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CISG CASE PRESENTATION

Russia 12 March 1996 Arbitration proceeding 166/1995 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/960312r1.html]

Primary source(s) for case presentation: Case text

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Case identification

DATE OF DECISIONS: 19960312 (12 March 1996)

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: 166/1995

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russia (respondent)

BUYER'S COUNTRY: Ecuador (claimant)

GOODS INVOLVED: Unavailable


Case abstract

RUSSIAN FEDERATION: Award in Case No. 166/1995 of 12 March 1996 of the
Arbitration Tribunal of Russian Federation Chamber of Commerce and Industry

Case law on UNCITRAL texts (CLOUT) abstract no. 461

Reproduced with permission of UNCITRAL

Abstract prepared by Alexander Komarov, National Correspondent

Under an agreement concluded in October 1993, a Russian company, the seller, delivered goods on CFR terms to a buyer in Ecuador, but after a few days defects were found, preventing the goods from being used for their proper purpose. The seller offered to exchange the defective goods with conforming goods, but the buyer did not accept the offer and sued, demanding reimbursement of the value of the defective goods and compensation for losses sustained. The seller refused, stating that the manufacturer would not accept the return of any of the goods to Russia and recommended that the goods should be disposed of as the buyer saw fit.

The tribunal determined that the agreement had set no conditions regarding the quality of the goods. The seller was, therefore, obligated to supply the buyer with goods of normal quality appropriate for their practical application to specific conditions of use. From the facts of the case, it was clear that defects had occurred in the course of manufacture preventing the goods from being used for their proper purpose. The tribunal thus concluded, on the basis of article 35(2) CISG, that the goods did not conform with the contract. Under article 45 CISG, the buyer has the right to choose its legal remedy in case of breach of contract by the seller, so it was entitled to refuse the sellerís offer to exchange the defective goods and claim compensation for its loss. The tribunal considered that the sellerís business experience could have enabled it not only to foresee the actual loss to the buyer but also the possibility of avoiding such loss. The losses borne as a result of the breach of contract were therefore subject to compensation, in accordance with article 74 CISG. The tribunal rejected the sellerís assertion that it could not pay damages to the buyer until the successful conclusion of the case that it intended to bring against the manufacturer, since the sales contract as concluded established rights and obligations only between the buyer and the seller.

On the basis of the above, the tribunal found in favour of the buyer.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issues: Articles 35(2) ; 36 ; 45(1)(b) ; 74 ; 78 [Also cited: Article 39(1) ]

Classification of issues using UNCITRAL classification code numbers:

35B1 ; 35B2 [Conformity of goods (requirements imposed by law): fitness for purpose for goods of same description; Fitness for particular purpose made known to seller];

36B1 [Time for assessing conformity of goods (lack of conformity after passage of risk): caused by seller's breach of any of his obligations];

45B [Remedies available to buyer: remedies under articles 46-52 do not bar damages];

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

78B [Rate of interest]

Descriptors: Conformity of goods ; Passage of Risk ; Damages ; Foreseeability of damages ; Legal costs ; Interest

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Editorial remarks

Conformity of goods. "Case No. 166/1995 represents an interesting example of the application of Article 35 CISG. According to the facts, a Russian seller (the respondent) delivered goods to the buyer (the claimant) in Ecuador. After several days of use of the contract goods, defects were discovered. The defects excluded the possibility of using the goods in accordance with their purpose.

"The respondent argued that one of the reasons for the appearance of the defects was use of the goods in the climatic conditions of the claimant's country. The Tribunal rejected this argument. It stated that at the time of the conclusion of the contract the respondent could not have been unaware of the climatic conditions in which the goods were to be used. Therefore, under paragraph 1, Article 76 of the fundamentals of Civil Legislation 1991, the respondent had an obligation to deliver goods of 'ordinary quality' conforming to the purpose of their use in particular conditions. At the same time, the ICAC referred to Article 35(2)(b) by stating the 'the goods [did] not conform with the contract if they [were] not fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract'.

"So far as the 'ordinary quality' standard provided for in the Fundamentals of Civil Legislation was concerned, the Tribunal did not agree with the respondent and ruled that the goods did not conform to this standard. At the same time, the Tribunal referred to the provisions in Article 35(2)(a) CISG.

