Case text (English translation)
Queen Mary Case Translation Programme
Russian Federation Arbitration proceeding 328/1994 of
10 February 1996
Translation [*] by Yelena Kalika [**]
Translation edited by Mykhaylo Danylko [***]
1. SUMMARY OF THE RULING
1.1 It is held that the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG] is applicable to the contract concluded between a Russian company and a Swiss company in January 1994. The civil law of the Russian Federation is applicable to questions not settled in the Convention.
1.2 Since neither the CISG nor Incoterms (1990), to which the parties have referred during the hearing, determine the moment of passing of the title to the goods sold [to the buyer], the Tribunal of International Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation (hereinafter Tribunal) was guided by the provisions of Article 50 of the Fundamentals of Civil Law [of USSR] 1991. It is found that [the title] passed to the buyer (under the FOB delivery term) not later than the date on which the representative of the [buyer] has received the bills of lading.
1.3 After acquiring title to the goods purchased, the [buyer] bears the responsibility as to storage and further disposition of the goods. The [buyer]'s refusal to accept the goods after the documents of title to the goods was handed over to [buyer] does not constitute the per se annulment of the transfer of title which had taken place, even if by this moment the [buyer] has not yet made the payment for the goods.
1.4 Since none of the parties to the contract has given notice of avoidance, the contract continues to be valid; therefore, the [buyer] retains the right to demand from the [seller] to make shipment of the non-delivered quantity of goods.
1.5 Even notoriousness of the circumstances which the [buyer] considers to be force majeure, does not release the [buyer] from the duty to inform the [seller] of such circumstances in accordance with the terms of the contract. The Tribunal finds not proven the causal connection between the event, upon which the [buyer] relies, and [buyer]'s delay in performance of his obligations.
1.6 It is found that, in accordance with Incoterms (1990) (paragraph B. 5 of the FOB terms), the [buyer] bears all risks of loss of or damage to the goods from the moment of expiration of the date of delivery set forth in the contract, provided that the goods were properly identified. However, that does not release the [seller], who continues to possess or control the disposition of the goods which the [buyer] delayed to accept, from taking all reasonable measures under such circumstances in order to preserve the goods. Since the Tribunal has found that the [seller] did not take all such measures in order to preserve the goods delivered to the port from deterioration of their quality, pursuant to Article 36 CISG, the [Tribunal] imposed on the [seller] the obligation to provide a discount for the [buyer].
2. FACTS AND PLEADINGS
The action was brought by [seller], a Russian company, against [buyer], a Swiss company, in connection with failure to pay for the goods delivered on "FOB Black Sea port" term in accordance with the contract concluded between the parties on 27 January 1994. Since the [buyer] did not issue a letter of credit, the [seller] handed over the complete set of documents specified in the contract to the buyer's representative in Moscow so that [the documents] would be sent to a Swiss bank.
2.1. [Buyer's position]
The [buyer] refused to pay for the goods on the ground of their poor quality and filed a Counteraction. The [buyer] claimed damages resulting from the delivery of deteriorated goods and demanded that there be imposed on the [seller] the obligation to deliver the entire quantity of the goods under the contract and to dispose the deteriorated goods. In [buyer]'s opinion, it should be found that there was no delivery at all, since the change in the quality of the goods had taken place at the time when the goods were stored at the port of loading, i.e., before the goods were taken aboard.
2.2 [Seller's reply]
The [seller] argued that some insignificant change in quality of the goods resulted for reasons for which the [buyer] was responsible, taking into consideration that there was a delay in chartering the vessel at the port and, the goods got wet due to rain after the risks had passed to the [buyer].
There were four hearings of this case at the Tribunal.
3. TRIBUNAL'S REASONING
The judgment of the Tribunal is based on the following grounds.
3.1 [Applicable law]
During the hearing of the case, the parties agreed that their relations were governed by the CISG, to which Russia and Switzerland are Contracting States. As to the questions not settled in the Convention, the Civil Law of the Russian Federation should apply.
3.2 [Seller's claim for payment for the goods]
While resolving the principal action [brought by the seller], the Tribunal first discussed the issue of the title to the goods delivered by the [seller]. Neither the CISG, nor Incoterms (1990) (FOB terms), upon which the parties relied during the course of the hearing, provide for the moment when the title to the goods sold passes from the [seller] to the [buyer]. Article 50 of the Fundamentals of Civil Law of USSR 1991, which apply to the relations between the [seller] and the [buyer], states that the title of the purchaser of the goods under a contract arises at the moment of transfer of the goods, unless the applicable law or the contract provides otherwise. The transfer occurs at the moment of either handing over the goods to the [buyer] or, in cases where the [seller] is not bound to deliver the goods to the buyer, handing over goods to a shipping company [carrier] for shipment of the goods to the [buyer]. The transfer of a bill of lading or other document of title to the goods is equivalent to the transfer of the goods. As follows from a receipt signed by the representative of the [buyer] in Moscow on 12 April 1994, [buyer] received the originals of the bills of lading for the entire quantity of the goods in dispute. Therefore, the title to the goods shipped has passed to the [buyer] not later than 12 April 1994.
