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CISG CASE PRESENTATION

Russia 4 April 1997 Arbitration proceeding 387/1995 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970404r1.html]

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

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Case identification

DATE OF DECISIONS: 19970404 (4 April 1997)

JURISDICTION: Russian Federation

TRIBUNAL: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 387/1995

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russia (claimant)

BUYER'S COUNTRY: United Kingdom (respondent)

GOODS INVOLVED: Coal


Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 25 ; 49 ; 78 [Also cited: Article 53 ]

Classification of issues using UNCITRAL classification code numbers:

25B [Fundamental breach: refusal to pay for quantity stipulated (subjecting payment to conditions];

49A1 [Buyer's right to avoid contract (grounds for avoidance): fundamental breach of contract];

78A [Interest on delay in receiving price: held not to be precluded by parties' agreement not to claim damages, fines and penalties as interest said to be without prejudice to any claim for damages recoverable under art. 74]

Descriptors: Fundamental breach ; Avoidance ; 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

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=377&step=Abstract> [dated 4 April 1998]

CITATIONS TO TEXT OF DECISION

Original language (Russian): Unavailable

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Liu Chengwei, Recovery of interest (November 2003) n.58; Larry A. DiMatteo et al., 34 Northwestern Journal of International Law & Business (Winter 2004) 299-440 at n.506

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 387/1995 of 4 April 1997

Translation [*] by Yelena Kalika [**]

Translation edited by Yuliya Chernykh [***]

FACTS

On 15 November 1995, Claimant [Seller], a joint stock company of Moscow, Russia, commenced an action against Respondent [Buyer], a limited liability company of the United Kingdom. The action was commenced at the Tribunal to recover US $149,512.71 [US $106,339.06 of the cost of coal delivered to the [Buyer] + US $39,451.79 as a penalty in the amount of 0.1% per day on the sum in arrears + US $3,721.86 in bank interest at the rate of 3.5%] plus arbitration expenses. The delay in payment constituted 371 days.

As follows from the materials of the claim, the [Seller] and the [Buyer] entered into Contract No. EU-18/6 of 19 May 1994. The contract was signed in Moscow. In accordance with that contract, the [Seller] delivered 2,427.842 metric tons of coal to the [Buyer].

According to the contract, the Seller was to sell and the Buyer was to buy up to 5,000 metric tons of coal with an option up to 10,000 metric tons of coal. The Buyer was to exercise his option right and to coordinate it with the Seller not later than 30 June 1994 (clause 1 of the contract). The price was set at US $39.50 per metric ton FOB St. Petersburg and/or Kaliningrad (clause 3 of the contract).

The final estimated price of a lot was to be determined on the basis of a testing certificate issued by a neutral laboratory at the port of unloading. If fine particles (i.e., smaller than 30 millimeters) were in excess of 20%, the FOB price was to be reduced in proportion of 1 per cent [of the price] for 1 per cent of [fine particles] (clause 11 of the contract).

The payment was to be made for the coal factually delivered not later that 90 days after the clear bill of lading date.

A penalty in the amount of 0.1% of the cost of the coal delivered was to be imposed for every day of delay (clause 6 of the contract).

The Seller's obligations were to become fulfilled upon delivery of the whole quantity of the goods of the quality stated in Appendix No. 1 to the contract. The Buyer's obligations were to become fulfilled upon his payment of the final price of goods to the Seller (clause 11 of the contract).

Clause 10 of the contract set forth that all the disputes and disagreements arising out of the contract or in connection with it were to be arbitrated by the International Commercial Arbitral Court at the Russian Federation Chamber of Commerce and Industry.

The neutral laboratory determined that the level of fine particles was 24.2% higher [than the level allowed]. It also determined that there was a defect due to the inclusion of a different brand of coal (152.66 tons of anthracite). In this connection, on 13 February 1995, the [Seller] sent the [Buyer] bill No. 10 for US $106,339.06, which the [Buyer] never paid.

In the materials of the case, there are letters of the parties in connection with the payment for the first lot of coal.

The [Seller] paid the arbitration fees in the amount of US $7,126.00.

On 15 March 1996, the Tribunal received [Buyer]'s reply to the claim along with a counterclaim brought against the [Seller]. The [Buyer], a limited liability company, relied on other agreements of the parties not submitted with the original claim, namely: a confidential agreement and the shareholders agreement in connection with [Limited Liability Company No. 2] which were made by the parties on 6 June 1994 in London. [Buyer] alleged that, pursuant to [those agreements], the parties created a partnership and the terms of payment under the contract were modified.

