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CISG CASE PRESENTATION

Russia 25 April 1995 Arbitration proceeding 161/1994 (Computer equipment case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/950425r3.html]

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

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Case identification

DATE OF DECISIONS: 19950425 (25 April 1995)

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: 161/1994

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Portugal (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: Equipment to connect with a computer system


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issues: Articles 25 ; 49(1)(a) ; 72 ; 73 ; 77 ; 81

Classification of issues using UNCITRAL classification code numbers:

25B [Fundamental breach (definition of): substantial deprivation of expectation, etc.];

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

72A2 [Avoidance prior to date for performance (when clear that other party will commit fundamental breach): other party may declare avoidance];

73C1 [Avoidance in installment contracts (defect in one delivery prevents use of other deliveries): avoidance for both past and future installments];

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

81A ; 81B [Effect of avoidance on obligations (arbitration, restitution): obligations of both parties under Convention; Contract clauses not terminated by avoidance]

Descriptors: Avoidance ; Fundamental breach ; Anticipatory breach ; Installment contracts ; Restitution ; Mitigation of loss

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Editorial remarks

"The seller was ... regarded as having committed an anticipatory breach of fundamental nature ... In this case, the seller undertook an obligation to manufacture equipment for the buyer. As was required by the contract, the seller provided the buyer with preliminary drawings on the basis of which the equipment was to be manufactured. The buyer concluded that the scheme was of 'low technical level' and the equipment that would be manufactured under this scheme could not be joined to the equipment of the buyer's customer. On these grounds, the buyer refused to approve the drawings and declared the contract avoided. The seller regarded he buyer's declaration of avoidance as unjustifiable and offered to elaborate the scheme further and agree on a new project.

"In the Tribunal's opinion, the buyer proved that the drawings contained serious defects and the buyer was entitled to avoid the contract under Article 72. The Tribunal did not discuss the requirement as to giving a notice under 72(2). It only stated that the seller failed to prove that it would be able to cure the effects on time and manufacture equipment in accordance with the contract. Therefore, it is not clear whether or not the buyer complied with its obligation to give a notice in order to permit the seller to provide adequate assurance of performance." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at 40-41 (citations omitted).

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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): Rozenberg, Practika of Mejdunarodnogo Commercheskogo Arbitrajnogo Syda: Haychno-Practicheskiy Commentariy [Practice of the International Commercial Arbitration Court: Scientific - Practical Comments] Moscow (1997) No. 32 [87-93]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Russian: Rozenberg, Kontrakt mezhdunarodnoj kupli-prodazhi. Sovremennaja praktika zaklijutchenija. Razreschenie sporov [International sales contracts], Mezhdunarodnyj centr finansovo-ekonomitcheskogo razvitija, Moscow [19961] 36; Rozenberg, Kontrakt [19962] 37; Rozenberg, Kontrakt [19983] 38

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 161/1994 of 25 April 1995

Translation [*] by Yelena Kalika [**]

1. SUMMARY OF RULING

     1.1 The ongoing court proceeding commenced by the Claimant [buyer] against the Bank-Guarantor does not preclude arbitration by the Tribunal of a dispute between the Claimant [buyer] and Respondent [seller] arising from the contract containing an arbitration clause. The Tribunal, in particular, took into account that the Bank-Guarantor was not a party to the contract.

     1.2 The fact that in the fax message sent by the [seller] to the [buyer] -- and not to the Tribunal --the [seller] stated, without giving any reasonable grounds to support such a statement, that he did not recognize Tribunal's competence to arbitrate the dispute cannot serve as a ground for Tribunal's arbitrating such issue of non-recognition. The Tribunal took into consideration the fact that in the materials of the case there was evidence that the [seller] received proper and timely notice of the date of the proceeding. However, in his fax message sent to the [buyer], the [seller] stated that he did not intend to appear at the proceeding.

     1.3 When determining the applicable law, the Tribunal considered the fact that the parties indicated Moscow as the place where the contract was signed. The Tribunal also took into account that Article 566 of the Russian Soviet Federative Socialist Republic Civil Code 1994 was still in force at the time of the signing of the contract.