"This decision in this case is questionable. It is not clear whether the Tribunal applied Russian law of the CISG to determine if the goods were conforming. The decision seems to imply that it was the national standard of 'ordinary quality' which served as the ultimate yardstick for evaluation of whether or not the goods were conforming. If this conclusion is correct, it is submitted that a national standard could not be applied to a case governed by the CISG and where the CISG contains express provisions as to the standards for evaluating conformity of the goods. Although some commentators take the view that 'purposes for which goods would ordinarily be used' should be determined according to a national standard, it is argued that these purposes should only be determined on the basis of interpretation of the contract. Thus, no domestic standard can affect interpretation of Article 35(2).

"If, however, the basis for the Tribunal's decision were Article 35(2), then no references to national law should have been made. No domestic rule can be referred toin cases where the CISG expressly provides a relevant provision." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at 25-26 (citations omitted).

Foreseeability of damages. "[T]he Tribunal held the seller's experience in carrying out commercial activity allowed the seller to foresee the loss that the buyer would suffer as a result of the breach." Id. at 49.

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg ed., Arbitrazhnaja praktika za 1996-1997 gg. [Arbitration practice in the years 1996-1997], Moskva (Statut) 1998, No. 12 [42-48]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at nn.113, 135, 209; CISG-AC advisory opinion on Examination of the Goods and Notice of Non-Conformity [7 June 2004] (this case and related cases cited in addendum to opinion); Henschel, The Conformity of Goods in International Sales, Forlaget Thomson (2005) 222

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation Arbitration proceeding 166/1995 of 12 March 1996

Translation [*] by Mykhaylo Danylko [**]

Translation edited by Djakhongir Saidov [***]

1. SUMMARY OF RULING

      1.1 The Vienna Convention of 1980 [UN Vienna Convention on Contracts for the International Sale of Goods of 1980 (hereinafter CISG)] should be applied to the relations arising out of the present contract, because on the date of signing of the contract the parties' principal places of business activity were located in States (Russian Federation and Ecuador, respectively) which are Contracting States to the CISG.

      1.2 Although the contract does not stipulate provisions on applicable law, the Tribunal of International Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation (hereinafter Tribunal) came to the conclusion that the parties have chosen the substantive law of the Russian Federation as the law applicable to the merits of their dispute. This conclusion follows both from the parties' referring to the rules of Russian law while defending their positions and from the submissions made in the proceedings of the Tribunal.

      1.3 The presence of manufacturing defects in the goods which rendered them unfit for the ordinary purpose of their use, under Article 35(2)(a) CISG, means that the goods do not conform with the contract and that, under Article 45 CISG, the buyer is entitled to choose the remedy, including a claim for damages instead of replacement of the goods as proposed by the seller.

      1.4 The [seller] could not have been unaware of the climatic conditions of use of the goods when he concluded the contract for delivery of the goods to the particular country. Therefore, the [seller] should have delivered goods of ordinary quality that would have been fit for the particular purpose in the particular conditions for their use. The [seller]'s assertion that the defects of the goods arose from their use in climatic conditions in the buyer's country which are unknown in Russia, cannot be admitted on the basis of Article 35(2)(b) CISG, considering that the [seller] was informed of the particular purpose of use of the goods at the time of the conclusion of the contract.

      1.5 Neither can be admitted the assertions of the [seller] that, because the inspection was held without considering the requirements of the manufacturing plant with whom [seller] had contracted and the GOST [All-Union State Standard] which is in force in Russia, the results of inspection in the place of destination are not evidence of the goods not being in conformity with the criterion of "ordinary quality". Defectiveness of the goods is also proved by the results of the expert examination, conducted by the Moscow Specialized Testing Center and is not disputed by the manufacturing plant.

      1.6 In the Tribunal's opinion, the [seller]'s experience in business and commercial activity allowed him not only to foresee the fact that the [buyer] would suffer loss as a result of the breach of the contract, but also the possibility to avoid it. Thus, Article 74 CISG, by virtue of which the [buyer] is entitled to claim the recovery of losses suffered, is applicable in this case.

