Russia 14 September 1998 Arbitration proceeding 131/1996 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980914r1.html]
DATE OF DECISION:
CASE NUMBER/DOCKET NUMBER: 131/1996
CASE HISTORY: Unavailable
SELLER'S COUNTRY: Russian Federation (claimant)
BUYER'S COUNTRY: Norway (respondent)
GOODS INVOLVED: Goods
APPLICATION OF CISG: Yes
APPLICABLE CISG PROVISIONS AND ISSUES
Key CISG provisions at issue:
Classification of issues using UNCITRAL classification code numbers:
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Future losses. "One of the important questions in the context of damages under the CISG is whether or not future losses are recoverable. There has been no uniformity in relation to this issue in decisions taken by arbitral tribunals. See, for example, ICC Case No. 7660 of 1994, where damages within the meaning of Article 74 were interpreted as covering only those losses which were actually suffered ...; see also Zürich Arbitration proceeding dated 31 May 1996 (Switzerland) where damages for future losses under the framework contract were awarded ...
"In this regard, it should be noted that the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry has consistently ruled that Article 74 did not cover losses which have not yet been incurred but which would have to be incurred in future. The main reason for this conclusion seems to be the Russian text of the Convention which uses past tense for the word 'suffered' ('ponesyon'). In addition to that, in decisions where this issue was discussed, the Tribunal seems to have been comparing the provision in Article 74 with that in Article 15 of the Russian Civil Code, which ... clearly specifies that recoverable losses include those which have been incurred or will have to be incurred. Absence of an express reference to future losses in Article 74 also may have led the ICAC to the said conclusion." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at p. 42.Go to Case Table of Contents
CITATIONS TO ABSTRACTS OF DECISION
(a) UNCITRAL abstract: Unavailable
(b) Other abstracts
CITATIONS TO TEXT OF DECISION
Original language (Russian): Rozenberg, Practika of Mejdunarodnogo Commercheskogo Arbitrajnogo Syda: Haychno-Practicheskiy Commentariy [Practice of the International Commercial Arbitration Court: Scientific - Practical Comments] Moscow (1998) No. 48 [161-165]
Translation (English): Text presented below
CITATIONS TO COMMENTS ON DECISION
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Case text (English translation) [second draft]
Queen Mary Case Translation Programme
Translation [*] by Yelena Kalika [**]
1. SUMMARY OF RULING
1.1 The claims arising in connection with several contracts were arbitrated in one proceeding since it turned out to be impossible to apportion the amount of claim between each contract and since the parties did not contest their arbitration in one proceeding.
1.2 Since the commercial enterprises of the parties to the contract are located in CISG signatory states, its provisions were found to be applicable. Taking into consideration Article 28 of the Russian Federation Law "On International Commercial Arbitration", Article 7(2) CISG and Article 166 of the USSR Principles of Civil Law 1991, the substantive law of Russia was found applicable as the law of the seller's state.
1.3 It is unnecessary to apply the laws of Russia to the issues which are clearly settled in the CISG. In this connection the term "damages" was determined pursuant to Article 74 CISG without taking into consideration Article 15 of the Russian Federation Civil Code.
1.4 When evidence presented is not clear, such evidence cannot be a ground for making an arbitral award.
2. FACTS AND PLEADINGS
The action was brought by the Russian [seller] against the Norwegian [buyer] since, when making payments for the goods delivered under the three contracts made in August-October 1995, the Norwegian company withheld the maintenance expenses which it had paid as per [seller]'s request. In this connection, the Russian Federation State Tax Service imposed penalties upon the [seller] in the amount of hard currency revenues which had not been deposited to the [seller]'s account at the authorized bank. When imposing such penalties, The Russian Federation State Tax Service referred to the Russian Federation Law "On Currency Regulation and Control" and the Russian Federation President's Ordinance of 14 June 1992 "On partial modification of the mandatory exchange of hard currency revenues and export duties." In his modified complaint, the [seller] qualified his claim as the claim to recover damages suffered.
