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CISG CASE PRESENTATION

Russia 22 March 1999 Arbitration proceeding 227/1996 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990322r1.html]

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

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Case identification

DATE OF DECISION: 19990322 (22 March 1999)

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: 227/1996

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Russian Federation (respondent)

BUYER'S COUNTRY: Iran (claimant)

GOODS INVOLVED: Goods for a factory construction contract


Case abstract

RUSSIAN FEDERATION: Award in Case No. 227/1996 of 22 March 1999 of the
Arbitration Tribunal of Russian Federation Chamber of Commerce and Industry

Case law on UNCITRAL texts (CLOUT) abstract no. 472

Reproduced with permission of UNCITRAL

Abstract prepared by Alexander Komarov, National Correspondent

The buyer, an Iranian firm, sued the seller, a Russian company, for the latterís breach of its obligations under contracts concluded in April and May 1995 and under an agreement on cooperation in building and assembling a factory in Iran. The buyerís claims included compensation for losses incurred by the partial nondelivery of the goods and termination of the cooperation, and for the costs incurred in registering the contracts, obtaining licences and arranging publicity. The seller asserted that the buyerís breach of the payment procedure gave sufficient grounds for it to terminate the deliveries and declare the contracts avoided. The seller also denied that agreement had been reached on a further delivery of goods or that a contract had been concluded on cooperation in building and assembling the factory.

The tribunal found that advance payments to the seller were made on 12 March and 8 November 1995 in accordance with the contract of 6 May 1995, after which the seller delivered part of the goods under this contract proportionally to the sum of the advance. Under the contract, the final payment was to be made within 45 days from the date of delivery of the goods to Iran. The last shipment took place on 20 December 1995 and the sellerís letter on the termination of cooperation was sent to the plaintiff on 1 February 1996, within the 45-day limit. The tribunal, therefore, concluded that the seller had no grounds for a unilateral avoidance of the contracts. In view of the above, the tribunal concluded that the buyer was entitled to claim compensation for damages, including loss of profit, in accordance with article 74 CISG. Bearing in mind, however, that the buyer had not paid in full for the goods delivered and had not submitted sufficient evidence to support the scale of its claims, the tribunal reduced the buyerís damages to 60 per cent of the claimed amount. The buyerís claims for compensation from the seller for the losses incurred by the termination of cooperation in building the factory were not upheld, since the agreement on which the buyer based its claim did not rise to the level of an enforceable contract.

The tribunal granted in part the buyerís claims for restitution from the seller of advertising costs and expenses incurred in travelling and conducting negotiations over the contracts. It, therefore, ordered the seller to pay the buyer a sum amounting to 50 per cent of that claimed by the buyer. The buyerís claim for the recovery from the seller of the costs of registering the contracts and obtaining import licences was granted in full, since evidence as to the amounts involved had been submitted by the buyer.

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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: Article 74 [Also cited: Article 7(2) ]

Classification of issues using UNCITRAL classification code numbers:

74A [General rules for measuring damages: loss suffered as consequence of breach]

Descriptors: Damages ; Profits, loss of

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Editorial remarks

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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 (1999-2000) No. 9 [53-60]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at p. 51 (claim for compensation of the amount of loss of profit in question regarded as "just")

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 227/1996 of 22 March 1999

Translation [*] by Mykhaylo Danylko [**]

Translation edited by Yelena Kalika [***]

1. SUMMARY OF RULING

     1.1 The Tribunal of International Commercial Arbitration at the Chamber of Commerce & Industry of the Russian Federation (hereinafter Tribunal) has recognized the company, which upon the [seller]ís consent had taken over the rights and obligations of the buyer to the contracts, as a proper claimant in the contracts made between the respondent-[seller] and the other companies.

     1.2 The Tribunal also recognized that the arbitration clauses in the contracts, according to which the action had been brought, did not govern the [buyer]ís claim as to damages caused by the breach of [seller]ís obligation that was essentially a memorandum of intention and could not be of any legal consequence to the parties.

     1.3 In the absence of agreement between the parties on the applicable law, the applicable law should be determined according to the rules of Russian conflict of laws (Article 166 of the Fundamentals of Civil Law of USSR 1991). The Tribunal ruled in favor of the applicability of Russian civil law, as the law of the sellerís country, part of which is the Vienna Convention 1980 [U.N. Convention on Contracts for the International sale of Goods (1980), hereinafter CISG]. The applicability of the CISG to this case is based on Article 1(1)(b) CISG.

