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CISG CASE PRESENTATION

Ukraine 10 May 1999 Arbitration proceeding (Sunflower seeds meal case) [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990510u5.html]

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

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Case identification

DATE OF DECISION: 19990519 (9 May 1999)

JURISDICTION: Arbitration ; Ukraine

TRIBUNAL: Tribunal of International Commercial Arbitration at the Ukraine Chamber of Commerce and Trade

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: Unavailable

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Ukraine (claimant)

BUYER'S COUNTRY: Belarus (respondent)

GOODS INVOLVED: Sunflower seeds meal


Classification of issues present

APPLICATION OF CISG: Yes, along with other laws

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 6 ; 77

Classification of issues using UNCITRAL classification code numbers:

6B [Choice of law (agreement to apply Convention): contract stated that it shall be governed by "the legislation of the Republic of Belarus" (Court applied Art. 77 of the Convention)];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Choice of law ; Mitigation of damages

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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): Praktika ofzhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP Ukraine. Vneshneekonomicheskie spory [Practice of the International Commercial Arbitration Tribunal at the Ukraine Chamber of Commerce and Industry, Foreign Economic Disputes], Kyiv, published by Praksis (____), Case No. 44 [381-389]

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

Tribunal of International Commercial Arbitration of the Ukrainian Chamber Commerce and Trade

Award of 10 May 1999

Translation [*] by Gayane Nuridzhanyan [**]

The International Commercial Arbitral Tribunal at the Ukrainian Chamber of Commerce and Trade (hereinafter Tribunal) having considered the action brought by [Seller], a Ukrainian firm, against [Buyer], a Byelorussian industrial complex, for the recovery of US $82,609.11 including:

   -    US $56,994.61 as the main sum in arrears for delivered goods;
   -    US $19,170.28 as a penalty levied on the [Seller] by the tax authorities for a currency return delay; and
   -    US $6,644.23 as a contract penalty for delay in payment for the goods,

has decided the following:

      The legal basis for the adjudication of the dispute by the Tribunal is the Supplement to Contract #5 of 5 May 1998 according to which disputes shall be submitted to the ICA Tribunal at the Ukrainian Chamber of Commerce and Trade for adjudication on the basis of the UNCITRAL Model Law on International Commercial Arbitration. The President of the Tribunal may appoint any person as a sole arbiter for the settlement of the dispute. This Supplement is valid during the term of the Contract. Art. 10.5 of the Contract envisaged that with respect to the issues which are not regulated by the Contract, parties shall follow legislation of the Republic of Belarus.

On 5 May 1998, the [Seller] and the [Buyer] concluded Contract #5 according to which:

   -    The [Seller] was obligated to deliver the goods (sunflower oilseeds meal) in the amount of 1,500 tons on the conditions DAF - border of Ukraine, Republic of Byelorussia; and
 
   -    The [Buyer] was obligated to accept the goods and to pay for them within five bank days from the date of the receipt of the factual weight of the goods.

On 22 October 1998, the parties signed Additional Conditions to Contract #5 which changed the price formulation and payment procedure. The price of the goods was established in Russian rubles at the rate of US dollars as of the moment of the delivery of the goods which is 1,000 rubles per ton, equivalent to US $162.045. The payment sum in Russian rubles shall correspond to its equivalent in US dollars as of the moment of the receipt of the goods or shall constitute US $162.045 per ton.

Pursuant to the provisions of Contract #5 of 5 May 1998, the [Seller] delivered to the [Buyer] 497.1 tons of goods for the price of US $497,100 on 15 May 1998. The [Buyer] has not paid for the goods within the terms envisaged by the Contract (within five bank days from the day of the receipt of the goods). On 14 August 1998, the [Seller] sent a letter of complaint to [Buyer] requesting recovery of 522,422 Russian rubles (which included the main sum in arrears and penalty). [Seller] also sent an Act of Mutual Accounts Revision. On 28 August 1998, the [Buyer] transferred 165,000 Russian rubles as partial payment for the goods.

POSITION OF THE PARTIES

[Seller]'s claim

Later negotiations for the settlement of the dispute were not successful. Hence, on 9 December 1998 the [Seller] lodged a claim with the Tribunal for the recovery from the [Buyer] of US $82,609.11. This included:

   -    US $56,994.61 (the main sum in arrears for delivered goods);
   -    US $19,170.28 as a penalty levied upon the [Seller] by the tax authorities for currency return delay; and
   -    US $6,644.23 as a contract penalty for delay in payment for the goods.

The proceedings of the Tribunal were commenced by the Resolution of the Tribunal's President of 9 December 1998.

[Buyer]'s defense

On 15 February 1999, the Tribunal received [Buyer]'s statement of defense in which the latter alleged that the [Seller] had not fulfilled its obligations under Contract #5. In particular, [Buyer] alleged that the [Seller] delivered only 495.8 tons of goods instead of 1,500 envisaged by the Contract (according to the commercial documents of the railway service, the shortage of the goods against the documents of the sender constituted 1,200 tons).

Moreover, the [Buyer] alleges that it is not the proper Respondent in this case, since on 6 May 1998, the [Seller], the [Buyer] and Russian Ltd. concluded trilateral Contract #6 on the assignment of the debt. Under Contract #6, the [Buyer] transferred and Russian Ltd. accepted all the rights and obligations under Contract #5 of 5 May 1998 with respect to the payment of the debts for the goods delivered to the [Buyer].