     1.4 Pursuant to Article 1(1)(b) CISG, the CISG was applied to the contract between the Russian company and the Portuguese company since Russian law was found applicable.

     1.5 Taking into consideration the adversary character of the proceeding, by refusing to submit relevant evidence, the party accepts the risk of adverse consequences that may arise because of such refusal.

     1.6 Pursuant to Articles 72, 73 and 49(1)(a) CISG, the actions of the Buyer, who terminated the contract due to the flaws in the preliminary sketches, were found reasonable.

     1.7 The finding of the contract terminated does not entail the invalidity of the arbitration clause in the contract since it covers all the disputes and disagreements that may arise both out of the contract and in connection with it.

     1.8 Termination of the contract does not give the [seller] a right to automatically retain the advance payment made by the [buyer] without considering the amount of losses suffered. The burden of proof of such losses is on the party seeking restitution.

     1.9 Taking into account both Article 77 CISG, that places on the creditor the burden of taking reasonable measures to mitigate the loss caused by creditor's breach of contract, and the expenses of the [seller], who had begun to perform [his obligations under] the contract, the Tribunal found it possible to reduce the amount of the advance payment that was to be refunded to the [buyer] by the [seller]. The amount of [seller]'s expenses is reflected in the contract.

2. FACTS AND PLEADINGS

The Russian [buyer] brought the claim against the Portuguese [seller] in connection with its breach of the contract entered into on 27 April 1992 in Moscow. The contract was for the supply of certain equipment. Under the contract the [buyer] made an advance payment the refund of which he now claims. Besides, the [buyer] requested to find the contract terminated and to recover from the [seller] the amount of penalties for the delay in shipment as set forth in the contract.

In accordance with the contract, the [seller] submitted preliminary sketches that the experts found not suitable. Having recognized the flaws in the preliminary sketches, the [seller] expressed his readiness to improve them. At the same time, he suggested that the parties should agree upon a new project instead of performing the existing contract in controversy. The [buyer] declared the contract avoided due to the fact that the equipment designed in accordance with the design suggested by the [seller], was of low technological level and could not be joined with the equipment installed at customer's enterprise. The [seller] claimed that the avoidance of the contract was unreasonable and, thus, in his opinion, he could retain the advance payment.

3. TRIBUNAL'S REASONING

The Tribunal rendered its award on the following grounds.

     3.1 After considering the issue of the absence of [seller]'s representative at the proceeding of 25 April 1995, the Tribunal found that on 3 February 1995 the [seller] was duly notified of the place and time of the proceeding. The notice was sent to him by certified mail with the return receipt requested. In the materials of the case, there is evidence that the notice was timely and properly delivered to the [seller] on 27 February 1995.

The fact of receipt of the notice by the [seller] also follows from his fax message of 3 March 1995 sent to the [buyer]. [In that fax message] the [seller] directly referred to the proceeding scheduled for 25 April 1995 and stated that he did not intend to attend this arbitration proceeding.

In accordance with Article 26(2) of Tribunal's Rules, when a party was duly notified of the time and place of the arbitration proceeding, such party's failure to appear does not preclude the proceeding, if the absent party had not requested to postpone the proceeding due to a valid reason prior to the end of such proceeding. The [seller] has not submitted any requests to postpone the proceeding.

For the above reason, the Tribunal came to the conclusion that it could hold the proceeding in the absence of the [seller].

     3.2 Pursuant to clause 10 of the contract entered into by the parties on 27 April 1992, all disputes and disagreements that may arise from the contract or in connection with it shall be arbitrated by "the Russian Federation Foreign Trade Arbitration Tribunal in accordance with the rules and procedure of the said Tribunal." The same arbitration clause further states that any awards of the said arbitral tribunal shall be final and binding on both parties. The parties also agreed to exclude jurisdiction of state courts.

