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CISG CASE PRESENTATION

Russia 22 October 1998 Arbitration proceeding 196/1997 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/981022r1.html]

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

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Case identification

DATE OF DECISION: 19981022 (22 October 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: 196/1997

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Cyprus (claimant)

BUYER'S COUNTRY: Russian Federation (respondent)

GOODS INVOLVED: Goods


Case abstract

RUSSIAN FEDERATION: Award in Case No. 196/1997 of 22 October 1998 of the
Arbitration Tribunal of Russian Federation Chamber of Commerce and Industry

Case law on UNCITRAL texts (CLOUT) abstract no. 470

Reproduced with permission of UNCITRAL

Abstract prepared by Alexander Komarov, National Correspondent

A Cypriot firm, the seller, sued a Russian company, the buyer, for the outstanding balance due on goods delivered under a contract concluded in April 1996. The contract provided for delivery by instalments in May-June 1996. The buyer did not pay for the goods, which were delivered in July. The buyer stated that it was justified in declaring the contract avoided at the end of the agreed period, having offered to pay the seller for the goods at current prices. The buyer considered the delivery of the goods in July 1996 to fall outside the scope of the contract. The seller claimed payment for the goods delivered in July 1996 at the contract price plus interest.

The seller and the buyer agreed on the application of the law of the Russian Federation, which is a party to the CISG. Article 6 CISG allows the parties to a contract of sale to exclude the application of the Convention, but such agreement between the parties must be expressed clearly and specifically. In the present case, in the tribunal’s view, the parties, in agreeing to be bound by Russian law and thus submitting themselves exclusively to the operations of a national legislation, did not intend to exclude the application of the CISG. On the contrary, in making their cases to the tribunal, both parties cited the provisions of the CISG. Consequently, the tribunal concluded that article [1(1)(b)] CISG was applicable inasmuch as, in accordance with private international law, (which allows the parties to an agreement to choose the applicable law, in the present case the law of the Russian Federation, as a Contracting State), it was applicable on the strength of the corresponding agreement between the parties.

As for national civil law, and particularly the Russian Federation Civil Code, it was applicable only to the extent to which the case currently before the tribunal was not regulated under the CISG (see art. 7(2)).

The tribunal determined that the buyer’s communication addressed to the seller on 1 July 1996 could not be characterized as declaring the agreement avoided, since it did not contain a direct and unambiguous expression of the buyer’s will. It was clear from the parties’ business correspondence that the buyer considered shipments made after the expiry of the agreed time limit to be deliveries under the contract. The buyer’s contention that the price of the goods delivered by the plaintiff should be reviewed was not accepted. Since the buyer did not declare the agreement avoided within a reasonable time after the delivery had been made, as provided for under article 49 CISG, the tribunal found that the goods delivered in July 1996 should be paid for in full at the price stipulated by the contract. Furthermore, the tribunal awarded interest on the damages to be paid by the buyer pursuant to article 78 CISG, the amount of such interest to be determined in accordance with Russian law. On the basis of the above, the tribunal ruled in favour of the seller.

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Classification of issues present

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

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 8 ; 26 ; 49 ; 78 [Also cited: Articles 4 ; 7(2) ; 25 ; 53 ; 62 ; 75 ; 76 ; 82(1) ]

Classification of issues using UNCITRAL classification code numbers:

6B [Choice of law of Contracting State = choice of Convention];

8A ; 8C [Intent of party making statement or engaging in conduct; Interpretation in light of surrounding circumstances];

26A [Notification of avoidance: effective declaration required];

49B1 [Buyer's loss of right to declare avoidance after delivery: failure to avoid within periods specified in art. 49(2)(a) and (b)];

78B [Rate of interest]

Descriptors: Choice of law ; Intent ; Avoidance ; Interest

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Editorial remarks

Notice of avoidance: effective declaration required. "[T]he ICAC had to determine whether the message sent by the respondent to the claimant represented a declaration of avoidance of the contract. In this message, the respondent asked the claimant to cease shipment of the goods until issues relating to the price for the goods were resolved. The pride for the contract goods dropped and the sub-buyers refused to accept the goods at the prides provided for in the contract between the parties. The Tribunal ruled that such a message could not amount to a notice of avoidance. In the Tribunal's opinion, the message contained not a declaration of avoidance, but a request not to ship the goods until the issues of price were resolved. The importance of this decision lies in the way in which Article 26 was interpreted. According to the decision, if the respondent had, in fact, made a decision to avoid the contract, the notice should have been given in a clear and unambiguous manner." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at p. 24.