      1.7 The fact that the [buyer] did not demand handing over of the certificate of quality, the procurement of which by the [seller] is prescribed by the contract, cannot provide grounds for mitigation of [seller]'s liability. Absence of such a request by the [buyer] did not absolve the [seller] from his contractual obligation to deliver goods of conforming quality and to hand over the certificate of quality. By virtue of Article 36 CISG, the seller is liable for any lack of conformity which exists at the time when the risk passes to the buyer, even if the lack of conformity becomes apparent after that time.

      1.8 Since the contract concluded by the parties creates right and obligations only for the [buyer] and [seller], the extent of [seller]'s liability for breach of the provisions of the contract should not depend on the extent of the liability of the third party (manufacturing plant) with whom the [seller] placed the performance of its obligations.

      1.9 Only [buyer]'s claims for the recovery of expenses which have documentary proof have to be granted.

2. FACTS AND PLEADINGS

Under the contract concluded in October 1993, [seller], a Russian company, shipped goods on C.F.R. [C.&.F.] terms to Ecuador. After a few days of use of these goods, the defects were discovered, which deprived the possibility of their use according to their purpose. Defectiveness of goods was proved by the expert examination conducted in Ecuador and also by subsequent inspections of samples of the goods in Russia. The [seller] proposed to the [buyer], an Ecuadorian company, to replace the defective goods. The [buyer] did not agree to this proposal and brought an action before the Tribunal claiming the recovery of the price for the defective goods and compensation of losses suffered. The [seller] denied the [buyer]'s claims, notifying the [buyer] that the manufacturing plant with whom [seller] had contracted had refused to accept the return of the whole quantity of goods and recommended that [buyer] dispose the goods at [buyer]'s own discretion.

The [seller] has submitted a series of arguments in defense of his position during the Tribunal hearings.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

      3.1 [Applicable law]

The States (Russian Federation and Ecuador, respectively) where the parties have their principal business activity, were Contracting States to the CISG at the moment of signing of the contract. Thus, the CISG should be applied to the parties' relations.

In the absence of provisions in the contract on the law applicable to the merits of this dispute, the parties, in defense of their positions, have referred to the law of the Russian Federation, and confirmed during the Tribunal's hearing that the rules of Russian law should be applied to their dispute. On this ground, the Tribunal, guided by Article 28 of the Russian Federation Law on International Commercial Arbitration, holds that the parties have chosen Russian law as the law applicable to the merits of their dispute.

      3.2 [Claimant properly identified]

The Ecuadorian company which brought the action has presented to the Tribunal relevant evidence that it is a successor to the company that had entered into the contract as a buyer. There is an agreement on this matter between the Ecuadorian company which entered into the contract and the [seller] on the transfer of the rights and obligations under the contract. The [seller] does not challenge this succession. Under these circumstances, the Tribunal recognized the Ecuadorian company which had brought the action as the proper Claimant.

      3.3 [The merits of the case]

   3.3.1 [Seller's assertion that the defects have occurred due to the climatic conditions in the buyer's country]

Having considered the merits of the [buyer]'s action, the Tribunal stated the following.

The parties when signing the contract agreed on the delivery of goods of certain nominal size; the conditions of quality were not discussed. The contract provided that the goods were considered delivered by the seller and accepted by the buyer as being of quality which is in accordance with the certificate of quality of the manufacturing plant. There is no evidence in the case materials proving that [seller] has transmitted the certificate of quality to the [buyer]; moreover, it can be unambiguously concluded from the parties' explanations that the certificate of quality has not been included in the set of shipping documents.

The [seller] could not have been unaware of the climatic conditions of use of the goods when he concluded the contract on delivery of the goods to Ecuador. Thus, under Article 76(1) of the Fundamentals of Civil Legislation of the USSR 1991, the [seller] should have delivered to the [buyer] goods of ordinary quality conforming to the particular purpose of their use in the particular conditions. Besides this, the climatic conditions in Ecuador did not impede the [seller]'s obligation to provide the warranty of quality of the goods for a certain period of time, commencing from the date of delivery, for delivery of next installments of these goods manufactured in Russia, proposed by the [seller]. In accordance with Article 35(2)(b) CISG, the goods do not conform with the contract if they are not fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract. In this regard, the assertion of the [seller], that one of the reasons for the manifestation of the defects was the use of the goods in climatic conditions in the country of the buyer that were unknown in Russia, cannot be admitted.