The [buyer] argues that he has never accepted the goods. [Buyer] relies on his letter of 12 May 1994. However, this letter cannot be admitted into evidence for the above mentioned assertion, because it contradicts the factual circumstances of the case. In the letter, inter alia, it is stated that a part of goods is still (i.e., on 12 May 1994) located at the port of loading. However, it follows from the case materials, including the documents submitted by the [buyer], that, the goods in dispute had not only been loaded aboard a vessel, but had already been unloaded in the ports of destination by the time the letter was sent.
In the case materials, there are the [buyer]'s communications on the refusal to accept the goods by [buyer]'s domestic counter-agents, to whom the [buyer] resold the goods. However, there was no obligatory privity between the [seller] and those counter-agents of [buyer]. Thus, the actions of the counter-agents create no legal consequences for the [seller].
After acquiring title to the goods purchased, the [buyer] bears the responsibility for the storage of goods and their further disposition. Therefore, the Tribunal finds unreasonable the [buyer]'s numerous communications to the [seller] in relation to the future [disposition] of the goods rejected by the third parties, which bought the goods from the buyer.
When answering the Tribunal's question as to why the [buyer] still thought that the goods delivered were still the property of the [seller], the representative of the [buyer] explained it with the [buyer]'s refusal to pay for the goods. The Tribunal believes that such a position does not comply with either the applicable law or the terms of the contract. Pursuant to Article 53 CISG as well as to the terms of the contract, the [buyer] must pay the price for the goods delivered.
3.3 [Date of buyer's counteraction]
The counteraction was filed with the Tribunal on 11 June 1995, however, the arbitration fee was paid only on 13 June 1996. Pursuant to section 18 of the Rules of Tribunal, the date of filing of the counteraction is 13 June 1996.
3.4 [Undelivered part of goods]
The claims set forth in the counteraction relate to the non-conforming quality of the goods delivered. The [buyer], first of all, asks [the Tribunal] to impose on the [seller] the obligation to deliver, on the terms set forth in the contract, the entire quantity of goods under the contract within 3 months after the date of the Tribunal's judgment. However, as it has been mentioned above, the [seller] had already delivered a significant part of the goods under the contract, goods that have been sold by the counter-agent of the [buyer], while the rest of the goods have been stored in warehouses in the country of destination.
Therefore, the [seller] has performed the significant part of his obligations under the contract and granting the [buyer]'s claim would lead to the second delivery of the significant quantity of the goods. Therefore, the Tribunal does not find any reasons for granting the [buyer]'s claim mentioned above. However, since neither of the parties to the contract has given notice of avoidance of the contract, the contract remains valid; therefore, the [buyer] retains the right to demand delivery of the rest of the goods from the [seller].
3.5 [Buyer's delay and assertion of force majeure]
The claim of damages set forth in the [buyer]'s counteraction concerns wetness of the goods shipped. The [seller] does not contest the fact of loading the goods in a partially wet condition aboard a vessel. However, in [seller]'s opinion, this resulted due to the [buyer]'s fault, since the [buyer] had breached the provisions of the contract regarding the term of delivery.
The term of delivery was set forth in the contract as from 1 February 1994 to 15 March 1994. The [seller] delivered the goods to the port of loading in due time ([seller]'s telex of 10 March 1994). Under the FOB terms, the [buyer] had an obligation to charter a vessel for the shipment of the goods and to accept the delivery of the goods not later than the date set forth in the contract. However, by 15 March 1994, no vessel chartered for the delivery of the goods had arrived at the port of loading, and, the [buyer] failed to perform his obligation to accept the goods within the time period set forth in the contract.
On 15 March 1994, the [buyer] informed the [seller] that the [buyer] had chartered a particular vessel for the delivery of goods prepared for loading and that the vessel was expected to arrive at the port of loading on either 16 March or 17 March 1994 (telex of 15 March 1994). On 16 March 1994, the [buyer] sent a communication to the [seller] that the vessel was delayed due to the force majeure circumstances in the Bosporus Strait (telex of 16 March 1994). However, the [buyer] has presented no evidence proving the causal connection between the delay in performing [buyer]'s obligations to accept the goods and the incident that took place in the Bosporus Strait.