Timeliness of notice of avoidance. "[T]he Tribunal recognised the buyer's right to avoid the contract after delivery of the goods. At the same time, the Tribunal stated that according to Article 49(2)(a), 'in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so, [...] in respect of late delivery, within a reasonable time after he has become aware that delivery has been made'. The Tribunal considered whether the buyer had complied with this requirement.

"The ICAC found that the buyer knew of the shipment of the goods on 15 July 1996. In any event, the Tribunal established that the buyer was in the position to know of delivery on 27 July 1996 when the last consignment of the goods arrived at the place of destination. The Tribunal also found that the buyer's declaration of avoidance ['even if it could denote avoidance of the contract'] was made on 17 December 1996 and January 1997. On the basis of these facts, it was held that such a declaration was made beyond the reasonable period of time." Id. at pp. 32-33 (citations omitted).

Calculations under Articles 75 and 76 when contract not avoided. "The ICAC has repeatedly denied claims based on calculations under Articles 75 and 76 in cases where the contract has not been avoided. The Tribunal correctly stated that methods of calculation provided for in the said provisions can only be relied upon where the contract has been avoided." Id. at p. 51 (citation omitted).

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Citations to other abstracts, case texts and commentaries

CITATIONS TO OTHER ABSTRACTS OF DECISION

Unavailable

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. 58 [193-199]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Liu Chengwei, Recovery of interest (November 2003) n.200

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 196/1997 of 22 October 1998

Translation [*] by Alexander Morari [**]

Translation edited by Mykhaylo Danylko [***]

1. SUMMARY OF RULING

     1.1 Even though the contract does not cover expressly the issue of applicable law, the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry [hereinafter Tribunal] ruled that Russian substantive law is applicable to the dispute because the [seller] in his statement of action and the [buyer] in her statement of defense made reference to provisions of the Civil Code of the Russian Federation, thereby expressing their common will to apply Russian substantive law to their relations.

     1.2 The Tribunal came to the conclusion that, by their agreement on Russian substantive law, the parties did not intend to exclude the application of the 1980 Vienna Convention [hereinafter CISG]. This conclusion is supported by the parties' reference to the provisions of the CISG in the arbitral proceedings. The rules of Russian Civil Code are applicable to the dispute as a subsidiary statute and within the limits provided for in Art. 7(2) CISG. Therefore, it is inadmissible to refer questions settled by the CISG to the Russian Civil Code and the CISG at the same time.

Applicability of the CISG to the present dispute is based upon provisions of Art. 1(1)(b) CISG since Russia, whose substantive law is chosen by the parties, is a Contracting State to the CISG.

     1.3 Whereas the [buyer]'s communication to the [seller] shall be viewed legally as merely a proposal for reduction of the contractual price and not as a declaration of avoidance of the contract, therefore, the [buyer] shall be obliged to pay for the goods delivered with delay at contractually fixed prices.

     1.4 According to the provisions contained in Art. 395 of the Russian Civil Code, the interest to be paid shall be calculated in relation with the current interest rate at the creditor's (i.e., [seller]'s) place of business. This interest rate must be confirmed by a certificate issued by the Central Bank at the creditor's State.

     1.5 As the [buyer] failed to bring his claims to the [seller] in the form of a counterclaim in connection with the breach of the contract by the [seller], this issue was not considered in the present proceedings.

2. FACTS AND PLEADINGS

The action was brought by a Cypriot company [seller] against a Russian company, [buyer] in connection with partial payment for the goods delivered under a contract concluded between the parties in April 1996. According to the contract, the goods were to be delivered in May-June 1996. The [buyer] paid for a portion of the goods, delivered in June 1996, though she acted with delay in payment. As for the goods delivered in July 1996, the [buyer] did not pay for them at all.

     2.1 [Buyer]'s position

In [buyer]'s opinion, the contract fixed a definite delivery time, which the [seller] could not deviate from without [buyer]'s consent. Since [buyer] became disinterested in accepting the goods at the contractual prices after the fixed delivery period, the [buyer] reasonably avoided the contract and proposed to the [seller] to pay for the goods at current prices. As the [buyer] stated, the delivery by the [seller], which took place in July 1996, was extra-contractual.

