Russia 13 December 1995 Arbitration proceeding 364/1994 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/951213r1.html]
DATE OF DECISIONS:
CASE NUMBER/DOCKET NUMBER: 364/1994
CASE HISTORY: Unavailable
SELLER'S COUNTRY:Russian Federation (claimant)
BUYER'S COUNTRY: Czech Republic (respondent)
GOODS INVOLVED: Unavailable
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issues:
Classification of issues using UNCITRAL classification code numbers:
53A [Buyer's obligation to pay price of goods]; 78A [Interest on delay in receiving price or any other sum in arrears]; 79B [Impediments excusing party from liability for damages]
53A [Buyer's obligation to pay price of goods];
78A [Interest on delay in receiving price or any other sum in arrears];
79B [Impediments excusing party from liability for damages]
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
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. 66 [183-187]
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
13 December 1995 [Case No. 364/1994]
Translation [*] by Alexander Morari [**]
1. SUMMARY OF RULING
1.1 As applied to contractual obligations between the [Seller] and the [Buyer], the Bank, in which the [Buyer] opened a letter of credit in favor of the [Seller], shall be considered a third party acting on behalf of the [Buyer]. Therefore, in accordance with art. 223 of the Civil Code of the Russian Federation, 1964, the [Buyer] is to be held liable for non-performance or inappropriate performance by the Bank of its obligations in connection with the letter of credit.
1.2 Opening of the letter of credit per se does not satisfy a pecuniary obligation to pay for the delivered goods, since payment was not made under the letter of credit.
2. FACTS AND PLEADINGS
2.1 The contract between the [Seller] of the Czech Republic and the [Buyer] of the Russian Federation was concluded on 24 September 1991 in Moscow, Russia.
According to the contract, payment of the price of the delivered goods had to be made by way of opening of an irrevocable letter of credit at a bank in [Seller]'s country within a month after the contract was signed by the parties. Duration of the letter of credit was to be 60 days. According to the contract, the [Seller] had an obligation to deliver the goods within two months after opening of the letter of credit.
2.2 On 22 October 1991 the [Buyer] opened an irrevocable confirmed letter of credit. The term of delivery was settled at two months. The [Seller] delivered the goods in December 1991.
Due to the circumstances at hand, the [Seller] asked to have the duration of the letter of credit extended.. With consent of the [the Bank for Foreign Economic Affairs of the USSR (hereinafter the Vnesheconombank)], the terms of the letter of credit were changed, and its duration was extended to 31 January 1992.
Yet, notwithstanding the fact that the documents necessary for the letter of credit were handed over to the bank in [Seller]'s country, the payment under the letter of credit was not made. The reason why the letter of credit could not be used, according to [Seller]'s statement, was that the funds were "frozen" by the Vnesheconombank.
At the arbitration proceedings, the parties reached an agreement that under favorable circumstances the payment could have been made by 10 January 1992.
2.3 In its statement of defense, the [Buyer] submits that, in accordance with the concluded contract, it opened an irrevocable letter of credit. As soon as the letter of credit was opened, a certain sum was written off the [Buyer]'s account, equal to the sum for which the letter of credit was opened.
In its Regulation of 13 January 1992 No. 2172-1, the Presidium of the Supreme Council of the Russian Federation suspended use of currency funds. As a result, this led to the appearance of commercial debt of the Vnesheconombank in connection with payment for the goods under the said contract. The [Buyer] informed the [Seller] that the Vnesheconombank wrote off his account the sum of the letter of credit for subsequent payment for services provided and that all further transactions related to payments under the contract would be effected by the Vnesheconombank. The [Buyer] sent to the Vnesheconombank an official message regarding [Seller]'s claim concerning non-payment of the invoice for the delivered equipment. Also, the [Buyer] makes a reference to the Declaration of the Russian Federation Government "On re-structuring of commercial debt of the ex-USSR to foreign creditors" of 27 September 1994, which provides that the Russian government is ready to accept legal responsibility of legal persons which appeared in the period starting from 28 October 1991 up to 31 March 1993, and which, unconditionally, is subject to satisfaction, including the debts arising out of revocable and irrevocable letters of credit (clause 6.4.4 of the Declaration). Taking into account the above mentioned circumstance as well as art.79 of the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG], the [Buyer] submits that all claims out of the present action should be brought against the Vnesheconombank.
3. TRIBUNAL'S REASONING
The Tribunal ruled that [Seller]'s claims are to be granted. The ruling of the Tribunal was based on the following reasoning.
3.1 [Jurisdiction of the Tribunal]
The contract concluded between the parties in Moscow on 24 September 1991 contains an [arbitration] clause providing that all disputes between the parties shall be referred to the jurisdiction of the Arbitration Court at the USSR Chamber of Commerce and Industry. According to section 4 of Tribunal's Regulations, the Tribunal is the successor of the Arbitration Court at the Russian Federation Chamber of Commerce and Industry and is entitled, in particular, to arbitrate disputes out of parties' agreement to refer their disputes to the jurisdiction of the Arbitration Court at the USSR Chamber of Commerce and Industry.
