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CISG CASE PRESENTATION

Russia 5 June 1997 Arbitration proceeding 229/1996 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/970605r1.html]

Primary source(s) for case presentation: Case text

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Case identification

DATE OF DECISIONS: 19970605 (5 June 1997)

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: 229/1996

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Bulgaria (claimant)

BUYER'S COUNTRY: Russia (respondent)

GOODS INVOLVED: Unavailable


Case abstract

"[T]he contract provided for a fixed payment agreed upon by the parties to be made in case of a breach. When the respondent breached the contract, the claimant demanded payment of sum calculated in accordance with the said clause in the contract. The respondent asked the Tribunal to reduce the amount of the payment. The Tribunal stated that according to Article 9(2) CISG, '[t]he parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned'. On the basis of this provision, the Tribunal applied the UNIDROIT Principles of International Commercial Contracts as an international usage. [The UNIDROIT Principles, in the words of the Tribunal, reflected 'international legal practice',] The Tribunal also noted that according to the preamble of the UNIDROIT Principles, they may be used to interpret or supplement international uniform law instruments. Although reference was made to the subsidiarily applicable national law, the decision was made on the basis of Article 7.4.13 of the UNIDROIT Principles, and the amount claimed was reduced to fifty percent from the amount originally claimed." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at 59-60 (commentary also cites other references to the UNIDROIT Principles in Russian arbitral awards).

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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 4 ; 9(2)

Classification of issues using UNCITRAL classification code numbers:

4A [Issues excluded from scope of Convention: penalty clauses];

9D2 [Usages impliedly made applicable to contract: Unidroit Principles applied as usage with reference to art. 9(2)]

Descriptors: Scope of Convention ; Penalty clauses ; Usages and practices ; Unidroit Principles

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Editorial remarks

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

English: Unilex database <http://www.unilex.info/case.cfm?pid=1&do=case&id=669&step=Abstract>

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. 62 [209-211]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 9 para. 26

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 229/1996 of 5 June 1997

Translation [*] by Yelena Kalika [**]

Translation edited by Mykhaylo Danylko [***]

1. SUMMARY OF RULING

     1.1 The competence of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry (hereinafter Tribunal) to arbitrate the action instituted by a Bulgarian organization against a Russian organization is based on the arbitration provision of the contract that meets the requirements of the Moscow Convention 1972.

     1.2 The Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG], is found to be the law applicable to the relations between the parties. Bulgarian law is applicable as subsidiary law.

     1.3 The provisions of the UNIDROIT Principles of International Commercial Contracts, published in 1994, were applied as usage with reference to Article 9(2) CISG.

     1.4 [The Tribunal], relying first of all on international trade practice, found it legally possible and justified to reduce the contractual penalty for the delay in payment, considering its grossly excessive amount.

2. FACTS AND PLEADINGS

The action was brought by [seller], a Bulgarian company, against [buyer], a Russian company, to recover a [contractual] penalty for delay in payment for the goods delivered by the [seller] to the [buyer] under the contracts of June 1994 and March 1995.

     2.1 [Buyer's position]

The [buyer], while not disputing the fact of delay, has referred to the problems that occurred to him. The [buyer] has asked to reduce the amount of penalty, asserting that the amount of penalty was not proportional to the consequences of his breach of obligation.

     2.2 [Seller's position]

The [seller] disagreed with the [buyer]'s arguments and asked the Tribunal to grant the claims in full, asserting that he, as manufacturer of the goods, had to take a loan that caused significant expenses.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

     3.1 [Tribunal's jurisdiction competence]

The Tribunal's competence to arbitrate the dispute follows from the arbitration clause of the contracts concluded between the parties. [These provisions] set forth that disputes arising from the contracts "shall be settled by the Arbitration court established to settle such disputes in Russia, excluding competence of the courts of general jurisdiction and State arbitration courts." On the grounds of the above mentioned arbitration clause of the contracts, the [seller] brought a statement of action to the Tribunal located in the [buyer]'s State that in connection with this dispute was done in compliance with Article II (1) of the Moscow Convention 1972. The [buyer] does not challenge the Tribunal's competence. After receiving notice that the claim was brought against him, the [buyer] filed his reply.