     2.2 [Seller]'s position

Claims of the [seller] included:

-   Payment for the goods delivered in July 1996, at contractual prices;
Recovery of the interest at the interest rate used at the [seller]'s place of business.

In connection with the latter, the [seller] presented a certificate from the Central Bank of [seller]'s State, which confirmed the interest rate applied by him.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

     3.1 [Jurisdiction of the Tribunal]

The Tribunal's competence follows from clause 9 of the contract according to which all disputes and disaccords between the parties should be arbitrated by the Tribunal in Moscow according to the rules and usages of this tribunal (the exact name of this tribunal at the Chamber of Commerce and Industry of the Russian Federation is the Tribunal of International Commercial Arbitration).

     3.2 [Applicable law]

According to § 13 of the Rules of Tribunal, the Tribunal "arbitrates disputes on the basis of applicable rules of substantive law agreed upon by parties; when there is no such agreement between the parties, on the basis of law applied by the Tribunal according to the rules of conflict considered at the Tribunal's discretion." This provision is based on Article 28 of the Law of Russian Federation on the Tribunal of International Commercial Arbitration, the first paragraph of which establishes free will of the parties to choose the rules of law applicable to their dispute as one of the most important principles of private international law. This principle is expressed in Article 166(1)(1) of the Fundamentals of Civil Law 1991 which remain in force in the territory of the Russian Federation while the new Code of Rules of Private International Law in Russia is being developed to be incorporated in the Third Part of the Russian Federation Civil Code, which provides that "rights and obligations of the parties under international contracts are to be determined according to the law of the country elected by the parties at the conclusion of the contract or by virtue of their consequent agreement."

Despite the fact that the contract, which by its context is a contract of sale, made between the [seller] and the [buyer] does not contain clauses concerning applicable law, the [seller] in his statement of action and the [buyer] in her statement of defense referred to the rules of the Russian Federation Civil Code, whereby expressed their common will to apply Russian law to their relations.

     3.3 [Applicability of the CISG]

According to Art. 15 of the Russian Constitution, international treaties are a component part of the legal system of the Russian Federation. Furthermore, if an international treaty sets rules different from those provided in Russian domestic law, the former shall be applied. Similar provisions are found in Art. 7 of the Russian Federation Civil Code. Thus, the CISG is a part of the law of the Russian Federation because the USSR joined the CISG on 16 August 1990 and to which the Russian Federation is a Contracting State since 24 December 1991 as successor to the USSR.

In accordance with Art. 1(1) CISG, the Convention is to be applied to contracts for the sale of goods between parties whose places of business are in different States when these States are Contracting States (Art. 1(1)(a) CISG), or when the rules of private international law lead to the application of the law of a Contracting State (Art. 1(1)(b) CISG).

The [buyer]'s place of business is in Russia, whereas the [seller]'s place of business is in Cyprus. Since Cyprus is not a Contracting State [see, UNCITRAL A/CN 9/449, 27 May 1998, The Status of Conventions], the 1980 Vienna Convention cannot be applied on the basis of Art. 1(1)(a) CISG.

Nevertheless, as said above, there is an agreement between the parties to apply the law of the Russian Federation, which is a Contracting State. Art. 6 CISG allows the parties to a sale contract to exclude the application of the CISG by an agreement, provided this agreement is made in an explicit and clear way. In the present case, the Tribunal finds that by subjecting their relations to Russian law, the parties did not intend to exclude application of the CISG and to subject their relations exclusively to domestic civil law. On the contrary, in their pleadings during the hearings both sides referred to the provisions of the CISG. Under these circumstances, the Tribunal came to the conclusion that the CISG is applicable to the present dispute by virtue of Art. 1(1)(b) CISG, because the rules of private international law allow the parties to choose the applicable law, in present case, the law of the Russian Federation is applicable as a law of a Contracting State on the basis of the respective agreement between the parties.

As to the national civil legislation, and the Russian Civil Code in particular, it is applicable as long as an arisen question is not settled in the CISG itself (Art. 7(2) CISG). From this point of view a party may not, as the [buyer] has done on several occasions, refer questions settled in the Convention, to the Russian Civil Code and the CISG at the same time. Consequently, the Tribunal is guided mostly by the CISG, which comprehensively governs rights and obligations of the parties to a contract of international sale of goods (Art. 4 CISG).