The language of the mentioned arbitration clause allows to determine that the parties meant their disputes to be arbitrated by an institutional (permanent) arbitral tribunal located in the Russian Federation and specializing in international commercial arbitration. The only arbitral tribunal of such kind in Russia is the International Commercial Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry that was earlier known as the Foreign Trade Arbitration Commission.

The [seller] has not submitted to the Tribunal any arguments challenging the competence of this arbitral tribunal, although he had an opportunity to do so when the Tribunal mailed him the complaint along with the letter of 18 July 1994. In accordance with Article 18(2) of the Tribunal's Rules, the letter suggested the [seller] give his written explanations as to the claim. Such explanations were to be also supported by relevant evidence.

In his fax message of 3 March 1995, which was addressed exclusively to the [buyer] and which the [buyer] handed over to the Tribunal during the hearing held on 25 April 1995, the [seller] stated that he did not recognize the competence of the Tribunal. However, the [seller] failed to give any reasonable arguments in support of his position. The court proceeding in Portugal, which the [seller] mentioned, concerns, according to the [buyer], the relationships between the [buyer] and the Bank-Guarantor. The latter is not a party to the contract of 27 April 1992. The fact of commencement of such proceeding itself does not deprive the [buyer] of his right to commence a proceeding against the [seller] in accordance with the contract containing an arbitration clause. It also does not release the parties from their obligations following from the contract. [Seller]'s arguments that, in his opinion, the [buyer] breached the contract cannot serve as a ground for not recognizing the competence of the Tribunal.

Taking the above into consideration and in accordance with Articles 4 and 16 of the Russian Federation Law "On International Commercial Arbitration", the Tribunal finds it has competence to arbitrate the present dispute.

     3.3 The contract of 27 April 1992 stated that it was signed by the parties in Moscow. In accordance with Article 566 of the Russian Soviet Federative Socialist Republic Civil Code 1994, that was still in force on the date of signing of the contract, rights and obligations of the parties to an international commercial transaction shall be determined in accordance with the laws in the place where it was contracted for. Thus, Russian law governs the contract.

Russia, as the successor to the USSR, is a CISG signatory state. The said Convention had been in force in Russia on the date when the contract of 27 April 1992 was signed. The CISG is a component part of the Russian Federation legal system.

Pursuant to Article 1(1)(b) CISG, it also applies " when the rules of private international law lead to the application of the law of a Contracting State." This leads to the conclusion that the CISG applies to the present dispute. Russian substantive laws are also applicable as subsidiary law.

     3.4 The legal issue here is whether the contract was rightfully terminated due to the flaws in the preliminary sketches. Since [the contract] involved goods, which were to be manufactured in accordance with the preliminary sketches approved by the [buyer] (see clause 4 of the contract of 27 April 1992), it is important to have evidence that the [seller] had an opportunity to eliminate the flaws detected in the sketches and to secure the manufacturing of the equipment as well as its delivery in accordance with the contract.

Pursuant to Article 72 CISG:

"(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

"(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance."

Since the contract of 27 April 1992 provided for the shipment of several lots of goods, Article 73 CISG should also be mentioned. Article 73 (2) and (3) states the following:

"(2) If one party's failure to perform any of his obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.

"(3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract."

Besides, Article 49(1)(a) CISG allows the Buyer to declare the contract avoided if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract.

In support of his position, the [buyer] submitted the technological report written by the customer on 1 September 1992. The main points of [that report] were stated in the letter of 7 September 1992 sent by the [buyer] to the [seller]. In the said technological report, it was concluded that the equipment designed in accordance with the suggested draft was of a low technological level and that its installation would lead to the decrease of productivity as well as to the decrease of the quality and reliability of the final product.

The [buyer] also submitted the experts' opinion issued by the Foreign Trade Association "Soyuzekspertiza" at the Russian Federation Chamber of Commerce and Industry on 15 February 1995. This association is a neutral specialized inspecting organization. It follows from the experts' opinion that the equipment, for which sketches were made, had several serious flaws and, in breach of the terms of the contract, could not be connected with the computer system of the machine for which it was intended. Thus, the machine cannot work in the automatic mode and it is impossible to fully use all of its functions.