The Tribunal's jurisdiction to arbitrate the present dispute is also provided for in art. II(1) of the Moscow Convention, 1972.
Based on the above, bringing the action before the Tribunal as a competent body for arbitration is legally justified.
3.2 [Applicable law]
Taking into account that the Russian Federation and the Czech Republic are State parties to the CISG, the Tribunal concluded that CISG is applicable to the relations between the parties.
In accordance with art. 7 CISG, all questions concerning matters governed by the CISG, which are not expressly settled in it are to be settled in conformity with the general principles on which it is based, and when such principles are absent, in conformity with the law applicable by virtue of the rules of private international law.
Subject to art. 566 of the Civil Code of the Russian Soviet Federative Socialistic Republic, 1964 [hereinafter, Russian Civil Code, 1964], Russian substantive law is applied as subsidiary law to the relations under the present contract since Russia is the place of conclusion of the contract of 24 September 1991.
3.3 [Ruling on the merits of the case]
The parties do not have any dispute as to whether the [Seller] duly performed its contractual obligation to deliver the goods, as well as to the price of the goods to be paid. At the same time, the [Buyer] refers to non-performance of the obligation to pay for the goods committed by the Vnesheconombank and submits that this circumstance is a valid ground for the [Buyer] to be released from the obligation to pay the price of the contract. The burden of proof of existence of such circumstances, exempting from any liability under the concluded contract, rests on the [Buyer].
In the Tribunal's opinion, the [Buyer] failed to prove the existence of the circumstances provided for in the contract (more specifically: in the force-majeure clause of the contract). From the point of view of contractual obligations between the parties, the Vnesheconombank is a third party.
In accordance with art. 223 of the Russian Civil Code, 1964, when the debtor imposes upon a third party the obligation to perform its contractual obligation, the debtor is liable for non-performance or inappropriate performance of its obligations by the third party. Opening of the letter of credit per se does not lead to termination of a pecuniary obligation to pay for the delivered goods, as payment was not made under the letter of credit.
As for [Buyer]'s reference to the Declaration of Russian Government "On re-structuring of commercial debt of the ex-USSR to foreign creditors" approved by a Government Regulation of 24 September 1994 No.1107, the Tribunal states that this declaration provides that the Russian Government is ready to accept legal responsibility for commercial debts out of obligations of the USSR provided foreign creditors fulfill a number of conditions and only after the Russian Government approves all technicalities and financial conditions of re-structuring of commercial debts of the ex-USSR. In the Tribunal's opinion, the this Regulation of the Russian government entitles the [Seller], under certain circumstances, to address the Russian government directly in respect of liquidation of the debt. Yet, this fact does not amount to an automatic exemption of the [Buyer] from its obligation to liquidate the debt out of the contract.
Taking into account the above and based on provisions of the contract, as well as on art. 53 and 62 CISG, the Tribunal ruled that the [Buyer] must pay the [Seller] the claimed sum as payment of the debt out of the contract.
3.4 [Interest on the debt]
Turning to [Seller]'s claim for recovery of the interest on the overdue debt, the Tribunal states that the [Seller] is entitled to this claim by virtue of art. 78 CISG. However, the CISG does not provide for the interest rate to be applied to the debt in question. Therefore, the Tribunal applied the relevant provisions of the Russian substantive law, which is the subsidiary law applicable to the present dispute.
According to art. 226 of the Russian Civil Code, 1964, a debtor who failed to perform a pecuniary obligation on time shall pay the interest on the overdue sum at the rate of 3%. On the other hand, art. 66 of the Fundamentals of the Russian Civil Legislation of 1991 [hereinafter, Fundamentals 1991], which came into force on 3 August 1992, provides for an interest rate of 5% for overdue payment.
Further, art. 66(3) of the Fundamentals 1991, provides a possibility of payment of the interest for making use of the monetary funds of another when a pecuniary obligation out of entrepreneurial activity is overdue as well as other pecuniary obligations of legal persons. The burden of proof of the amount of interest for making use of another company's funds rests on the [Seller]. During the arbitral proceedings, the [Seller] submitted no such proof.
Part I of the Russian Civil Code, which came into force on 1 January 1995, does not provide for recovery of a fixed rate of interest provided by law.
In accordance with art. 395 of Part I of the Russian Civil Code, for the use of the another company's money as a result of its illegal retention the interest on the total amount of these funds shall be due. The interest rate is to be determined by the discount rate of the bank interest existing at creditor's place of business. The burden of proof of the amount of the discount rate rests on the creditor. As was indicated above, the [Seller] failed to submit such proof.
The parties agree on the fact that the payment for the delivered goods had to be received by the [Seller] no later than 10 January 1992. Therefore, the [Buyer] must pay to the [Seller] the interest at the rate of 3% for the period starting from 11 January 1992 to 2 August 1992; and at the rate of 5% from 3 August 1992 to 31 December 1994.
* All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Czech Republic is referred to as [Seller]; Respondent of Russian Federation is referred to as [Buyer].
** Alexander Morari, born in the Republic of Moldova; has taken part in a number of international moot courts as a member of Moldovan Team and as the coach of a Russian Team.Go to Case Table of Contents