Taking into consideration the above mentioned, the Tribunal has concluded that it has competence to arbitrate this dispute.

     3.2 [Applicable law]

When discussing the issue of the law applicable to the relations between the parties under the above mentioned contracts, the Tribunal found that both Bulgaria and Russia, where the [seller] and the [buyer] respectively had their principal places of business, were Contracting States to the CISG. Thus, it should be said that provisions of the CISG are applicable to the relations between the parties.

     3.3 [Imposition of penalty not disputed; reduction requested]

During the hearing, the [buyer] did not dispute that the imposition of the penalty submitted by the [seller] reflected both the [buyer]'s breach of the terms of the contracts between the parties and the length of the delay in payment. In such circumstances, the Tribunal finds reasonable the [seller]'s claim to recover the penalty. However, the [buyer] asks the Tribunal to reduce the amount of the claim against him.

     3.4 [Usages - Art. 9(2) CISG]

Pursuant to Article 9(2) CISG, the parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

     3.5 [Liquidated damages: Article 7.4.13 UNIDROIT Principles]

The Principles of International Commercial Contracts, published in 1994 by the International Institute for the Unification of Private Law (UNIDROIT), which, according to their Preamble, may be used to interpret or supplement international uniform law instruments, set forth in Article 7.4.13 that where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, this sum may be reduced to a reasonable amount where it is grossly excessive in relation to the damages resulting from the non-performance and to other circumstances.

     3.6 [Bulgarian law on reduction of penalties]

The [seller] submitted materials on the Bulgarian law, which is applicable to the present dispute in the absence of international regulations. [These materials] evidence that [Bulgarian laws] on the issue in dispute have been changed several times over the last years, however, principally [these laws] do not deny the possibility to reduce the penalty specified in the contract. Pursuant to Article 92 of the Law on Obligations and Contracts 1950, the penalty could be reduced. In 1993 that law was reversed, however, it was reinstated in 1996. The Law on Modification of the Trade Code of Bulgaria 1996 provides that in the case of commercial transactions the penalty cannot be reduced (paragraph 309), however, in accordance with Section 11 of that Law, this rule applies only to future transactions.

     3.7 [Merits of the case]

In this situation, the Tribunal finds it legally possible and just to take into consideration the [buyer]'s request to reduce the penalty for his delay in payment of the price that is claimed by the [seller]. In this connection, the Tribunal notes the following circumstances.

-   The [buyer]'s delay in payment under one of the contracts was 30 days. The delay under the other contract was insignificant (only 7-15 days).
-   The amount of penalty specified in the contract is grossly excessive; it equals 0.5% per day and has no limitations, thus constitutes 180% per year. The amount of penalty claimed by the [seller] equals more than a half of the cost of the goods delivered under the contracts.
The [seller] has presented no evidence as to the loss suffered due to the delay in payment and referred to the necessity to obtain a loan. According to the [seller]'s information, at the time of the breach the interest rate was between 70% and 108%, which is much lower than the amount of penalty he has claimed.

     3.8 [Reduction of penalty]

For the above reasons and in accordance with the international practice stated in the UNIDROIT Principles of International Commercial Contracts, the Tribunal holds that there are sufficient legal grounds for the reduction of the amount of penalty claimed by the [seller]. The Tribunal finds it correct and just to impose the penalty in the amount of 50% of the sum requested by the [seller].


FOOTNOTES

* This is a translation of data on Proceeding 229/1996 of 5 June 1997 of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in: Arb. Praktika 1996-1997, No. 62 [209-211]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Bulgaria is referred to as [seller]; Respondent of the Russian Federation 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.

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