of the goods at a certain price in U.S. dollars per metric ton. Product price under the replacement contract (default price) was higher while the basis of delivery was identical (FOB with stowing and stacking, the same port). Average contract amount of goods to be used in the calculation of damages shall be an amount, specified in the contract (excluding specified option plus-minus 10%).

Thus, the amount of losses to be reimbursed for damages shall be calculated using the following formula: average contract quantity multiplied by (price of goods under the replacement contract minus the price of goods under the contract of July 27, 2004).

Being given the above-mentioned, the provisions of the contract and keeping in mind the proved fact of lawfulness of the termination of the contract by the [Buyer] and the conclusion of the replacement contract to substitute it, and taking into account the absence of the [Seller]'s objections, the Tribunal finds that [Buyer]'s claims to oblige the [Seller] to pay the amount of damages is reasonable and shall be sustained.

5. PAYMENT OF THE ARBITRATION FEES AND EXPENSES

The [Buyer] requested recovery from the [Seller] of the costs, paid by it as an arbitration fee. According to Article 6 (1) of the Regulations on Arbitration Fees and Expenses (Appendix to the Rules and Procedures of the MKAC), "unless otherwise agreed by the parties, the arbitration fee shall be paid by the party, against which the decision was made." The Tribunal is not aware of the presence of an agreement of the parties concerning the other procedure of apportioning of the arbitration fee.

Since the [Buyer]'s claims were sustained in full, the Tribunal ruled that the [Seller] is obliged to compensate the [Buyer] the costs of the arbitration fee in the amount, paid by it.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of French is referred to as [Buyer] and Respondent of the USA is referred to as [Seller].

** Andriy Kril is a graduate of the Kyiv-Mohyla University (Kyiv, Ukraine), currently working towards his LL.M. degree at the University of Pittsburgh (Pittsburgh, USA).

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Pace Law School Institute of International Commercial Law - Last updated October 7, 2011
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