According to the above mentioned instruments, the [Buyer] is of the opinion that:

  1. The main sum of debt stated in the claim in the amount of US $106,339.06 should, pursuant to the above-mentioned agreements, [be reduced to] US $103,743.84.

  2. The penalty in the amount of US $39,451.79 should not be imposed as set forth in the Confidential Agreement that governed the said contract which set forth that the parties would indemnify each other.

  3. The bank interest should not be applied for the reason stated in paragraph 2. In case it was applied, it should be calculated from the date of receipt of the modified invoice, bill of lading and quality certificate in accordance with the terms of the contract.

Further, the [Buyer] claimed that since the [Seller] did not make further shipments of the whole quantity of coal, he breached the contract. Thus, the [Buyer] claimed from the [Seller] all the expenses incurred under that contract as well as all the expenses incurred while establishing the partnership relationships between the parties.

In addition, the [Buyer] claimed a recovery of medical expenses incurred at the request of the General Director of the [Seller] who, while staying in England, used medical services.

Besides, in accordance with the shareholders agreement, it was stipulated that [Limited Liability Company No. 2] would act for the purpose of receiving profits.

Due to the low quality of the coal delivered as well as because of the cessation of any further deliveries, the [Buyer] did not receive the full payment for the coal. Thus, it suffered losses which he now wanted to recover from the [Seller].

The total counterclaim, which was brought by the [Buyer] against the [Seller], amounted to US $154,582.99 reduced by the cost of the coal delivered in the amount of US $103,743.84, i.e., US $50,839.15.

Therefore, the [Buyer] petitioned:

  1. To deny the [Seller]'s claim in the amount of US $149,512.71.
  2. To sustain the counterclaim brought by the [Buyer] in the amount of US $154,582.99.
  3. To offset the cost of the coal delivered under Contract No. EU-18/6.
  4. To recover US $50,839.15 from the [Seller].
  5. To recover arbitration expenses from the [Seller].

In support of his claims, the [Buyer] submitted the Confidential Agreement signed by the [Seller] and [Buyer] on 6 June 1994 in London. Pursuant to that agreement, the parties confirmed that it governed all present and future contracts between the parties in connection with sales of coal.

In that agreement, the parties recognized that they were equal partners and were to carry out their business as equal partners. The parties also agreed to indemnify each other from any penalties, fines, losses or damages under any contracts.

In case of delays or cancellation of obligations under any contract, the payments of any expenses or damages incurred by one of the parties were to be settled in a separate, individual agreement by the parties.

However, any such payment was always to be limited to the factual expenses incurred.

Notwithstanding the terms of payment under any contract between the parties in connection [with a sale of] coal, the payment was to be made within 120 days of the clear bill of lading date.

Any disputes and disagreements were to be settled in a friendly manner. If it was not possible to settle, they had to be arbitrated by the International Chamber of Commerce in Paris.

The [Buyer] also submitted the shareholders agreement of 6 June 1994 signed by the [Buyer] and the [Seller]. [The agreement stated that] the parties were equal partners in Limited Liability Company No. 2 registered in England: 50% of the stock of that company was owned by the [Buyer]; the [Seller] owned the remaining 50% of the stock.

In that agreement the parties stipulated that Limited Liability Company No. 2 was to be profitable.

The [Buyer] attached its letter of 27 April 1995 in which it stated that it had no objections in connection with the arbitration of the dispute by the Tribunal. It emphasized that the total amount of expenses amounted to US $111,470.71 reduced by the cost of the coal delivered in the amount of US $106,339.06, i.e., US $5,131.65. The [Buyer] requested that US $ 5,131.65 be transferred to its account along with the confirmation that all the claims under the contract were settled.

The [Buyer] attached to the counterclaim copies of invoices for the establishing of a joint venture. In support of its counterclaim, it also submitted bills in connection with medical services provided to Mr. Rutberg.

The [Buyer] paid the arbitration fee in the amount of US $7,268.00 in connection with the counterclaim.

The Tribunal sent a copy of the counterclaim to the [Seller] along with its letter No. 1800-387/1159 of 4 April 1996. The materials of the case contain a receipt evidencing that the letter was received.

The proceeding was scheduled for 3 December 1996. The [Buyer]'s representative was absent at the proceeding held on 3 December.

On 29 November 1996, the [Seller] submitted his objections to the counterclaim. However, [such objections] were submitted only in one copy.

