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CISG CASE PRESENTATION

Russia 26 January 1998 Arbitration proceeding 76/1997 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980126r1.html]

Primary source(s) for case presentation: Case text

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Case identification

DATE OF DECISIONS: 19980126 (26 January 1998)

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: 76/1997

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Algeria (respondent)

BUYER'S COUNTRY: Russia (claimant)

GOODS INVOLVED: Unavailable


Classification of issues present

APPLICATION OF CISG: No, dicta reference to CISG

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issues: Article 7(1)

Classification of issues using UNCITRAL classification code numbers:

7A3 [Observance of good faith]

Descriptors: Good faith

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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

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg, [1998] Mezhdunarodnyj dogovor i inostrannoe pravo v praktike Mezhdunarodnogo kommertscheskogo arbitrazhnogo suda [The international contract and foreign law in the practice of the International Commercial Arbitration Court], Moskova: Statut 94-99

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 76/1997 of 26 January 1998

Translation [*] by Mykhaylo Danylko [**]

1. SUMMARY OF RULING

     1.1 Algerian law was found applicable to the relations [of the parties] under the present contract since it has the closest connection to the contract: the seller is a firm, established and located in the territory of Algeria; the obligations under the contract should also be performed in Algeria.

     1.2 The rules of Algerian law, on the basis of which the judgment was rendered, correspond to principles generally accepted in practice and, in particular, in international commercial practice. To them, first of all, should be referred the principle of observance of bona fides (Art. 7(1) CISG and Art. 1.7 of the Principles of International Commercial Contracts UNIDROIT).

     1.3 Non-performance of the obligation to transfer the goods and the title to them is a fundamental (essential) breach of contractual obligations, and is a ground to avoid a contract.

     1.4 Fraudulent actions in performing a part of a contract are also grounds to avoid a contract. However, such actions, unless the contrary is proved, cannot be evidence that at conclusion of the contract the party, which committed a fraudulent action thereafter did not intend to perform the contract at all.

     1.5 The parties' agreement on exclusion of the subject of the contract and inclusion in it of a provision that the subject will be agreed later leads to admittance of the fact that there is no effective sales contract between the parties, since the essential condition of it is not present (the subject of the contract) without which the contract cannot exist. The obligation, taken by party against whom the fraudulent actions were committed, to agree the further deliveries of the subsequent lots of goods, titles and descriptions of which were not defined in the agreement, should be found void by allegation of that party.

2. FACTS AND PLEADINGS

A contract for delivery from Algeria of certain goods was concluded between the Claimant, a Russian company [Buyer], and Respondent, an Algerian company [Seller]. The [Seller] had not performed the delivery of these goods and the parties had signed an addendum to the contract, in which they set that specification of the goods to be delivered under the contract would be agreed additionally prior to every shipment. At the same time, the specific goods which should be delivered as a first lot are defined in the addendum (these goods do not relate to the prior specification in the subject of the contract). The terms of delivery of this lot were defined as well. The parties did not additionally agree on the deliveries of the subsequent lots of goods on account of this contract.

The [Seller] undertook the line of actions that created an illusion of intention to fulfill the obligations in relation to the first lot of goods. First, he duly registered the addendum to the contract with the Bank of Algeria, on which he informed the [Buyer]. Second, he concluded a contract with an Algerian company (a subcontractor) for delivery of these goods to him. Third, at the warehouse of subcontractor the [Seller] provided to [Buyer] the goods for inspection and assured that these goods are for delivery to [Buyer]. The representatives of [Seller], [Buyer] and subcontractor had signed a certificate of inspection. Considering these circumstances, the representatives of [Seller] and [Buyer] had formalized the transferring documents. On the basis of these documents and on the basis of invoices issued by [Seller], payment for the goods was made to him. However, the goods specified were not actually shipped. As became known later, the [Seller] had issued transferring certificates on the goods he had not possessed and title to which he had not owned. The [Seller] had not paid his subcontractor for the goods which are the subject of the contract, and had not undertaken any action to secure performance of this contract, directly stipulated in it (in particular, had not opened a letter of credit neither had he issued shipment instructions).

The claims of [Buyer] included:

  1. Recognition of the initial contract and addendum to it as void on the grounds that they were concluded as a result of [Seller]'s fraudulent actions;

  2. Recognition of the addendum to the contract as rescinded and obligating the [Seller] to compensate the [Buyer] for damages. These damages included: recovery of the unfairly received sums for the goods that were not delivered; recovery of the annual interest for using the money; recovery of the lost profit -- the commission that the [Buyer] would have had received had the contract been performed.

The [Buyer] based his claims by reference to relevant provisions of the Civil Code of Algeria. Although the contract signed by the parties does not contain any provisions on applicable law, the [Buyer] supported applying Algerian law to the dispute by the fact that the [Seller] is a legal entity located in Algeria.

