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CISG CASE PRESENTATION

Russia 1 December 1995 Arbitration proceeding 22/1995 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/951201r2.html]

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

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Case identification

DATE OF DECISIONS: 19951201 (1 December 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: 22/1995

CASE NAME: Unavailable

CASE HISTORY:Unavailable

SELLER'S COUNTRY:Russian Federation (respondent)

BUYER'S COUNTRY: Cyprus (claimant)

GOODS INVOLVED: Unavailable


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issues: Articles 6 ; 25 ; 29 ; 63 ; 64(1) ; 74 ; 75 ; 84(1) ; 96 [Also cited: Articles 7(2) ; 77 ; 80 ; 81 ]

Classification of issues using UNCITRAL classification code numbers:

6B [Choice of law: need for affirmative indication to exclude Convention];

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

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

29A [Parties by agreement may modify or terminate the contract: subject to formal requirements preserved by Article 96];

63A [Notice fixing additional final period for buyer's performance];

64A [Seller's right to avoid contract: grounds for avoidance];

74A [General rules for measuring damages: loss suffered as consequence of breach];

75A [Damages established by substitute transaction];

84A [Restitution of benefits received: seller bound to refund price must pay interest]

Descriptors: Choice of law ; Intent ; Formal requirements ; Declaration, Art. 96 ; Fundamental breach ; Nachfrist ; Avoidance ; Damages ; Cover transactions ; Restitution ; Interest

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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): Rozenberg, Practika of Mejdunarodnogo Commercheskogo Arbitrajnogo Syda: Haychno-Practicheskiy Commentariy [Practice of the International Commercial Arbitration Court: Scientific - Practical Comments] Moscow (1997) No. 62 [167-173]

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 22/1995 of 1 December 1995

Translation [*] by Yelena Kalika [**]

1. SUMMARY OF RULING

     1.1 The reference to the norms of Russian law stated both in the claim and counterclaim were qualified as an agreement of the parties to apply Russian law to the relationships arising from the international sale contract. Since the parties did not state otherwise, their relationships are governed by the CISG which is a component part of the Russian legal system.

     1.2 When making a legal evaluation of the amendments to the contract signed by the parties, all the relevant circumstances allowing to determine the parties' intent shall be taken into account pursuant to Article 8 CISG.

     1.3 Pursuant to Article 84(1) CISG, any termination of the contract, in accordance with which the Buyer made an advance payment, entails the Seller's duty to refund not only the advance payment but also interest on it from the date on which the price was paid.

     1.4 Pursuant to Articles 29 and 96 CISG, any termination of a contract must be done in writing.

2. FACTS AND PLEADINGS

In accordance with the contract made in May 1993 between the Russian company (Seller) and the company located in Cyprus (Buyer), the Seller was to deliver to the Buyer the goods stated in the contract in two shipments.

In his complaint, the Buyer referred to an additional agreement made by the parties. In accordance with [this additional agreement], the Buyer made an advance payment of the price. That advance payment was only partially refunded to him.

Since the Seller never made delivery and since the contract between the parties was terminated, the Buyer claimed a refund of the rest of the advance payment from the Seller, interest for the use of monetary funds, lost profit and penalties for the delayed shipment.

In his reply to the claim, the Seller denied the Buyer's claims [on the following grounds]:

-   As to the claim for penalties, the statute of limitations had run out;
 
- As to the lost profit claim, there was no evidence of causal connection between the termination of the contract and damages suffered;
 
- As to the interest for the use of monetary funds, its computation was made in violation of Article 133 of the USSR Principles of Civil Law 1991.

Regarding [Buyer]'s claim to recover the advance payment, the Seller explained that he withheld this amount to cover his losses caused by the storage of the goods -- for which the Buyer was responsible -- for a period of time longer than agreed upon.

At the same time, the Seller filed a counterclaim. The amount of the counterclaim included the penalties for [Buyer]'s delay in opening a letter of credit and [Seller]'s expenses in connection with the storage of the goods in excess of the amount of penalties.

To prove the losses he suffered in connection with the storage of the goods, the Seller submitted relevant documents. Besides, he calculated such expenses as of the date of his making a contract with another counteragent in substitute of the one terminated. The Seller reasoned his position by the agreement made by the parties.