In his reply the [buyer] fully rejected the [seller]'s claims. His arguments can be summarized as follows.
|-||First, the [buyer] fully performed his obligations under the contracts. This fact is not contested by the [seller] who on numerous occasions asked the [buyer] to pay maintenance expenses. Thus, the [seller] knew that such expenses would be withheld from the payments by the [buyer]. Later, when asking the [buyer] to make such payments through the [seller]'s authorized bank in the Russian Federation, the [seller] did not guarantee that such amounts would be repaid to the [buyer].|
|-||Second, there is no causal connection between the [seller]'s losses in controversy and the [buyer]'s actions. When filing his complaint, the [seller] mistakenly assumed that the [buyer] violated the Russian currency control laws by withholding the maintenance costs and, thus, caused the [seller] to suffer damages in controversy. Since, as follows from the Russian Federation Central Bank's regulations, the Russian currency control laws do not apply to the [buyer], who is not a resident, and since the [buyer] paid the maintenance costs relating to the performance under the contract at [seller]'s request, the [buyer] is of the opinion that he performed his obligations under the contract.|
|-||Third, the [seller] did not take any actions to prevent the damages in controversy. In the [buyer]'s opinion, the qualification of the [seller]'s actions as "intentional concealment of the hard currency revenues," which was given by the Russian Federation State Tax Service when it was imposing penalties, is incorrect. Notwithstanding this fact, the [seller] failed to contest the decision of the Tax Service in the order set forth in the laws. The [seller] also failed to exercise his right to either get the Central Bank's permission to partially deposit his hard currency revenues as set forth in the laws or to turn to the Russian Federation Ministry of Foreign Trade for the written confirmation of the reasonableness of partial receipt of hard currency revenues.|
|-||Fourth, the [seller]'s claim that the [buyer] must observe the Russian laws including the currency control laws) is unreasonable, taking into consideration that the contracts state that "any quality and quantity control as well as any other relationships between the parties shall be governed by the existing international norms and rules."|
During the arbitration proceeding the [seller] contested the [buyer]'s arguments. The [seller] submitted a copy of the collection order (incasso) issued by the Tax Service evidencing that the penalty for the failure to deposit hard currency revenues [to the account] had been withdrawn pursuant to the Tax Service decision. The [seller] also pointed out that, although the said amount had not been withdrawn from his account by the date of the arbitration proceeding, however, he based his claim on the definition of "damages" as stated in Article 15(2) of the Russian Federation Civil Code. According to the said legislative act "damages" are expenditures which the party, whose right was violated, has made or will have to make to restore the status quo.
When discussing the issue of the law applicable to the merits of the case, the parties' representatives confirmed that when entering into the contract the parties did not mean to exclude the CISG from being applied to their relationships. Both Russia and Norway are the signatories to the CISG. The [seller]'s representative also pointed out that, in addition to the "international norms and rules" that were referred to in the contracts, the Russian laws were also applicable to the case as the subsidiary laws in accordance with the conflict of laws provisions of the place where the contract was entered into. In addition, the [seller] emphasized that since the currency control laws were part of the Russian laws, in his opinion, they should be applied to the relationships of the parties. Consequently, since the [buyer] had knowledge of the existing currency control regulations, he was supposed to transfer the hard currency payments in full. The [seller] disagreed with the [buyer]'s position reflected in his reply to the claim. In particular, the [seller] disagreed with the [buyer]'s argument that the [seller] could contest the Tax Service decision to impose penalties on the ground that the Tax Service incorrectly qualified the [seller]'s actions as the "concealment of hard currency revenues". The [seller] argued that the Russian Federation President's Ordinance of 14 June 1992, on which the penalties were based, itself set forth the penalties for violation of the rules of depositing hard currency revenues. Thus, the [seller] argued he had no basis for challenging [the Tax Service's] decision.
3. TRIBUNAL'S REASONING
The Tribunal's award contained the following main points.
3.1 The contracts between the [seller] and [buyer] contain arbitration clauses saying that any disputes have to be resolved "in Moscow by the Arbitration Tribunal at the Chamber of Commerce and Industry of Russia."
Although the language of the arbitration clauses in the contracts is not absolutely correct, there is no doubt that the parties meant this Tribunal, taking into consideration that, in accordance with the Russian Federation Supreme Council Resolution of 7 July 1993, the Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry was renamed the International Commercial Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry. Besides, at the time when the contracts were entered into there was no other authority arbitrating similar disputes at the Russian Federation Chamber of Commerce and Industry in Moscow.
The Tribunal found it possible to hold one proceeding to arbitrate the claims following from several contracts in controversy. Besides, the Tribunal took into consideration that the amount of the claim under the contracts was determined by the [seller] on the basis of the amount of penalties imposed by the Tax Service for his failure to deposit hard currency export revenues. The Tribunal also took into account that the Tax Service's decision to impose such penalties -- covering all the contracts between the [seller] and [buyer] entered into in 1995-96 -- did not contain any information as to the issue of apportioning the amount of penalties between each contract. When deciding on its competence, the Tribunal also took into consideration that the parties did not file any motions challenging arbitration of this dispute in one proceeding.