     3.4 [Notice of avoidance - Art. 26 CISG]

Regarding the merits of the dispute, the Tribunal finds that the key issue arises from the [buyer]'s assertion that by means of communication of 1 July 1996, she avoided the contract of 25 April 1996 and, thus, the goods delivered by the [seller] in several installments on 3, 12, and 15 July, that is, later than the contractual time of delivery (May-June), are to be viewed as extra-contractual deliveries.

Without going into the question of whether the [seller] committed a fundamental breach of the contract in the light of Art. 25 CISG, which can serve as a ground for avoidance of the contract by the [buyer], the Tribunal examined the above mentioned communication by the [buyer] to the [seller] in terms of its possibility to be recognized as a valid declaration of avoidance of contract. Here, the Tribunal noted that in accordance with Art. 26 CISG, a party which decided to avoid the contract must notify the other party of that decision. Without such a notification, the contract cannot be declared avoided.

[Buyer]'s communication of July 1,1996 reads as follows:

"In reply to your request of 26 June 1996, please be informed that we have given instructions to pay the invoices issued by you for the goods you delivered directly to your company. Taking into account the fact that a number of regions in Russia have started to gather this year's harvest, prices for the contractual goods have come down and are at the indicated level according to offers at hand. Companies refuse to accept goods in July of this year at prices indicated in the contract of 25 April 1996. For this reason, we ask you to stop shipment of the goods until [we] have the questions mentioned settled."

The Tribunal finds that such communication cannot be viewed as declaration of avoidance of the contract. Avoidance of a contract is of paramount importance, for according to Art. 81 CISG [translator's note: In the original text, reference is made to Art. 82(1) CISG] it releases both parties from their obligations under the contract, above all things, the seller from the obligation to deliver goods and the buyer from the obligation to take delivery of the goods and pay the price for the goods.

The requirement of a clear notification of avoidance of the contract is highlighted in a number of Russian and foreign commentaries on the CISG. Particularly, a Russian commentary to the 1980 Vienna Convention ("Vienna Convention for the Contracts for the International Sale of Goods: Commentary", Moscow, 1994 [translator's note: publisher not indicated in the original]) states that:

"The Convention is based on the existence of a clear-cut declaration, ruling out avoidance of a contract automatically or ipso facto. This position guarantees more stability in the relations between the seller and the buyer. The conclusion is: If an injured party does not declare the contract avoided, it remains valid." (Ibid., p. 76).

The commentator considers a contract avoided only "when a contracting party is notified by the other party in a direct and unambiguous way" (Ibid., p.136). The plain rule in Art. 26 CISG conforms to "the requirement wholly supported by national systems that such a dramatic sanction as avoidance of the contract should be duly given notice of." (Honnold J., Uniform Law for International Sales, [Kluwer Law International] 1990, p. 262).

As a matter of fact, the [buyer]'s communication of 1 July 1996 does not contain a declaration of avoidance, but rather a request to stop shipment of the goods until the question of price is settled, because the companies who are the final buyers of these goods refuse to accept the goods in July at the contractual prices referring that the prices for the goods went down. If the [buyer] had really decided to avoid the contract, she should have notified the [seller] about that decision directly and unequivocally. Therefore, the [buyer]'s communication is legally viewed as merely a proposal for reduction of the contract price, which consequently required [seller]'s consent. Equally, any doubts concerning [buyer]'s position are out of the question if one takes into account further correspondence between the parties, including the communication by the [buyer] of 9 July 1996 where she says that all goods delivered starting from 1 July 1996 will be paid for at the price indicated in her communication of 1 July 1996.

Keeping in mind that the contract was made on the basis of CPT, which means it is a "shipping contract", it is clear that this communication does not refer to the arrival to destination of the goods shipped in June, that is, within the contractual delivery term, as the [buyer] herself interpreted her communication during the proceedings, but rather to the goods shipped in July. From the communication of 9 July, it is also clear that such deliveries, though performed beyond the contractual term, are viewed by the [buyer] as performed in accordance with the contract of 25 April 1996.

Under these circumstances, the Tribunal considers that the contract was not avoided by the [buyer] by virtue of her communication of 1 July 1996 and that the delivery in question was performed by the [seller] in conformity with the contract. As for the [buyer]'s communication of 1 July 1996, regarding her decision to pay for the goods at the price indicated in the communication and not at contract price, the Tribunal views it as a unilateral declaration making a proposal to review the contract price. However, the [seller] did not accept this proposal. The latter insisted, as in his communication of 15 July 1996, that the delivered quantity of goods must be paid for as stipulated in the contract.