In particular, no information has been presented as to when the vessel was chartered and as to where it was at the time when the accident happened in the Bosporus Strait. It is also unclear why the [buyer] informed the [seller] of the scheduled arrival of the vessel at the port of loading on either 16 March or 17 March 1994 after the Bosporus Strait had already been closed for navigation.
In accordance with clause 10 of the contract, the proper evidence of force majeure circumstances and their length in time shall be certificates issued by the Chamber of Commerce in the [seller]'s and [buyer]'s countries respectively. No such certificate has been presented by the [buyer]. The buyer argues that the force majeure circumstances in the Bosporus Strait were commonly known and widely publicized; that, however, in the Tribunal's opinion, did not release the buyer from its duty to fulfil the requirements set forth in clause 10 of the contract.
The articles from the "Neue Zurcher Zeitung" newspaper, which were submitted to the Tribunal by the [buyer], do not contain exact information on the first day of the accident and the period of time during which the Bosporus Strait was closed for navigation. For example, in the newspaper of 14 March 1994, it is stated that a collision of two oil tankers and a fire took place the night before (13 March 1994). The next day (15 March 1994) the newspaper refers to a news report from Istanbul, dated 14 March 1994, about the suspension of navigation in the Bosporus Strait, but does not give the exact date of the closing. On 22 March 1994, the newspaper states that eight days after the collision of the tankers the Bosporus Strait was fully open for navigation. However, in the same article it states, quoting an officer of an Istanbul shipping company, that as of Monday night (i.e., 20 March) the first tanker passed through the Bosporus Strait. Thus, two different dates of the opening of the Bosporus Strait for navigation after the collision of the tankers were given in the same article in the "Neue Zurcher Zeitung". The mentioned discrepancies prove the fact that no newspaper articles may replace the official certificates of the force majeure circumstances, which in accordance with the provisions of the contract are to be obtained from the Chamber of Commerce in the [seller]'s or buyer's country. The above stated [facts] serve as evidence that the [buyer] did not fulfil these requirements.
For the above reasons, the Tribunal finds not proven the causal connection between the accident in the Bosporus Strait and the [buyer]'s delay and cannot admit this accident as a ground for the extension of the period of time within which the [buyer] has to perform his obligations (provision 10 of the contract).
3.6 [Discount of price for non-conformity]
Under Incoterms (1990) (paragraph B. 5 of FOB terms), the buyer bears all risks of loss of or damage to the goods from the moment of expiration of the specified date of delivery, i.e., 16 March 1994, provided that the goods were properly identified, i.e., either specifically separated or marked by any other manner as a subject matter of the contract. The [seller]'s telex of 10 March 1994, in particular, may serve as evidence of such identification of the goods intended for the [buyer].
However, Article 85 CISG provides that, if the buyer is in delay in taking delivery of the goods, the seller, who is either in possession of the goods or otherwise able to control their disposition, must take such steps as are reasonable in the current circumstances to preserve the goods.
It is stated in a letter of the administration of the port of loading of 6 June 1996, which was submitted to the Tribunal by the representative of the [seller], that the unloading of the goods in the total quantity of about one-third of all of the goods delivered from the special railroad cars onto the quay began at 7:30 on 16 March 1994 and was finished by 8:00 on 17 March 1994. During the hearing, the representative of the [buyer] also conceded that the said quantity of goods was unloaded on the quay.
According to the [seller]'s assertion, the rest of the goods, which were later loaded aboard the vessel, were stored in an enclosed warehouse as well as in special railroad cars, which guaranteed the goods' full preservation from loss or deterioration.
The seller, however, has not presented compelling evidence of the preservation of the rest of the goods. In the case materials, there is a cargo plan of the vessel on which the goods were loaded, signed by the captain. It follows from this plan that the entire quantity of the goods was loaded into four holds, but all of the goods stored on the open quay were not loaded into a single hold. Thus, the mixing of [the wet] goods with some quantity of the rest of the goods was unavoidable. Since the [seller] has presented no evidence either as into which holds the goods from the quay were loaded or as to what measures were taken in order to prevent the mixing of the wet goods with the rest of the goods, the Tribunal is unable to determine whether at least some of the goods loaded aboard were not wet.
Therefore, the [seller] did not take all the possible measures to preserve the goods delivered by him to the port of loading from getting wet. The [seller], in his attempt to justify his actions in unloading the part of goods on the quay, refers to a letter from the authorities at the port of loading that says that the procedure of reloading of goods like the ones in the present case requires an advance storing of the goods on the quay (one and a half to two days prior to the expected arrival of the vessel on a good weather day). However, the seller could not be absolutely sure that the arrival day of a chartered vessel (in mid-March) would be a good weather day. Therefore, in the Tribunal's opinion, the [seller] did not take all the measures in order to preserve the goods stored on the quay from getting wet. The goods got wet due to rain on 20 March and 22 March 1994. Consequently, the [seller] is liable for the deterioration of that part of the goods.
