Case text (English translation)
Queen Mary Case Translation Programme
Russian Federation Arbitration proceeding 433/1994
of 26 September 1996
Translation [*] by Mykhaylo Danylko [**]
Translation edited by Yelena Kalika [***]
1. SUMMARY OF RULING
1.1 The mandatory requirement of signing international agreements by two persons for Russian companies, enacted by the USSR Council of Ministries Resolution No. 122 of 14 February 1978, became ineffective as of 3 August 1992, the date of entry into force of the Fundamentals of Civil Law of USSR 1991.
1.2 Under Article 174 of the Russian Federation Civil Code, violation of the requirement of signing international agreements as prescribed by the company's by-laws may effect that the agreement is declared void, if the action is brought by the party, for whose benefit the limitations were set forth, but only if it is proved that the other party knew or ought to have known of these specified limitations.
1.3 Even if the contract were declared void under the Russian Federation Law on the Tribunal of International Commercial Arbitration (Article 16(1)) and the Rules of Tribunal 1988 (§ 1(3)), the arbitration clause would remain valid.
1.4 Based on Article 74 of the Vienna Convention 1980 [UN Vienna Convention on Contracts for the International Sale of Goods, 1980 (hereinafter CISG)] and the subsidiary application of Article 224 of the Russian Soviet Federative Socialist Republic [hereinafter RSFSR] Civil Code of 1964, the Tribunal of International Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation (hereinafter Tribunal) held that it was reasonable to reduce the amount of the seller's liability, ruling that damages had resulted due to the fault of both parties.
1.5 The loan interest ([proved annual interest] paid by the [buyer] to [buyer]'s bank), was recoverable by way of compensation of losses under Article 74 CISG.
1.6 On the basis of Article 78 CISG, the annual interest could be calculated only with respect to monetary obligation.
1.7 The Tribunal denied [buyer]'s claim for recovery from the [seller] of additional interest for use of the bank loan - in accordance with provisions of Danish law and commercial practice in Denmark - ruling that under the parties' agreement Russian law, rather than Danish law, is applicable to the disputes between the parties.
1.8 The Tribunal granted in part the [buyer]'s claim for recovery of the legal fees paid to legal representatives [attorneys] to present [buyer]'s claims, granting only the reasonable amount of such expenses.
2. FACTS AND PLEADINGS
This action was brought by [buyer], a Danish company, against [seller], a Russian company, for recovery of damages suffered due to non-conforming performance of obligations under the contract made between the parties in January 1994.
2.1 [Buyer's position]
The [buyer] alleged that [seller] delayed shipping the goods and shipped goods of non-conforming quality, and that this caused the [buyer] to pay for the demurrage and dead freight and additional expenses for the use of a bank loan, and to provide discounts for [buyer]'s domestic customers.
The [buyer]'s claims included:
- recovery of direct losses suffered by the [buyer], and, in addition, recovery from the [seller] of interest for the use of [buyer]'s money;
- recovery of a penalty, provided in Article 66(3) of the Fundamentals of Civil Law of USSR 1991;
- recovery of additional interest for the delay to repay a [bank] loan by [buyer], based on provisions of Danish law and commercial practice in Denmark;
- recovery of legal fees paid to legal representatives to present [buyer]'s claims.
2.2 [Seller's position]
The [seller] objected to the [buyer]'s claims.
The [seller] contested:
- the validity of the contract between the parties;
- the validity of the arbitration clause of the contract and, consequently, the Tribunal's competence to arbitrate this dispute.
The [seller] also presented objections to the merits of the [buyer]'s action asserting that the action should be dismissed.
After bringing the action, the [buyer] changed claims, which led to a reduction in the sum of [buyer]'s claims.
3. TRIBUNAL'S REASONING
The ruling of the Tribunal contained the following main points.
3.1 [Jurisdiction competence of the Tribunal]
After discussing the issue of the Tribunal's competence to arbitrate the dispute, on the [seller]'s argument as to invalidity of the contract and the arbitration clause incorporated therein due to violations of contract signing requirements, the Tribunal made the following ruling.
The [seller] based his argument on the grounds that the USSR Council of Ministries Resolution No. 122 of 14 February 1978 "On The Requirements of Signing of International Sale Agreements" provides that international sale agreements must be signed by two persons authorized to do so on behalf of a Soviet company. Violation of this requirement leads to avoidance of the international sale agreement (Articles 45 and 565 of the RSFSR Civil Code 1964). The [seller] also relies on the company's by-laws, which provide the same requirement that an agreement be signed by two persons. The [seller] alleged that because the mentioned USSR Council of Ministries' Resolution has not been reversed, this requirement remained valid.
The Tribunal stated that [seller]'s argument was erroneous. The USSR Council of Ministries' Resolution No. 122 of 14 February 1978 was effective in the territory of Russia, by virtue of the RSFSR Supreme Council Resolution of 12 December 1991 "On The Ratification of Treaty on Establishing of Commonwealth of Independent States", until 3 August 1992 - from which date the Fundamentals of Civil Law of USSR 1991 became effective in the territory of Russia. The Fundamentals of Civil Law of USSR 1991 neither contain the special requirement for signing of international sale agreements nor impose any consequences for violation of such requirement. Although the USSR Council of Ministries Resolution No. 122 has not been formally reversed, the RSFSR Supreme Council Resolution of 12 December 1991 determines the effectiveness of the former USSR's laws in the territory of Russia, on the grounds of whether or not the relevant laws were enacted by the Russian Federation, rather than whether or not the laws of the former USSR were reversed. Therefore, there was no basis to apply Resolution No. 122 after 3 August 1992.