3.2 In the contracts entered into by the [seller] and [buyer], there is no reference to the national law of any state that would be applicable to the dispute in controversy. Since at the time, when the contracts were entered into, [seller]'s and [buyer]'s commercial enterprises were located in CISG signatory states (Norway has been a signatory since 1 August 1989, the Russian Federation has been a signatory since 1 September 1991), and taking into consideration that, as noted above, the parties did not exclude the CISG, the Tribunal concludes that the provisions of this Convention shall be applied to the present dispute.
At the same time, pursuant to Article 7(2) CISG, questions concerning matters which are not expressly settled in the CISG and which cannot be settled in conformity with the general principles on which the CISG is based, shall be settled in conformity with the national law applicable by virtue of the rules of private international law (conflict of laws rules). Taking into consideration Article 28 of the Russian Federation Law "On International Commercial Arbitration" and Article 166 of the USSR Principles of Civil Laws 1991, where the provisions of the CISG are not sufficient to resolve a dispute, the Tribunal finds it possible to turn to the substantive laws of the Russian Federation as the laws of the seller's state.
3.3 After reviewing the [seller]'s claim to recover the amount of claim from the [buyer], the Tribunal has come to the following conclusions.
As to the issue of payments of the maintenance expenses in connection with the contracts, the Tribunal finds that the [buyer] paid those expenses at the request of the [seller] himself (see [seller]'s fax messages of 3 August 1995, 10 August 1995, 14 August 1995, 17 August 1995, 28 August 1995, etc. in which [seller] requested [the buyer] to pay maintenance expenses). The Tribunal also finds that such payments related to the performance of obligations under the contract. Taking into account that the [buyer] fully paid the maintenance expenses and that the [seller] did not deny the fact of payment and never raised the issue that such expenses were additional expenses (i.e., expenses above the price of the contract), the Tribunal concludes that the parties originally treated the maintenance expenses as part of the sale price in connection with which the claims were raised in the original complaint of 10 April 1996. However, later the [seller] dropped those claims (see modified complaint of 12 August 1997). Therefore, the [seller]'s claims relate not to the [buyer's] failure to pay the sale price but to the peculiarities of transferring payments under the contracts to the [seller]'s account at the authorized bank which were imposed by the Russian Federation currency control and taxation laws.
In support of his claims, the [seller] submitted to the attention of the Tribunal and [buyer] the decision of the State Tax Service to make a mandatory withdrawal of two amounts from his account as penalties for failure to fully deposit hard currency revenues. The [seller] also submitted a copy of the collection order that one of those amounts had already been withdrawn. However, the [seller] failed to submit any collection order evidencing that the second amount had also been withdrawn.
After reviewing the documents submitted, the Tribunal has come to the conclusion that they cannot serve as sufficient evidence of damages caused to the [seller]. The Tribunal took into consideration the following facts.
|-||First, neither the collection order nor the Tax Service decision contain any information as to which contracts the said amounts pertain to.|
|-||Second, as the [seller]'s representative admitted, the relevant amounts had never been withdrawn from the [seller]'s account due to the lack of funds in that account.|
The Tribunal also disagrees with the [seller]'s arguments that, although the amount of penalties had never been withdrawn from his account, it does not preclude him from bringing an action to recover damages since, according to Article 15(2) of the Russian Federation Civil Code, the definition of "damages" includes expenses which the person, whose right is violated, has made or will have to make to restore the status quo. The Tribunal based its decision on the fact that the relationships between the parties to the contracts were governed by the CISG. Unlike Article 15(2) of the Russian Federation Civil Code, this Convention defines "damages" as "a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach" (see Article 74 CISG). When applying the provisions of Article 74 of the Convention, the Tribunal was governed by Article 15 of the Constitution and Article 7 of the Russian Federation Civil Code. [These legislative acts set forth that] international treaties of the Russian Federation are part of its legal system and, if an international treaty of the Russian Federation sets forth rules different from its national laws, the rules set forth in the international treaty shall apply.
Thus, Article 74 CISG clearly treats as damages only the losses [actually] sustained. Therefore, there is no need to apply the Russian laws and, in particular, Article 15 of the Russian Federation Civil Code, as subsidiary laws. Since, as the [seller] agreed, the amount of penalties, which he wants to transfer to the [buyer], has never been paid, the Tribunal finds no reasons to sustain the claim. Therefore, the Tribunal finds it unnecessary to evaluate the parties' positions as to their obligations arising in connection with the Russian currency control laws.
* This is a translation of data on Proceeding 131/196, dated 14 September 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. 48 [161-165]
All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Russian Federation is referred to as [seller]; Respondent of Norway 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.Go to Case Table of Contents