     3.5 [Buyer's right to avoid the contract - Art. 49 CISG]

According to Art. 49 CISG, the [buyer] had the right to avoid the contract even after the delivery of the goods had taken place. However, under Art. 49(2)(a) CISG, "the buyer loses the right to declare the contract avoided unless he does so, in respect of late delivery, within a reasonable time after he has become aware that delivery has been made." In such a situation, when the delivery has been already made, the avoidance of the contract involves additional factors. That is why the CISG sets a time limit for the buyer to exercise the right to avoidance. As commentaries note, "avoidance of the contract leads to crucial consequences as to the responsibility for handling and taking care of the goods. A delay with notification of avoidance causes unforeseen expenses, unreasonable risks, price variation, etc." (Honnold, op. cit., p. 385).

In accordance with Art. 49(2)(a), such a declaration must be made within a "reasonable time", which depends on the relevant facts of each individual case. In the present dispute, there are grounds to believe that the [seller] knew of the performed deliveries no later than 15 July 1996. In any case, the [seller] must be considered to have known about these deliveries by 27 July 1996 when the last consignment arrived to the destination. The [buyer] took the deliveries without any declarations of refusal to accept the goods. After examination of the correspondence between the parties, it is clear that it was only on 17 December 1996 and January 1997 that the [buyer] informed the [seller] that the delivered goods could be restituted and the goods were merely in her responsible possession. Even if such a declaration was meant to avoid the contract, the [buyer] made the declaration far beyond the reasonable time in the meaning of Art. 49(2)(a) CISG. Therefore, the [buyer] must be considered as such that she lost the right to avoid the contract on the ground of a delay in delivery of the goods.

Consequently, in the light of the aforesaid, the Tribunal came to the conclusion that all goods delivered by the [seller], including those delivered in July, were delivered in accordance with the contract of 25 April 1996 and are to be paid for in full at the contract price. [Buyer]'s reference to the fact that other companies, for which the goods were to be shipped, refused to pay for the goods at contract price cannot serve as a ground for either exemption of the [buyer] from her obligation to pay the price for the goods (Art. 53 CISG) or limitation of the [seller]'s right to require the [buyer] to pay the price for the goods as stipulated in the contract (Art. 62 CISG).

Taking into account [buyer]'s partial payment of the price, the [buyer] is obliged to pay the [seller] only the outstanding amount.

The [buyer] may not refer to Arts. 75 and 76 CISG, which, among other things, deal with the recovery of the difference between the contract price and the current price. These Articles do not allow a unilateral alteration of the contract price. They deal with damages caused by a party's avoidance of the contract. Clearly, in the present case the contract was not duly avoided by any party.

     3.6 [Interest]

According to Art. 78 CISG, the [seller] is entitled to interest on the sum to be paid by the [buyer]. The interest, though not specified in the CISG, is to be calculated in conformity with subsidiary applicable law, that is the Russian Federation Civil Code Article 395, which provides that the interest for the use by the [buyer] of the unlawfully kept money is to be calculated on the basis of the bank interest rate at the [seller]'s place of business. The Tribunal, thus, admits the Certificate of 21 November 1997, issued by the Cypriot Central Bank, presented by the [seller], which certifies that on the day of bringing the action before the Tribunal the interest rate amounted to 8%. The [buyer] did not contest this certificate.

The Tribunal rules that this interest shall be applied at least from 1 August 1996, as the contractually fixed payment time, to 19 June 1997, i.e., when the action was brought before the Tribunal, and the [seller] duly paid the arbitration fees for his claim for recovery of interest.

[Finally,] the Tribunal ruled that the [buyer] may not rely on the damages caused by [seller]'s breaches of the contract, such as: non-complete delivery, delay in delivery, delivery of the goods from territories other than those stipulated in the contract, failure to supply all necessary shipping documents, etc. Since these reclamations were not submitted to the Tribunal as a counterclaim, the Tribunal did not consider them at all.


FOOTNOTES

* This is a translation of data on Proceeding 196/1997 of 22 October 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. 58 [193-199]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Cyprus is referred to as [seller]; Respondent of the Russian Federation is referred to as [buyer].

** Alexander Morari, born in the Republic of Moldova; currently a law student at Siberian Academy for Public Administration, Russia; has taken part in a number of international moot courts as a member of Moldovan Team. 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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