     1.4 Considering that the period of time within which the buyer was to perform its obligation to make final payment for the goods had not yet expired (according to the contract, that period of time started on the date when the goods entered the country of the buyer, and not on the date of shipping of the goods by the seller), the Tribunal has recognized that the seller had no grounds to cancel the contract ex parte. The Tribunal has rejected as unproven the sellerís contention that there had been no ex parte cancellation of the contract on the basis of the fact that the person who had declared the cancellation did not have necessary authorization to do so. Accordingly, the [buyer]ís loss of profit was recovered from the seller in the amount that the Tribunal has recognized to be reasonable after due consideration of all relevant circumstances of the case (it was taken into account that the buyer had not provided any evidence as to the ordinary amount of profit usually made from the sales of goods in buyerís country, as well as that the buyer was responsible for some delays in making the advance payments).

     1.5 The Tribunal has found that the parties did not reach the agreement on an additional delivery of goods, considering that there had been no acceptance by [buyer] of [seller]ís offer concerning terms of delivery different from those in the contract.

     1.6 [Buyerís] expenses as to the contractís registration and other fees paid to obtain import licenses, were recovered from the [seller] upon the presentation of evidence by the [buyer] at the hearing. [Buyerís] expenses incurred on advertising the goods were recovered only in part because the Tribunal found that these expenses had not been spent solely for the goods under the contracts in dispute.

     1.7 The Tribunal has rejected [buyer]ís claims as to [buyer]ís expenses for manufacturing spare parts in Iran because the contracts contained only clauses for delivery of these parts by the [seller] and the manufacturing of spare parts by the [buyer] did not follow from the contract. Accordingly, [buyer]ís damages caused by the inability to use the spare parts due to discontinuation of the deliveries of goods could not be recovered from the [seller].

2. FACTS AND PLEADINGS

     2.1 [The cause of action]

The action was brought by the [buyer], an Iranian company, against the [seller], a Russian company, for breach of [seller]ís obligations under the contracts, which were concluded on 28 April 1995 and 6 May 1996, and also for breach of [seller]ís obligations under a cooperation agreement for construction of a factory plant in Iran.

     2.2 [Buyerís claim of damages and costs for sellerís breach of contract]

The [buyer]ís claim of damages included:

(i) Compensation for losses suffered by short delivery of goods under the contract and by termination of the cooperation agreement as to construction of the factory plant in Iran, and by [seller] not providing the engineering documentation;

(ii) Compensation for expenses incurred for registration of the contracts, obtaining of import licenses, advertisement and business trips of specialists; and

(iii) Compensation for expenses incurred by establishing the manufacturing of spare parts in Iran.

Additionally, [buyer] claimed compensation for the arbitration costs and [buyer]ís attorneyís fees.

     2.3 [Sellerís defense pleadings]

The [seller] objected to [buyer]ís claim. In [seller]ís opinion, [seller]ís cancellation of the contract and discontinuation of the deliveries of goods derived directly from the [buyer]ís breach of the terms of payment for the goods. At the same time, the notice of cancellation of the contract sent to the [buyer] was void because it was signed by an unauthorized person. The [seller] denied the fact that parties had reached an agreement on additional delivery of goods, as well as the fact that the parties had concluded a cooperation agreement on construction of the factory plant in Iran.

The [seller] brought a motion to dismiss the [buyer]ís action and to declare the contracts terminated.

     2.4 [Buyerís reply to sellerís pleadings]

The [buyer] challenged the [seller]ís motion. Inter alia, the [buyer] called attention to the fact that claimant-[buyer] had taken over the rights and obligations of the buyers in the contracts after the advance payments terms that were stipulated in the contracts had already expired. Hence, the parties had reached a new agreement on the schedule of advance payments, which the [buyer] did not breach.

     2.5 [Applicable law]

Both [buyer] and [seller] agreed on the applicability of the CISG to their contractual relations. However, the [buyer] contended that Iranian law was applicable as subsidiary law (on the basis of lex loci solutionis); on the contrary, the [seller] contended that Russian law was applicable (as the law of the sellerís country).

The case was heard during six sessions of the Tribunal in 1997 through 1999.

3.††† TRIBUNALíS REASONING

The ruling issued by the Tribunal contains the following main points.

     3.1 [Jurisdiction of the Tribunal]

The parties agreed in the contract that the Tribunal would have competence to arbitrate this case (paragraph 8 of Annex No. 3 of 28 April 1995 and paragraph 8 of Annex No. 3 of 6 May 1995). Each of those clauses contains a provision on resolution of disputes by ďthe Arbitration Tribunal at the Chamber of Commerce and Industry of the Russian Federation in Moscow.Ē

Considering that at the time of conclusion of the contract there was no other judicial agency at the Chamber of Commerce and Industry of the Russian Federation, but the Tribunal of International Commercial Arbitration, which had competence to try such disputes, it should be accepted that the parties, when stipulating the arbitration clause in the contract, had in mind the Tribunal notwithstanding the inexactness of their wording.