In accordance with clause 7.3 of the contract, the certificates of quality and quantity shall be issued by an independent inspection authority at the port of loading and are binding on both parties. In the certificates of quality of goods issued by an independent inspection authority at the port of loading on 28 March 1994, the parameters of all lots of the goods are identical.
During the hearing, both parties agreed that the main quality parameter (besides the chemical composition, which was without deviation) should be determined depending on wetness. In the certificates of quality issued at the port of loading, there was a deviation from the parameters agreed upon by the parties only in relation to wetness (1.3% instead of 1%).
Under Article 36 CISG, the seller is liable for any lack of conformity of the goods which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time. Therefore, the Tribunal also takes into account the two reports, which contain the results of the random inspection of quality of the goods, issued by the control service at the port of delivery. Both reports contain the wetness parameters of 0.6% and 0.68%. However, the deviation from the parameter depending on wetness agreed upon by the parties was noted in the two reports.
The certificates issued at the port of loading as well as the above mentioned reports served as a basis for the report on the quality of the goods issued by a Russian Research Institute on 21 May 1996. As stated in this report, it follows from the above mentioned documents that the goods' packaging was affected by wetness, but the main parameters necessary for the purpose of use of the goods were not. The degree of wetness excludes the possibility of the total deterioration of the goods. According to the report, the partial deterioration of the mechanical characteristics of the goods did not result in significant decrease of their use value. However, the decrease in homogeneity of the product contents gives reasons for a reduction in the price range for the granulated and fine product.
The Tribunal finds it possible to make such a reduction relying on the letter of the Chamber of Commerce dated 7 June 1996. It was stated in that letter that, as of May 1996, the difference in average Ex-Works export prices for this type of goods of Russian origin was about 8.3%. This average rate, in the Tribunal's opinion, may be taken as the discount rate in relation to the 1994 prices. Respectively, the amount of discount which shall be reimbursed by the [seller] to the [buyer], has been determined taking into consideration this average rate.
3.7 [Demurrage]
In accordance with clause 7.2 of the contract, the demurrage shall be paid by the [seller]. Therefore, the [seller] shall reimburse to the [buyer] the cost of demurrage paid by the [buyer] to the carrier.
3.8 [Buyer's expenses of freight, inspection and letter of credit]
The [buyer]'s claim against the [seller] for the cost of freight shall not be granted, because under the terms of the contract (FOB) the [buyer] shall pay the cost of freight. The [buyer]'s claim of the expenses in relation to inspection of the goods as well as the expenses in relation to the letter of credit shall not be granted for the same reason.
3.9 [Other losses of buyer]
The Tribunal does not find reasonable the [buyer]'s claims in relation to other losses, alleged in the counteraction, for the following reasons: 1) the [buyer] (the owner of the goods) bears the risk of all the expenses and losses resulting from the reselling of the goods to her counter-agents; 2) during the hearing of the Tribunal the [buyer] withdrew the claim for lost profit (lucrum cessans).
3.10 [Interest]
The [buyer] claims annual interest at the rate of LIBOR + 2% from the date of filing the counteraction. Since the counteraction was filed after the first part of the Civil Code of the Russian Federation had come into force, the Tribunal is guided by the Article 395 of this Code when resolving this issue. The Tribunal believes that the annual interest shall be awarded at the rate of LIBOR on the date of this judgment, without the extra 2% charge from the date of filing of the counteraction (13 June 1996) to the date of payment, because the [buyer] has not presented any evidence which can serve as a ground for such extra charge.
FOOTNOTES
* This is a translation of data on the award in proceeding 328/1994, dated 10 February
1996, of the Tribunal of International Commercial Arbitration at the Russian Federation
Chamber of Commerce and Industry, reported in Rozenberg ed., Arb. Praktika 1996-1997
No. 29 [102-109]. 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 [seller]; Respondent of Switzerland 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. The second-iteration
redaction of this translation was by Dr. John Felemegas of Australia.
*** Mykhaylo Danylko is a Partner with the law firm Danylko, Kushnir, Soltys & Yakymyak, Attorneys & Counselors at Law, Kiev, Ukraine <http://www.dksylaw.com>. He holds a Masters of Laws (European Studies Program) from the Law School of International Science and Technology University, Kiev, Ukraine (July 2000); a Master of Management in Business of the Business School of International Science and Technology University (June 2002); and has received his LL.M. in International and Comparative Law at the Pace University School of Law.
Pace Law School
Institute of International Commercial Law - Last updated December 2, 2005
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