During the proceeding, Seller's representatives repeated his position stated in the reply to the claim and in the counterclaim. Buyer's representatives argued that Seller's counterclaim had no merits. They referred to the fact that the contract was terminated at Seller's suggestion and for reasons that were within the range of Seller's liability. In this connection, [Buyer's representatives argued that] the Seller had to be liable for the storage of the goods at the port. As to the claim of penalties for the delay in opening a letter of credit, [Buyer's representatives argued that] the Seller brought his claim after the statute of limitation had run out.

3. TRIBUNAL'S REASONING

The Tribunal rendered its award taking into consideration the following:

     3.1 In accordance with the contract between the parties, all disputes arising out of or in connection with it shall be arbitrated by the Arbitration Tribunal at the Chamber of Commerce and Industry of Russia in Moscow. Taking into account that pursuant to Russian Federation Supreme Council Resolution No. 5339-1 of 7 July 1993 "On coming into force of the Russian Federation Law on International Commercial Arbitration", the Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry was renamed the International Commercial Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry, this Tribunal has competence to arbitrate the present dispute.

     3.2 The contract is silent on the applicable law. At the same time, it follows from the claim and counterclaim that both parties to the dispute consider Russian law as applicable to their relationships under the contract. While ascertaining this fact, the Tribunal notes that the application of Russian law to arbitration of the present dispute is also based on Article 28(2) of the Russian Federation Law "On International Commercial Arbitration" and Article 166(1) of the USSR Principles of Civil Law 1991, which has been in force in Russia since 3 August 1992, since the Seller under this contract is a party which is incorporated and has its principal place of business in Russia.

In accordance with the Russian Federation Constitution (Article 15(4)), international treaties of the Russian Federation are a component part of its legal system. If the provisions of an international treaty of the Russian Federation differ from the [provisions of its national] law, the provisions of the international treaty apply.

As of the date of the parties' entering into the contract, the Russian Federation had been a signatory to the CISG (since 1 September 1991). Pursuant to Article 1(1)(b) CISG, this Convention applies to contracts of sale of goods between parties when the rules of private international law lead to the application of the law of a Contracting State (i.e., a signatory state). Pursuant to Article 6 CISG, the parties could exclude the application of the CISG. However, the materials of the case provide no evidence as to whether they did so. Nor was any such argument made during the arbitration proceeding. Therefore, in accordance with the provisions of the CISG, the parties' relationships under the contract are governed by the CISG. Pursuant to Article 7(2) CISG, questions concerning matters governed by this Convention which are not expressly settled in it and which cannot be settled in conformity with the general principles on which it is based shall be settled in conformity with the law applicable by virtue of the rules of private international law. In the present case, it is the national law of Russia.

     3.3 The contract entered into by the parties on 14 May 1993 was modified by the parties' agreement of 14 January 1994. In the modification agreement, the parties agreed upon the methods of performing the contract taking into account the factors they ascertained, such as delivery of the first lot of goods to the port 95 days later [than agreed], the change of the world market price as compared to August 1993 and the continuing trend of its decreasing, the storage of the goods at the port since 20 November 1993, and Seller's refusal to deliver the second lot of goods. As follows from the text of the agreement, by setting the new price for the first lot of goods (which was lower in comparison to the price stated in the contract of 14 May 1993), the parties settled all the claims that might be brought by them against each other prior to 14 January 1994. Therefore, neither the penalties for the delay in shipment of the first lot of goods, nor the penalties for the delay in shipment of the second lot, nor the cost of storage of the goods at the port from 1 December 1993 to 14 January 1994, nor the penalty for the delay in opening of a letter of credit can be brought either as the main claim or as the counterclaim.

At the same time, it directly follows from the agreement of 14 January 1994 that the rest of the contract of 14 May 1993 remains valid. In particular, the terms of payment amended by one new provision are still in force.

     3.4 The parties' agreement of 11 March 1994 is different from the parties' agreement of 14 January 1994. It sets forth the final date by which the contract had to be performed (before 31 March 1994). [Under this agreement] the Buyer was to open a letter of credit before 24 March 1994, to have a vessel ready for loading before 25 March 1994 and to pay a certain amount in advance on 11 March 1994. The agreement also set forth the method of issuing a refund of the advance payment by means of Buyer's withholding it at the time of opening the letter of credit.