     3.2 [Applicable law Ė Arts. 1(1)(b) and 7(2) CISG]

Taking into account that there is no provisions on applicable law in the contracts and that the parties have not agreed on this issue (it is evidenced by the [seller]ís statement of defense of 26 December 1996 and by the [buyer]ís response to the [seller]ís statement of 10 June 1997), the Tribunal, by virtue of Article 28(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration and Article 166 of the Fundamentals of Civil Law of USSR 1991 (continuing to be effective in the Russian Federation) applied the rules of Russian conflict of laws stating the applicable law to be the law of the country of seller, i.e., the Russian Federation substantive law.

According to Article 15(4) of the Russian Federation Constitution, the international treaties to which the Russian Federation is a party become part of its national legislation. If the international treaty adopted by the Russian Federation prescribes different rules than the rules provided by Russian Federation legislation, the rules of the international treaty prevail. A similar requirement is also provided in Article 7 of the Russian Federation Civil Code.

The Russian Federation has been a Contracting State to the CISG since 1 September 1999. According to Article 1(1)(b) CISG, this Convention applies to contracts of international sale of goods between parties [whose places of business are in different States] when the rules of private international law lead to the application of the law of a Contracting State. Therefore, by virtue of the prescriptions in the CISG, the relations between parties to the contract that led to the dispute should be governed by the provisions of the CISG. The Tribunal has also taken into account that the [buyer], whose company is located on the territory of a State that is not party to the Convention, had not objected to application of the Vienna Convention ([buyer]ís response on 10 June 1997 to the [seller]ís statement of defense).

At the same time, by virtue of Article 7(2) CISG, questions which are not expressly settled in the CISG and cannot be settled in conformity with the general principles on which the CISG is based, should be settled in conformity with the domestic law applicable by virtue of the rules of private international law (rules of conflict of laws); thus, in the present case, in conformity with Russian law.

     3.3 [Buyer as proper claimant]

The Tribunal is of the opinion that the action arising from the dispute in the above-mentioned contracts was brought by the proper claimant. The documents of the case contain a letter (facsimile message No. 27) of 25 June 1996, which was sent to the [seller]ís address, and which contained [buyer]ís confirmation that claimant-[buyer] had accepted all rights and obligations of the buyers in the contracts therein, which were signed by the respondent-[seller]ís company on one side, and on the other side by another Iranian company, i.e., the [buyer], (contract of 28 April 1995) and by a citizen (resident) of the Islamic Republic of Iran (contract of 6 May 1995) respectively.

     3.4 [Buyerís claim of damages for loss of profit allowed in part Ė Art. 74 CISG]

The Tribunal ruled to allow in part the [buyer]ís claim for compensation of damages (lost profits) caused by [seller]ís short delivery of the goods ordered in the contracts. The following circumstances were taken into account.

It follows from the documents of the case that on 12 March 1995 and 8 November 1995 two payment installments of the contract of 6 May 1995 were transmitted to the [seller]ís bank account, which constituted the advance payment (report of the Russian bank of 2 September 1997), whereupon, in conformity with that contract, the [seller] shipped to [buyer] a portion of the goods proportionate to the amount of the advance payment (10%). Under the contract provisions, the final payment for the remainder of the goods (90%) was to be made within 45 days after the goods were delivered to Iran. Considering that the last shipment of goods were made on 20 December 1995 (it must be noted that the last shipment passed through Iranian Customs Authorities on 15 January 1996), and that the [seller]ís letter of cancellation of cooperation with the [buyer]ís company Ė stating among other reasons [seller]ís non-performance of the contracts of 28 April 1995 and 6 May 1996 Ė was sent to the [buyer] on 1 February 1996, i.e., before the expiration of the 45-day term, the Tribunal concluded that since the term for the performance of [buyer]ís obligations as to payment for the goods had not expired yet, the [seller] had no basis for ex parte cancellation of the contracts.