In this connection, the Tribunal had to reschedule the proceeding to 7 February 1997 and suggested that the [Seller] send to the [Buyer] a copy of his letter of 29 November 1996, which contained his arguments regarding the counterclaim, along with the materials in support of his additional claims.

In his letter of 29 November 1996, the [Seller] noted that, in his opinion, the Confidential Agreement and the shareholders agreement had no relevance to Contract No. EU-18/6 of 19 May 1994. He stated that the 1% penalty was set forth in clause 6 of Contract No. EU-18/6. He also demanded that interest for the use of another's funds be recovered from the date of claim to the date of award. The [Seller] argued that, contrary to the [Buyer]'s assertion, Contract No. EU-18/6 did not set forth the quantity of coal to be delivered at 10,000 tons. The quantity of goods to be delivered under the contract was set at 5,000 tons with an option to buy up to 10,000 tons. Besides, the contract contained no sanctions for short delivery. The [Seller] argued that the [Buyer]'s counterclaim in connection with losses was unreasonable since, as he suggested, the [Buyer] suffered no losses but probably received a significant profit.

It was established during the proceeding held on 7 February 1997 that the [Seller] did not receive the [Buyer]'s letter of 8 January 1997. [It was also established that] the [Seller]'s letter dated 20 December 1996 was mailed to the [Buyer] on 31 January 1997. The Tribunal had no evidence that the [Buyer] received that letter. In such circumstances, the Tribunal rescheduled the proceeding to 4 April 1997.

In his letter of 8 January 1997, the [Buyer] again referred to the Confidential Agreement and the shareholders agreement signed by the parties on 6 July 1994. The [Buyer] pointed out that the Confidential Agreement set forth that it would govern all present and future contracts made by the parties in connection with sales of coal. Thus, it governed Contract No. EU-18/6.

The [Seller] attached an explanation of the basis for its claim of bank interest to its letter of 20 December 1996, namely, the computation of the recovery for the use of another's funds, a certificate issued by Autobank regarding the interest rates on short term loans made in hard currency, and a letter from the Russian Federation Prime Minister concerning the reputation of Autobank.

The Tribunal received the letter of 11 February 1997 from the [Seller]. In that letter, the [Seller] commented on the [Buyer]'s letter of 8 January 1997. The [Seller] sent a copy of his letter to the [Buyer] by express mail.

The [Seller] still asserted in his letter of 11 February 1997 that the Confidential Agreement and the shareholders agreement had no relevance to the present dispute.

The [Seller] also attached a copy of his letter No. 1826 of 21 November 1994 explaining why the [Buyer]'s claim concerning the option right was unreasonable. In that letter, the [Seller] confirmed his readiness to continue making deliveries of coal to complete the contract. [In that letter], the [Seller] also stated that in order to receive coal he had to make an advance payment for it, and to pay for the railroad transportation of the coal to the port of Kaliningrad and for the transit of the goods through the territory of Byelorussia and Lithuania, as well as for loading of coal at the port of Kaliningrad and for the freight of a vessel to transport the coal to the United Kingdom. Taking the above into consideration, the [Seller] requested the payment for the goods delivered earlier. [Seller] also requested the originals of the certificate issued by a neutral testing organization to compute the price of the goods delivered.

The [Seller] attached a copy of the [Buyer]'s letter of 9 September 1994 to his letter of 11 February. [In the letter of 9 September 1994, the [Buyer] stated that] the first shipment of coal, including substandard goods and fine particles, was sold at the median price of US $70.00 per metric ton. This made the cooperation extremely profitable.

On 31 March 1997, the Tribunal received letter No. 156 of 26 March 1997 from the [Seller]. In that letter, the [Seller] agreed that the [Buyer]'s debt for the coal delivered was equal to US $103,743.84.

In this connection, the [Seller] submitted a new computation of the estimated price that was done taking into account that figure and amounted to US $267,667.63.

However, notwithstanding the fact that the estimated price claimed exceeded the price stated in the claim filed on 15 November 1995 (US $149,512.71), the [Seller] did not change the price stated in the claim of 15 November 1995.

In the attachment, the [Seller] submitted a certificate issued by Alfa-Bank concerning the bank interest rate on short-term loans in hard currency. As of 15 November 1995 such annual bank interest rate was 30%.

The [Buyer]'s representative was absent at the proceeding held on 4 April 1997. However, in the materials of the case there is a return receipt evidencing that he received notice.

The [Seller]'s representative stated in the proceeding that he demanded the recovery of the cost of the coal delivered in the amount recognized by the [Buyer], i.e., US $103,743.84.