Pursuant to the CISG (Article 63(1)), the agreement of 11 March 1994 can be viewed as giving the Buyer an additional period of time for performance of [Buyer]'s obligations under the contract. Pursuant to Article 63(2) CISG, when allowing the Buyer an additional period of time for performance of his obligations, the Seller is not deprived of a right to claim damages for delay in performance. However, during that additional period of time the Seller is deprived of a right to resort to any other legal remedy for breach of contract.

The analysis of the language of the said agreement leads to the conclusion that, by entering into it, the parties did not mean to relieve each other from the duties following from the contract and, in particular, [the ones following] either from liability for failure to deliver goods conforming the terms of the contract or from liability for failure to open a letter of credit, or for failure to freight a vessel within the period of time set forth in the contract.

     3.5 The Seller does not contest the fact of transfer of the advance payment by the Buyer. Nor do the parties disagree on the issue that the Seller did not refund part of the advance payment. This debt of the Seller was created as a result of Buyer's performing his contractual obligations. Therefore, it cannot qualify as Seller's unjust enrichment that is governed by the provisions of Article 133 of the USSR Principles of Civil Law 1991. In the present case, Article 84(1) CISG shall apply. [This article of the CISG] sets forth that, when the Seller is bound to refund the price as a consequence of the termination of the contract, he must also pay interest on it. Since the CISG does not set forth the amount of interest that has to be paid, it has to be determined under the provisions of Russian national law.

     3.6 The Buyer did not fully perform [his obligations under] the agreement of 11 March 1994 as the letter of credit was not opened and the vessel was not ready. In such circumstances, in accordance with the CISG (Article 64(1)(b)) the Seller had a right to declare the contract avoided. In Tribunal's opinion, the Seller could also utilize such right under Article 64(1)(a) CISG since the breach by the Buyer can also qualify as fundamental (Article 25 CISG).

In accordance with clause 11.3 of the contract, any modifications and amendments to the contract are valid only if they are made in writing. The parties do not disagree that the fact of termination of the contract was recognized in writing on 18 April 1994 when the Buyer confirmed the termination of the contract to the Seller. The mandatory written form of any such document is also set forth in the CISG (Articles 29 and 96). Taking the above into consideration, the Tribunal finds that the contract of 14 May 1993 terminated on 18 April 1994.

     3.7 It follows from the documents submitted by the Seller that only part of the goods prepared for shipment conformed with the GOST (the Russian State Standard) to which there was a reference in the contract. As the same time, the Seller stated -- referring to the conclusion of a relevant Research Institute -- and the Buyer did not deny that the factual quality of the goods (their chemical composition) conformed to the contractual requirements. However, as the Buyer reasonably states, the existing difference between the requirements set forth in the contract and in the documents evidencing the quality of the goods could entail the impossibility to receive the payments under the letter of credit, had it been opened totally in accordance with the contract. The contract, that was entered into by the Buyer with a company from a third state, to whom the said lot of goods was resold, contained a reference to the same standard (GOST) as the one mentioned in the contract between the parties to the dispute. Besides, the Seller sent the Buyer incorrect information about the goods that required some additional verification.

     3.8 The amount of the original claim also included penalties for the delay in shipment computed in accordance with clause 9.2 of the contract. This amount is not included in the [modified] claim in which the amount of the claim was increased. In his reply to the claim, the Seller argued that the Buyer let the statute of limitation run out. The Tribunal finds that the Claimant [Buyer] dropped this claim.

     3.9 The calculation of the amount of the claim submitted by the Buyer contains the claim to recover lost profit from the [Seller] in connection with both the first and second lots of goods under the contract.

As to the second lot, such claim cannot be sustained for the reasons stated above (see paragraph 3).

The Tribunal also finds impossible to sustain the claim to recover lost profit in connection with the first lot for the following reasons.

-   As follows from the materials of the case, [Buyer]'s failure to open a letter of credit was caused both by the fault of the third party, to whom the Buyer resold the goods, and by [Buyer]'s termination of the contract due to the high level of devaluation of the national currency in the third party's state. In such circumstances, the Buyer had grounds to claim lost profit from his counteragent and not from the Seller.
 