   3.3.2 [Seller's motion to reduce his liability]

The [seller]'s argument that the fact that the [buyer]'s conduct contributed to the [seller]'s improper performance of obligations because the buyer did not take any actions to receive the certificate of quality of the goods, which, under Article 71(3) of the Fundamentals of Civil Legislation 1991, can serve as a basis for proportionate reduction of the debtor's liability, is considered unsubstantiated by the Tribunal and the [buyer]'s failure to take action towards the receiving of the certificate of quality did not have any causal connection with the [seller]'s performance of his obligations as to the quality of the goods; secondly, absence in the terms of the letter of credit of the requirement of presentation of the certificate of quality did not absolve the [seller] from his obligation to provide the certificate to the [buyer] for the purposes stipulated in the contract, which left the [buyer] unable to compare the conformity of the quality of the goods received with the quality prescribed in the certificate of quality of the manufacturing plant. In so ruling, the Tribunal was also guided by Article 36 CISG, according to which the seller is liable for any lack of conformity of the goods which exists not only at the moment when the risk passes to the buyer, but also if the lack of conformity becomes apparent later.

   3.3.3 [Defects of the goods]

[Seller] has alleged that he shipped goods that conformed to the "ordinary quality" criterion. However, as is seen from the case materials, the goods have been manufactured with defects of a kind that did not allow use of the goods according to their purpose. That leads the Tribunal to conclude that the goods were not in conformity with either the requirements of the particular standards or the criterion of "ordinary quality" of the goods.

According to the legislation, lack of conformity of the goods with the criterion of "ordinary quality" is a basis for regarding the goods as non-conforming to the contract. Thus, in accordance with Article 35(2)(a) CISG, the goods are considered not to conform with the contract if they are not fit for the purposes for which goods of the same description are ordinarily used.

   3.3.4 [Seller's challenge of the results of the expert's examination]

There is evidence in the case materials that the goods were delivered by the seller and that the buyer "within a reasonable time", as specified in Article 39(1) CISG, notified the seller of the lack of conformity of the goods with the contract and of impossibility of using the goods for their purpose.

According to the contract, the expert examination report on the quality of the goods for reclamation should be conducted by an independent expert company chosen by the buyer with the consent of the seller, or in the presence of the seller's representative. Case materials show that the [seller], upon receiving from the [buyer] the notice of delivery of defective goods, asked the [buyer] to propose "any independent firm (e.g., representative of the Chamber of Commerce of Ecuador)" for completion of the report of reclamation and additional inspection of conditions of use and quality of the goods. The [buyer] has repeatedly notified the [seller] of the results of the expert examination, conducted by the Ecuadorian Association of Control for Quality, and the [seller] has not contested these results until the day of the hearings of the case, which allows the conclusion that the [seller] consented that the expert's examination be conducted by this Association.

The [seller] and the manufacturing plant have not denied the existence of the defects in the goods; this fact is proved, in particular, by the [seller]'s fax proposals, included in the case materials, to replace the defective goods. The [seller] also has repeatedly notified the [buyer] of [seller]'s intention to bring suit before the Arbitration Court against the manufacturing plant. Particularly, the [seller] in his letter of 13 April 1995, confirmed the defective quality of the shipped goods and informed the [buyer] that the [seller] soon would resort to the arbitration court with an action against the manufacturing plant, in order to claim recovery of the [buyer]'s losses in the amount stipulated by the [buyer] in the [buyer]'s letter of claim of 18 August 1994.

The Tribunal cannot accept the [seller]'s opinion, submitted during the hearings, that the results of testing conducted in Ecuador did not comply with the "ordinary quality" criterion as specified by Article 76(1) of the Fundamentals of Civil Legislation of the USSR 1991 in the event that the parties have not agreed on the terms of quality in the contract. The [seller] based his opinion on the fact that the testing was held in accordance with the requirements of the U.S. Department of Transportation and not those of the manufacturing plant and GOST [the All-Union State Standard in force in Russia]. In this regard, the Tribunal notes that the fact of delivery of defective goods is also proved by the results of the expert examination conducted by the Moscow Specialized Testing Center.