The [Seller]'s representative also stated that the Buyer did not utilize his option right to buy up to 10,000 tons, and that the date of delivery was not recorded. [The date of delivery] could be determined only during the period of time within which the contract was binding. The contract did not set forth [such period of time].

The [Seller]'s representative explained to the Tribunal that his subsequent submission of a certificate issued by Alfa-Bank in substitute of the certificate issued by Autobank regarding the interest rate on short term loans in hard currency resulted from Alfa-Bank's being a more reputable financial organization.

REASONING

After reviewing the materials of the case and after hearing the arguments made by the [Seller]'s representative, the Tribunal finds the following:

1. The Tribunal's competence to arbitrate the present dispute follows from clause 10 of Contract No. EU-18/6 of 19 May 1994 which sets forth that all disputes and disagreements arising out of or in connection with the contract shall be arbitrated by the International Commercial Arbitral Court at the Russian Federation Chamber of Commerce and Industry ("the Tribunal").

Notwithstanding the fact that the Confidential Agreement made by the parties on 6 July 1994 sets forth that the tribunal at the International Chamber of Commerce in Paris shall be the competent tribunal to arbitrate disputes, the [Buyer] sent his reply to and filed his counterclaims against the [Seller] with the Tribunal. By so doing, he recognized the competence of the Tribunal to arbitrate the present dispute.

For the above reasons and pursuant to Articles 7 and 16 of the Russian Federation Law of 7 July 1993, the Tribunal finds that it has competence to arbitrate the present dispute.

2. Pursuant to § 28(2) of the Tribunal's Rules, the [Buyer]'s absence at the proceeding held on 4 April 1997 does not preclude arbitration. The [Buyer] received the claim in due time. Pursuant to § 23 of the Tribunal's Rules, the [Buyer] was notified of the date of the proceeding at least 30 days in advance. The [Buyer] has not requested to postpone the proceeding.

Taking the above into consideration, the Tribunal finds it possible to arbitrate the present dispute on the merits in the proceeding of 4 April 1997.

3. The Tribunal ascertains that between the parties there is no agreement as to the law governing Contract No. EU-18/6.

In accordance with Article 28(2) of the Russian Federation Law on International Commercial Arbitration 1993, in the absence of the parties' agreement as to the applicable law, the Tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. In accordance with the settled arbitration practice, the Tribunal finds that, since the present dispute is arbitrated in Russia, its conflict of law rules should apply.

Pursuant to Article 166(1) of the USSR Principles of Civil Law 1991, in the absence of any agreement of the parties as to the applicable law, the law of the State, where the Seller under the contract of sale was incorporated, resides or has its principal place of business, shall apply.

Therefore, when arbitrating the present dispute on the merits, the Tribunal shall apply the laws of the Russian Federation.

Article 15 of the Russian Federation Constitution sets forth that international treaties of the Russian Federation constitute a component part of its legal system. Since 1 September 1991 Russia has been a CISG Contracting State. Thus, this Convention shall apply to the present dispute pursuant to Article 1(1)(b) CISG.

4. The materials of the case evidence the fact of delivery. The [Buyer] admitted the sum in arrears.

Therefore, the Tribunal sustains the [Seller]'s claim in the amount of US $103,743.84.

In accordance with the contract, up to 5,000 tons of coal were to be delivered with an option right to buy up to 10,000 tons, although the option had to be agreed upon by 30 June 1994. At the proceeding, the [Seller] confirmed that no such agreement was made.

In the correspondence between the parties, the [Buyer] conditioned his payment for the first lot of goods on the [Seller]'s submission of a guarantee that the contract would be completed in full.

Such actions of the [Buyer] contradicted both the contract and the provisions of the CISG. In accordance with the CISG, it is the buyer's unconditional obligation to pay for the goods delivered (See Article 53 CISG). Buyer's failure to fulfill such obligation constitutes a fundamental breach of contract. (See Article 25 CISG). That gave the Seller a right to refuse to perform under the contract.

5. The [Buyer] delayed the payment. In accordance with the contract, a fine shall be paid for any delay of payment. However, the Tribunal takes into account the Confidential Agreement signed by the parties, in accordance with which the period of time within which the payment was to be made was extended to 120 days and the parties mutually agreed to indemnify each other from any fines and losses.

Taking the above into consideration, the Tribunal finds that the [Seller]'s claim of penalties for the delay [of payment] cannot be sustained.