- Besides, the termination of the contract followed due to the reasons for which, as stated above, both parties were liable. Seller's counterclaim to recover damages under Article 75 CISG -- the difference between the price set in the contract between the parties to the dispute and the price in the substitute transaction with the third party to whom the Seller resold the goods at a lower price after the contract of 14 May 1993 was terminated -- would not have been sustainable for the same reason, had it been submitted.

     3.10 Seller's claim for storage expenses is rather a claim to take into account the loss he suffered when a refund of an advance payment -- which he does not contest -- is made. When reviewing this counterclaim, the Tribunal took into consideration the following factors.

-   First, as stated above, no expenses in connection with the storage of goods from 1 December 1993 through 14 January 1994 can be recovered.
 
- Second, in accordance with clause 11.4 of the contract, any expenses in connection with the storage of goods shall be attributed to the Buyer's account starting on the eleventh day after the Buyer has been notified that the goods were ready to be loaded [aboard]. Taking into account the circumstances of the case, such expenses should be attributed to Buyer's account starting on 25 January 1994.
 
- Third, for the purposes of this computation, in order to determine the final date, for which such expenses have to be paid, it is necessary to take into account the facts of the case as well as the relevant provisions of the CISG (in particular, Articles 74, 77, 80 and 81). As follows from the correspondence between the parties, the making of a substitute contract required a lot of efforts and time. In such circumstances, the conclusion of the contract with another counteragent on 17 May 1994 was done within the reasonable time after the contract of 14 May 1993 was terminated on 18 April 1994. Thus, the storage expenses, which should be taken into account in the present case, should be calculated up to the date when a substitute contract was concluded.
 
- Fourth, the Buyer did not contest the arithmetical correctness of the storage expenses computation submitted by the Seller.
 
- Fifth, taking into considerations [Buyer]'s violations [stated] in the counterclaim, the Tribunal finds it just to divide the storage expenses equally between the parties.

     3.11 Seller's claim to recover the penalties for the delay in opening of the letter of credit shall be denied. [This claim] was mentioned for the first time in the counterclaim filed on 16 November 1995. As the Seller points out, the penalty is calculated up to 18 April 1994. The Buyer argued that the statute of limitation in connection with this claim had run out.

Pursuant to Article 43 of the USSR Principles of Civil Law 1991, the issue of statute of limitation shall be raised by a party to the dispute. Prior to 1 January 1995, the reduced statute of limitation (6 months) was applied in Russia to all the claims involving the penalty (see Article 79 of the Russian Soviet Federative Socialist Republic Civil Code 1964). Thus, the statute of limitation in connection with this claim ran out in October 1994.

     3.12 Buyer's claim to recover annual interest from the date of termination of the contract of 14 May 1993 shall be partially sustained. Pursuant to Article 66(3) of the USSR Principles of Civil Law 1991, he is entitled to 5% annual interest on the amount of the advance payment not refunded for the relevant periods of time starting on 19 April 1994.

As to Buyer's claim to recover 8% annual interest for the use of monetary funds, pursuant to the same Article 66(3) of the USSR Principles of Civil Law 1991, it cannot be reviewed. In support of his claim, the Buyer submitted a letter from a Swiss bank dated 10 November 1995 stating the annual interest rates existing in Switzerland in connection with operations in US dollars. However, as follows from the contract of 14 May 1993, the [Buyer] is located in Nicosia, Cyprus. Pursuant to Article 133(3) of the USSR Principles of Civil Law 1991 (that applies to contractual relationships by analogy), annual interest for the use of monetary funds shall be calculated at the median bank interest rate existing in the creditor's state. Article 395 of the Russian Federation Civil Code 1994, that governs such claims arising after 1 January 1995, also states the bank interest rate existing in the state where the legal entity is located. The Buyer has not presented any evidence of the rate existing in Nicosia, Cyprus.


FOOTNOTES

* This is a translation of data on Proceeding 22/1995, dated 1 December 1995, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in Rozenberg ed. Arb. Praktika (1997) No. 62 [167-173]

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

** 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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