The facsimile letters, received by the Tribunal of International Commercial Arbitration (hereinafter Tribunal) from the lawyers of [Seller] also allege that Algerian law should be applied to this dispute. [Seller] maintains that the action should be dismissed since the [Seller] had fulfilled his obligations under the contract, which is confirmed by the transferring certificates.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

     3.1 [Jurisdiction and competence of the Tribunal]

The competence of the Tribunal to arbitrate the present dispute is directly stipulated in the contract of the parties.

     3.2 [Applicable law]

On the basis of Art. 28(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration and Art. 13(1) of the Rules of Tribunal, Algerian law applies as the law of country of seller (where the seller is established and has his main place of business) according to Art. 166(1) of the Fundamentals of Civil Law USSR 1991.

     3.3 [The merits of the case]

By formalizing with [Buyer] the transferring documents on goods, title to which he did not possess, the [Seller] committed fraudulent actions in violation of Art. 107 of the Civil Code of Algeria, which provides for a contract to be performed in a bona fide manner and in accordance with its context. The cited article of the Algerian Civil Code obliges a contracting party to fulfill all that is considered necessary not only by virtue of the laws, customs of business practice or fairness, but also what is resulting from the contract and character of the obligations taken. As a professional commercial company, the [Seller] could not have failed to know that the subject of transfer by seller to buyer under a contract could be only goods, title to which belongs to the seller. Moreover, by virtue of the generally accepted understanding in civil law, the transfer of the item sold is a main obligation of a seller who enters into a sales contract to transfer to the buyer possession and ownership of the item sold. The Civil Code of Algeria (Arts. 361, 367, 371) follows exactly from that understanding. Furthermore, the [Seller], having received from the [Buyer] payment for the goods which did not belong to [Seller], did not undertake any actions in his relations with his subcontractor to allow the [Buyer] to receive the goods for which [Buyer] had pre-paid.

The Tribunal concludes that [Seller] failed to fulfill his obligation to transfer the goods and, moreover, by the way of fraudulent actions, has received from [Buyer] the money for the goods not transferred to [Buyer]. By virtue of Art. 119 of the Algerian Civil Code, the Tribunal found reasonable the [Buyer]'s claim to rescind the contract in part for the obligations provided in the addendum to the contract. Therefore, based on Art. 122 of the Algerian Civil Code, the [Seller] is obliged to return the price for the goods received by him without legal grounds.

Even though the fraudulent actions of [Seller] took place during performance of the obligation under the addendum to the contract, nevertheless, the Tribunal believes, only allegedly, may it be concluded in relation to the whole contract that [Seller] at the conclusion of the contract did not intend to perform it at all. Since the case materials do not contain convincing evidences proving this allegation of [Buyer], the Tribunal found it unreasonable to apply, as was requested by [Buyer], Art. 86 of the Algerian Civil Code and regard the contract as void because of fraud on the part of [Seller] at the conclusion of the contract.

At the same time, the fundamental breach of his obligation committed by [Seller] during performance of the contract was obviously mala fides. This led to [Buyer]'s significant damages. The behavior of [Seller] during the course of performance of the whole contract also leads the Tribunal to conclude that [Buyer]'s statement on his loss of interest in leaving in force the whole contract is well grounded. With this, the Tribunal also took into attention the following reasoning. On the date of hearing of the dispute between the parties, the subject of the contract was agreed by the parties, with the addendum providing, as mentioned above, that the specification of goods to be delivered under the contract would be additionally agreed by the parties. By this, the condition on the subject of the contract was not provided and the parties did not enter into a new agreement on this. When the condition on the subject of a contract is missing, which is a main condition for the present type of contract (Arts. 351 and 352 of the Algerian Civil Code), the parties' agreement on negotiation of the subject of the contract in the future cannot be considered as a sales contract. The fraud, committed by [Seller] during performance of the addendum in relation to the goods that should be delivered under it, is indeed a fundamental ground for [Buyer] to avoid further negotiations on the subject of deliveries of subsequent lots of goods in future, i.e., to avoid conclusion of the new sales contract. Therefore, the parties' agreement on negotiation of the contracts for the subsequent lots of goods in future shall be found void by virtue of Art. 86 of the Algerian Civil Code.

Considering the above and on the basis of provisions of Art. 119 of the Algerian Civil Code, the Tribunal found the whole contract rescinded.

In accordance with Art. 119 of the Algerian Civil Code, the party, which claimed a rescission of the contract, is entitled to claim recovery of the damages sustained. On this basis, the Tribunal found reasonable the claims of [Buyer] to recover annual interest for use of the sum unlawfully received by [Seller], and also to recover the lost profit - a commission which [Buyer] would have had received in result of performance of the contract.

As to the annual interest, the Tribunal took into consideration the amount of interest which would be calculated on the sum unlawfully received by [Seller] as if this sum had remained in the bank account of [Buyer].


FOOTNOTES

* This is a translation of data on Proceeding 76/1997, dated 26 January 1998, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in Rozenberg ed., Arb Praktika (1998) No. 8 [38-42].

All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Algeria is referred to as [Seller] and Respondent of Russia is referred to as [Buyer].

** 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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