6. Pursuant to article 78 CISG, if a party delays payment, a creditor has a right to claim annual interest.

The said interest is not a fine, nor is it a restitution of damages. It follows, in particular, from Article 78 itself which directly states that the recovery of interest does not preclude the creditor to claim any damages recoverable under Article 74 CISG.

7. Since article 78 CISG contains no interest rate, the Tribunal turns to the provisions of Russia laws.

At the time when the delay of payment took place on 28 November 1994, Article 66(3) of the USSR Principles of Civil Law 1991 was in force. Pursuant to [Article 66(3)], a creditor has a right to claim 5% annual interest which is qualified in that legislative act as a fine.

Since in the above mentioned Confidential Agreement the parties indemnified each other from any claims of penalties, the [Seller]'s claim to recover such 5% interest by 1 January 1995 shall not be sustained.

Since 1 January 1995, Article 395 of the Russian Federation Civil Code has been in force. According to [Article 395], in case of a delay of payment, a debtor must pay interest for the use of another's funds at the bank interest rate in the place of creditor.

The [Seller] submitted a certificate issued by one of the leading banks that at the time, when the claim was filed, such annual interest rate was 30%. (See the certificate issued by Alfa-Bank on 25 March 1997).

The [Seller] previously submitted a certificate issued by Autobank on 15 December 1996. Autobank is also one of the leading banks. In that certificate the interest rate was stated as 25-30%.

Taking into consideration these two certificates, the Tribunal believes it is reasonable and just to apply annual interest rate of 27.5%.

Should we calculate interest from 1 January 1995 to 4 April 1997 at this rate, the delay would constitute 826 days and at the rate of 27.5% the sum would amount to US $64,562.72. The total sum, which the [Seller] was entitled to at the time of rendering of the award, would be US $168,306.56. This sum would include the cost of the goods.

However, in his letter of 26 March 1997 the [Seller] limited his claim to US $149,512.71. The [Seller] paid the arbitration fee on that sum.

Taking that into consideration, the Tribunal sustains the [Seller]'s claim in the amount of US $149,512.71, i.e., the interest will constitute only US $45,768.87.

Pursuant to § 6 of the Schedule on Arbitration Fees and Costs, the [Buyer] should pay the arbitration fees on the amount of the claim sustained (US $149,512.71). Thus, he shall pay US $7,126.00. The Regulations on the Arbitration Fees and Expenses are in the Appendix to the Tribunal Rules.

8. After reviewing the counterclaim, the Tribunal makes the following conclusions:

Counterclaims can be filed under Article 33 of the Tribunal's Rules, if they arise from the same contract.

In the present case, the [Buyer] brought claims that follow from a different agreement of the parties. Besides, [such different agreement] states that disputes shall be arbitrated by another arbitral tribunal. Thus, pursuant to Article 7 of the Russian Federation Law "On International Commercial Arbitration" of 7 July 1993 and pursuant to § 3(1) of the Tribunal's Rules, the Tribunal does not have competence to arbitrate such claims.

As to the assertion that the [Seller]'s main claims should be offset by the losses suffered by the Buyer, the Tribunal has no opportunity to arbitrate these claims for the following reasons:

-   First, the termination of deliveries under Contract No. EU-18/6 resulted from events for which the [Buyer] was liable himself. As stated above, the [Buyer] did not pay for the first lot of goods without any legal basis;
 
- Second, the [Buyer] has presented no evidence of the amount of the losses he suffered.

Besides, the Buyer claims the recovery of losses while the Confidential Agreement states that the parties shall not claim losses from each other. Thus, the [Buyer]'s claim contradicts the Confidential Agreement on which he relies.

However, as stated above, the Tribunal took into account the Buyer's arguments stated in the counterclaim when it accepted them as explanations in such issues as the existence of the parties' agreement as to the extension of the term of payment to 120 days from the date of shipment and the parties' indemnification of each other from any penalties or losses under the previously made contracts.

Taking the above into consideration and pursuant to § 39 of the Tribunal Rules and § 6 of the Schedule on Arbitration Fees and Costs, the Tribunal

HOLDS:

  1. The [Buyer] must pay US $149,512.71 to the [Seller]. It also must reimburse US $7,126.00 of the arbitration fees.

  2. The counterclaim brought by [Buyer] against [Seller] is denied.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purpose of this translation, Claimant of Russia is referred to as [Seller]; Respondent of the United Kingdom 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.

*** Yuliya Chernykh graduated from the National University of Kyiv-Mogyla Academy (Ukraine, 2004) and Stockholm University (LL.M. in International Commercial Law, 2005), Intern at UNCITRAL (2005).

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