The Tribunal could not accept the [seller]ís argument that because the letter of 1 February 1996, which contained a unilateral cancellation of the contracts, was signed by a non-authorized person, therefore the delivery of this letter to the [buyer] could not be considered as action that might lead to the cancellation of the contracts. Additionally, the Tribunal also took into account that, under Article 174 of the Russian Federation Civil Code, if a person does not have authority to conclude an agreement (and respectively to cancel it) that agreement might be declared void by the court on the request of the party who stands to benefit from the limitation (lack of authority) only if it is proved that the other party had or ought to have had knowledge of the lack of authority. Since the [buyer] had no knowledge of the lack of authority of the person, who had signed the letter of 1 February 1996, to declare on behalf of the [buyer] the cancellation of the contracts and since the [seller] did not provide any relevant evidence of such knowledge (as required by Article 174 of the Russian Federation Civil Code), the Tribunal ruled that delivery of the aforesaid letter to the [buyer] should be considered as a unilateral cancellation of the contracts by [seller]. The Tribunal also took into account that at the time when the contracts were in force (as follows from the case materials and explanations of the [seller]ís representative at the hearing on 25 January 1999), the [seller] was negotiating with potential buyers of goods in Iran, business relations with which were of significant commercial importance to [seller].

Considering the above, the Tribunal concluded that the [buyer] had grounds to claim the recovery of damages (for lost profit), which arose as a result of [seller]ís unilateral cancellation of the contracts. In respect of this, it was noted that the definition of damages (lost profit) in Article 74 CISG and in Article 15 of the Russian Federation Civil Code, was relevant to the [buyer]ís claim for the recovery of damages in the amount claimed by [buyer]. According to Article 15 of the Russian Federation Civil Code, the definition of damages includes ďnon-received profit, which would have been received under the ordinary circumstances of civil course of dealing had the [aggrieved partyís] rights not been violated (lost profit).Ē

In view of the above, there is no doubt over the [buyer]ís calculation of the amount in [buyer]ís claim, which was calculated on the basis of the amount of profit (18%) that the [buyer] could have received in the event of resale of the undelivered goods, including the buyerís assumed expenses (insurance, transportation, customs duty) that were included in the price of the goods under the delivery term FCA.

However, considering that the [buyer] did not provide evidence in support of the asserted claims to prove that the profit of 18% is an ordinary amount of profit received from sales of goods in Iran as alleged by the [buyer] (inter alia, such evidence could include a publication of the current market prices of the goods), and also taking into consideration that cancellation of the contracts was to some extend caused by the [buyer]ís conduct, since [buyer] failed to make advanced payments on time and never paid in full the price of the delivered goods, the Tribunal, by virtue of Article 404 of the Russian Federation Civil Code, ruled that the [buyer]ís claims should be allowed only in part (in the amount of 60% of the claim).

     3.5 [Buyerís claim of damages for termination of factory construction agreement rejected]

The Tribunal ruled to reject [buyer]ís claim against the [seller] for the recovery of damages caused by termination of cooperation as to construction of the factory plant and by failure to provide the engineering documents by the [seller], because those claims did not follow from the contracts in dispute. The Tribunal also stated that the agreement of 1 November 1995, upon which [buyer] had based the amount claimed, was essentially an agreement of intention and could not be of any legal consequence to the parties who signed that agreement.

     3.6 [Buyerís claim of damages for registration and licensing expenses allowed]

The Tribunal ruled to allow [buyer]ís claim against the [seller] for the recovery of the expenses in connection with the registration of the contracts and obtaining import licenses, considering that the amount of those expenses was equivalent to State fees and tariffs set in Iran, which the [buyer] was referring to, and that the evidence of such amounts was provided in the documents of the case.

     3.7 [Buyerís claim of damages for advertising expenses allowed in part]

The Tribunal ruled to allow in part the [buyer]ís claim against the [seller] for the recovery of the expenses concerning advertising (according to the calculations provided). At the Tribunal hearing on 25 January 1999, the [buyer]ís representative presented to the Tribunal pamphlets, stickers and other advertising materials as well as a service manual translated from Russian into Persian. However, considering that the [buyer] had presented evidence on the total expenses for advertising of a subject matter of the contract in Iran ordered in pursuance to the parties' co-operation agreement (as confirmed by the [buyer]ís representative at the hearing) and that the [buyer]ís claim for compensation related only to the performance of deliveries as to these contracts, the Tribunal ruled that the mentioned expenses should be recovered only in part (in the amount of 50%) in the context of the quantity of goods which was advertised but not received by the [buyer].

     3.8 [Buyerís claim of damages for other expenses allowed in part]

The Tribunal ruled to allow in part [buyer]ís claims as to the expenses incurred in connection with business trips and the conduct of negotiations relating to the contracts in the amount provided in the report of the financial director of [buyer]ís company. Although during the hearing the [buyer]ís representative provided evidence of such expenses, the Tribunal ruled to allow only 50% of the expenses claimed, because it did not directly follow from the case materials that these expenses were incurred in connection with conducting negotiations which had led to the conclusion of the contracts in dispute.