   3.3.5 [Buyer's right to choose remedy]

Under Article 45 CISG, if the seller fails to perform any of his obligations under the contract, the [buyer] has the right to choose the remedy, i.e., the [buyer] was entitled to reject the [seller]'s proposal to replace the defective goods and instead claim damages, as is provided in Article 45(1)(b) CISG.

Under Article 74 CISG:

"Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."

The Tribunal does not doubt the fact that the [seller]'s experience in business and commercial activity allowed him not only to foresee the fact that the [buyer] will suffer loss as a result of the breach of the contract, but also the possibility to avoid it.

   3.3.6 [Sellers assertion of limited liability]

The Tribunal does not deem it possible to admit the [seller]'s opinion that since the defective quality of the shipped goods was a consequence of the improper conduct of technological process of their manufacturing, he cannot compensate the [buyer] for losses until the recovery of damages under the action which [seller] intends to bring against the manufacturing plant. The Tribunal also cannot agree with the [seller]'s submissions, according to which the amount of damages to be awarded to the [buyer] depends on the sum of claims that will be paid by the manufacturing plant against which the [seller] brings the suit.

In accordance with Article 62 of the Fundamentals of Civil Legislation of the USSR 1991, in the event that performance of an obligation under the contract is placed in full or in part on a third party, and this third party is connected to one of the parties by relevant agreement, then, the liability for non-performance of the obligation should be on the party to the contract from which it arose.

Since the concluded contract creates rights and obligations only for the buyer and seller, the extent of liability for breach of its provisions should not depend on the extent of liability of the third party to the [seller] under the contract concluded between the [seller] and the third party.

4. [RULING OF THE TRIBUNAL]

Taking into account the aforesaid, as well as the calculations provided by the [buyer] on separate sums of [buyer]'s claims and proof of their amounts, contained in the case materials, the Tribunal considered it possible to grant the following claims of the [buyer]:

-   recovery of the price for the goods paid by the [buyer];
compensation for the expenses as to marine insurance of the goods sold by the [seller] under the "C.F.R.
-   Ecuadorian port" term of delivery, which are confirmed by the insurance policy;
compensation for the expenses, which are proved by the [buyer] with documents, suffered by the [buyer] in Ecuador in connection with obtaining import license, customs clearance of the goods, payments of import tax and value added tax;
-   compensation for the expenses for inspection of the quality of the goods in Ecuador, which are confirmed with the invoice from the company that held the control inspection;
compensation for the [buyer]'s expenses, confirmed by the bank's report, incurred in connection with opening of the letter of credit, for the part of goods that was recognized as defective (this letter of credit also covered delivery of other goods, in relation to which no claims were brought forward);
-   compensation for the expenses incurred in conducting the claiming process against the [seller], confirmed by the certificate of the Ecuadorian auditor company, verified by notary;
partial compensation for legal fees incurred in connection with presentation of the [buyer]'s claims before the Tribunal, considering the level of difficulty of the case;
-   recovery of 5%
-   annual interest for the period until 31 December 1994 (inclusive) on the basis of Article 66(3) of the Fundamentals of Civil Legislation of the USSR 1991.

The Tribunal left unconsidered the [buyer]'s claim for continuing sanctions for the period from 1 January 1995, having noted that the [buyer] did not base this claim either on norms of law or provisions of the contract. Under Article 330 of the Russian Federation Civil Code, a penalty is subject to imposition only in the event that it is so provided by either the law or contract.

The claims of the [buyer] which were not based upon documentary proof, namely, the claim for [recovery] of the import tax for the period from 13 April 1994 until 31 December 1994 and for general import payments, were also left unconsidered by the Tribunal.


FOOTNOTES

* This is a translation of the award in Proceeding 166/1995, dated 12 March 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. 12 [42-48]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Ecuador is referred to as [buyer]; Respondent of the Russian Federation is referred to as [seller].

** 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. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

*** Djakhongir Saidov (Republic of Uzbekistan), Bachelor (University of World Economy and Diplomacy, Uzbekistan), LL.M. (University of East Anglia, UK).

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