The Russian Federation Civil Code also does not contain any special requirements as to the order of signing international sale agreements. Thus, the requirements as to the signing of international sale agreements by legal entities have been the same as [the requirements as to the signing of] other agreements in the territory of Russia since 3 August 1992.
The contract between the parties was concluded on 19 January 1994, thus provisions of Article 165(1) of the Fundamentals of Civil Law of USSR 1991 have to be applied to this contract.
Regarding the [seller]'s assertion as to violation of the order of signing of the agreements provided in [seller]'s by-laws, the Tribunal found this assertion unreasonable and contradicted by Article 174 of the Russian Federation Civil Code, according to which the right to challenge the authority of the person who solely signed the agreement is conferred only on the person for whose benefit the limitations were set forth, and only if it is proved that the other party to the agreement knew or ought to have known of these specified limitations.
Therefore, the Tribunal came to the conclusion that the contract between the parties was valid. Also valid is the clause of the contract providing for arbitration before the Tribunal of disputes arising from the contract. The Tribunal pointed out that even if the contract were considered void, the arbitration clause, which is part of the contract, should be interpreted as an agreement independent from other terms of the contract and would remain in force (Article 16(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration and §1(3) of the Rules of Tribunal 1988).
3.2 [Applicable law]
On the issue of applicable law, the Tribunal found that the parties consented that their relations should be governed by the CISG, and that matters not settled by the CISG should be settled in conformity with the Civil Law of Russia, applicable as subsidiary law by virtue of Article 7(2) CISG, Article 28(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration and Article 166(1) of the Fundamentals of Civil Law of USSR 1991.
3.3 [The merits of the case]
As to the principal amount of debt, the Tribunal found that this sum reflected [buyer]'s losses, suffered in connection with [buyer]'s cancellation of the contract for freight of the vessel, which had been chartered for the purpose of transportation of goods under the contract. From the materials of the case and explanations of the parties, the Tribunal found that the parties had resorted not only to the provisions of the concluded contract, but also to the previous practice established between the parties, of providing the railroad freight cars for loading. Case materials confirmed that most railroad freight cars had been provided by the shipper rather than the buyer as was required by the contract. In connection with this, the seller was able and had to inform the buyer about the readiness of goods for shipment; and [seller] failed to do so. On the other hand, the buyer, being able to provide the railroad freight cars for loading (the evidence is in the case materials), had not used all [reasonable] care to find out whether the seller had the goods in stock. Based on Article 74 CISG and also on Article 224 of the RSFSR Civil Code 1964 that was effective on the date of making of the contract, the Tribunal it found reasonable to reduce the amount of [seller]'s liability and to order [seller] to compensate the [buyer]'s losses in the amount of 50% of those claimed.
As to the [buyer]'s claim to recover the losses suffered in connection with adjustment of price of the goods for [buyer]'s domestic customers due to the non-conforming quality of the goods, the Tribunal found that the [buyer] did not base its claims on the provisions of the contract and that [buyer] did not present necessary documents to prove the amount of losses.
Thus, that claim was denied on that ground.
The [buyer] proved that it had used the loan from the Danish bank and paid in average 12% of the annual interest for the loan. The Tribunal held that the sum paid by the [buyer] to the bank constituted losses of the [buyer], thus, under Article 74 CISG, [buyer] had to be compensated by the [seller] in the amount of 12%, of the granted principal sum of the debt.
The Tribunal denied the [buyer]'s claim as to recovery of annual interest for delay in the payment of a monetary obligation under Article 78 CISG and rules of Russian civil law, since the seller was not a debtor in connection with the monetary obligations set forth in the contract; but annual interest was to be calculated for the delay or failure to pay a monetary debt.
The Tribunal denied the [buyer]'s claim for recovery of additional monthly interest on the amount of 1.75% of the debt for using the loan issued by [buyer]'s Danish bank because this claim was not based on the rules of Russian civil law that were applicable to the relations between the parties.
The [buyer]'s claim for recovery of the legal fees to present [buyer]'s claims before the Tribunal, inter alia, fees for legal representatives, is in compliance with the Rules of Tribunal which were in force as of the date of making the contract. Nonetheless, the Tribunal found that the amount claimed exceeded reasonable expenses incurred by [buyer] and granted the sum of 50% of the amount claimed.
3.4 [Reduction of arbitration fees]
The Tribunal held that the arbitration fees paid by the [buyer] at the time of bringing the action did not have to be reduced because the [buyer] had reduced the amount of its claims after the first hearing of the case.
FOOTNOTES
* This is a translation of the award in Proceeding 433/1994, dated 26 September 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. 28 [98-101]. All translations should be verified by cross-checking against the original text. For purposes of this translation,
Claimant of Denmark 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.
*** Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Mascow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.
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Institute of International Commercial Law - Last updated May 17, 2004
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