     3.9 [Buyerís claim of damages for manufacturing expenses rejected]

The Tribunal rejected [buyer]ís claim against the [seller] for the recovery of the expenses incurred by the [buyer] in relation to the manufacture of spare parts as well as after-sale service for the goods delivered. The case documents (the letter of 24 May 1995 sent to the management of the [buyer]ís company, and the list of spare parts to be manufactured in Iran) and the explanations given by [buyer]ís representative at the hearings reveal that the mentioned spare parts had been manufactured by the [buyer] using the moulds made in Iran, but could not practically be used due to the termination of deliveries by the [seller]. As the contracts in dispute provided for deliveries of both goods and spare parts to these goods manufactured by the [seller]ís company and, as follows from the scope of the contracts, there was no provision as to either the local manufacturing of spare parts using semi-manufactures or and after-sale service in Iran, the Tribunal, therefore, ruled that the [buyer]ís claim was outside the scope of the present dispute and could not be allowed.

     3.10 [Alteration of payment terms in contract not established]

After reviewing the case documents as to correspondence between the parties concerning the manufacturing and shipping of an extra quantity of goods by the [seller] on the terms of the contract of 6 May 1995 and the [seller]ís proposal, concerning this contract, to increase the amount of advance payments up to 40%, the Tribunal came to the following conclusions.

The case documents show that on 11 November 1995, the [seller] sent to the [buyer] a fax message notifying [buyer] of the readiness of part of the goods for shipment and also of the manufacturing of an extra quantity of goods (in addition to the quantity stated in the contracts) on terms and conditions of the contract of 6 May 1995. The [seller] also proposed therein to increase the amount of an advance payment up to 40%. The [buyer] in its fax response on 21 November 1995, pointed out to [seller] the complications relating to alteration of the contract provisions, which had to be registered with official authorities. Afterwards, at the Tribunal hearing, the [buyer]ís representative also confirmed that the [buyer] had not given assent to shipment of an extra quantity of goods if the terms of payment were to be altered. Considering that the [seller] had proposed to [buyer] the alteration of the contractual provisions and that the [buyer] had not accepted this proposal, and that the [buyer]ís conduct had not shown that the [buyer] had assented to the proposal (i.e., the [seller] did not receive an acceptance of the [buyer]), the Tribunal ruled that the exchange of letters between the parties and the subsequent conduct of the parties did not constitute an agreement between the parties to alter the payment terms.

     3.11 [Counselís fees allowed in part]

After hearing the [buyer]ís claim for the recovery of [buyer]ís expenses for the arbitration and also [buyer]ís legal fees, which claims [buyer] made in a letter received by the Tribunal on 26 August 1998 and which he subsequently confirmed at the hearings, the Tribunal came to the following conclusions.

In confirmation of the claimed expenses, the [buyer]ís counsel provided to the Tribunal with a report on expenses as to legal assistance in the present case, which had been sent by counsel to the [buyer]ís company management (letter of 11 August 1998). The Tribunal ruled to allow in part the [buyer]ís claim, taking into consideration that the [buyer] had failed to provide evidence of actual expenses incurred by the [buyer], that the sum provided was related not only to the present case but to other cases currently arbitrated by the Tribunal. The Tribunal also took into account that the expenses allowed were reasonable expenses in connection with the defense of [buyer]ís interests by counsel.

     3.12 [Arbitration costs]

According to ß 6 of the Rules of the Tribunal on Arbitration Expenses and Fees, the arbitration fees are to be paid by the Respondent [seller] proportionally to the amount of [buyer]ís claim that is allowed and by the Claimant [buyer] proportionally to the amount of the claim rejected by the Tribunal.


FOOTNOTES

* This is a translation of data on Proceeding 227/1996, dated 22 March 1999, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in: Rozenberg ed. Arb. Praktika (1999-2000), No. 9 [53-60].

All translations should be verified by cross-checking against the original text. For purposes of this translation, Respondent of the Russian Federation is referred to as [seller]; Claimant of Iran is referred to as [buyer].

** Mykhaylo Danylko holds a Master 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, Kiev, Ukraine (June 2002); and is a candidate for an LL.M. in International and Comparative Law at the Pace University School of Law. The second-iteration redaction of his translation was by Dr. John Felemegas of Australia.

*** Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Mascow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.

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