In accordance with Article 30 of Tribunal's Rules, the parties must prove the facts to which they refer as the grounds for their claims or counterclaims. In the Tribunal's opinion, the [buyer] has presented sufficient evidence at least of the fact that the preliminary sketches contained substantial flaws. The [seller] has the burden of proving that he was able to timely correct the flaws detected and to manufacture and deliver the equipment in accordance with the terms of the contract of 27 April 1992. The [seller] has not presented such evidence. Taking into account the adversary character of the proceeding, by refusing to present relevant evidence, the party accepts the risk of the unfavorable consequences that may arise from such refusal.

Besides, the actions of the parties that followed evidence that the parties treated the contract as terminated and the main issue in controversy was the settlement of the payments in connection with the termination of the contract.

Taking the above into consideration, the Tribunal finds the contract of 27 April 1992 terminated.

     3.5 The consequences of the termination of the contract are settled in Section V of the CISG.

Pursuant to Article 81(1) CISG, avoidance of the contract releases both parties from their obligations under it, subject to any damages that may be due. It also sets forth that avoidance of the contract does not affect any provision of the contract concerning the settlement of disputes or any the rights and obligations of the parties consequent upon the avoidance of the contract.

The latter provision agrees with the provision of Article 16(1) of the Russian Federation Law "On International Commercial Arbitration" stating that an arbitration clause, that is a part of the contract, shall be interpreted as an agreement separate from other provisions of the contract.

In other words, the finding that the contract of 27 April 1992 is terminated does not affect, in particular, the validity of the arbitration clause which was included in the contract and covers all disputes and disagreements that may arise both out of the contract and in connection with it.

In accordance with Article 81(2) CISG, a party who 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.

     3.6 At the same time, even without considering the issue of reasonableness of the [buyer]'s reference to the flaws in the preliminary sketches as the ground to declare the contract avoided, the Tribunal ascertains that neither the provisions of the CISG, nor Russian substantive laws, nor the provisions of the contract of 27 April 1992 give the [seller] a right to automatically retain the advance payment made by the [buyer] without taking into account the amount of losses suffered. Such losses have to be proven by the party seeking restitution.

Even assuming that there was a breach on the part of the [buyer], the [seller] -- who is of the opinion that the [buyer] breached the contract -- has never proved the amount of damages caused by such breach.

The [buyer] has presented proper evidence that the advance payment was made. In the parties' correspondence, the [seller] admits the fact of receiving the above mentioned advance payment.

For the above stated reasons and taking into consideration Article 77 CISG, which places on the creditor the burden of taking reasonable measures to mitigate the loss resulting from the breach of contract by the debtor, as well as the expenses of the [seller], who began his performance under the contract, the Tribunal finds it possible to reduce the sum of [buyer]'s recovery. (The amount of [seller]'s expenses is, in particular, reflected in specification No. 1 to the contract of 27 April 1992.)

     3.7 [Buyer]'s claim to recover the penalty from the [seller] in accordance with clause 7 of the contract of 27 April 1992 cannot be sustained. (The amount of the penalty sought was 10% of the cost of the equipment not delivered.)

The said clause in the contract sets forth that, in case of delay in shipment of the goods, the seller has a right to claim from the buyer damages that were evaluated and discussed in advance. In the present case, due to the unsatisfactory quality of the preliminary sketches prepared by the [seller], the seller himself declared the contract avoided before the date of delivery came. Therefore, in this case there are no legal grounds for the application of clause 7 of the contract of 27 April 1992.


FOOTNOTES

* This is a translation of data on Proceeding 161/1994, dated 25 April 1995, of the Tribunal of International Commercial Arbitration of the Russian Federation Chamber of Commerce and Industry, reported in Rozenberg ed. Arb Praktika (1997) [ 87-93].

All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Russian Federation is referred to as [buyer]; Respondent of Portugal is referred to as [seller].

** Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Moscow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.

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