In [Buyer]'s view, in fact, Contract #6 is an agreement to conceding the right of action since there was a verbal arrangement between the parties that the [Buyer] will transfer money for the delivered goods to Russian Ltd, thus the latter possesses the right to claim 495,800 Russian rubles from the [Buyer]. Pursuant to Contract #6 of 6 May 1998, the [Buyer] has transferred 165,000 Russian rubles to the account of Russian Ltd. (payment order of 25 August 1998). Thus, the [Buyer] had an indebtedness in amount of 330,000 Russian rubles owed to Russian Ltd., but not to the [Seller].

In the facsimile letter of 6 May 1999, the [Buyer] reiterated the arguments related to the trilateral Contract #6 of 6 May 1998 presented in its statement of defense. [Buyer] contends that there does not exist a reverse agreement for the return to the [Seller] of the right to claim from Russian Ltd. which according to art. 202 of the Civil Code of Ukrainian SSR shall be done in simple written form. Since there is no such written agreement on the reverse concession of the right of claim, this agreement is null and void as it does not satisfy requirements of the legislation. Moreover, according to art. 199 of the Civil Code of USSR, a debtor who is not notified of the concession of the right of claim in advance is entitled to fulfil the obligation with the initial creditor, i.e., Russian Ltd.

The [Buyer] also contests the effectiveness and validity of Contract #5 of 5 May 1998 since the latter was signed only by one person which is in contradiction with the Ukrainian legislation on external economic activity. By virtue of the provisions of the Civil Code of USSR, in the event an agreement is void, the parties shall return to each other everything which was acquired under the agreement. Therefore, the [Buyer] requests the Tribunal to oblige the [Seller] to return the sums paid by the [Buyer] under the void contracts (165,000 Russian rubles, with due regard to the inflation, and US $53,614).

[Seller]'s response

In its response of 17 March 1999 to the [Buyer]'s statement of defense and in its supplement to its claim of 7 May 1999, the [Seller] alleges that [Buyer]'s demands are unfounded for the following reasons:

   -    The [Seller] has fulfilled its obligations under Contract #5 and the [Buyer] has paid US $53,356 for the delivered goods in violation of the set terms, in particular, only on 9 March 1999, i.e., after the claim was lodged. The [Buyer] is obliged to reimburse the losses suffered by the [Seller] and to pay the penalty in compliance with the Contract.
 
   -    The [Buyer]'s statement that the [Seller] delivered 491.1 tons and not 495.8 tons cannot be taken into consideration since the [Buyer] has not presented a notice of complaint as is envisaged in para. 6.2 of Contract #5.
 
   -    The [Buyer]'s reference to art. 199 of the Civil Code of USSR is also wrong. Art. 199 stipulates that the debtor which was not informed about concession of the right to claim is entitled to fulfil the obligation with regard to the initial creditor, i.e., Russian Ltd. This being the case, the [Buyer] was obliged to transfer the money to Russian Ltd. during set terms; however, this was not done. Moreover, according to the letter of Russian Ltd. of 10 March 1999, it considers itself a secondary creditor under Contract #6 of 6 May 1998 and it will not bring any action claims against the [Buyer]. The [Seller] has received the consent of Russian Ltd. for the concession of the right to claim under the present Contract in order to recover the indebtedness for the delivered goods directly from the [Buyer]. Thus, the right to claim recovery of the debts under the present Contract is transferred to the initial creditor, i.e., the [Seller]. The same conclusion can be drawn from art. 160 of the Civil Code of USSR which envisages that if the party which had concluded the agreement stipulated for the fulfilment of the obligations with the third party, the latter as well as the party which had concluded the agreement are entitled to claim fulfilment of such obligation.
 
   -    When concluding Contract #5 of 5 May 1998, the parties reached agreement with regard to all the essential conditions. The [Seller] has fulfilled the Contract, the [Buyer] has accepted the delivered goods and, according to art. 151 of the Civil Code of USSR, [Buyer] was obliged to pay for the goods. In view of the circumstances as well as the provisions of arts. 153 and 156 of the Civil Code of USSR, the [Buyer]'s effort to have the Contract declared invalid cannot be upheld.

After the composition of the Tribunal was set, hearings were appointed on 10 May 1999.

At the hearings, the [Seller] modified its claims with due regard to the subsequent payment of the debts in the amount of US $53,614 by the [Buyer] under Contract #5. In particular, the [Seller] now seeks to recover from the [Buyer]:

   -    US $19,820.16 for the payment delay; and
   -    US $46,856.64 for the losses suffered, including:
      US $15,321.54 of the financial penalties levied by the tax authorities
      for the untimely return of the currency earnings under Contract #5; and
      US $31,537 for the payment of a loan received for the purchase of the
      sunflower oilseeds meal under Credit Contract #11-98 of 24 April 1998.

These modifications to the [Seller]'s action claims are set forth in the Supplement of 7 May 1999 enclosed with the action claims and presented at the hearings of the Tribunal.

OPINION OF THE ARBITRAL TRIBUNAL

Taking into consideration that:

1. On 5 May 1998, the [Seller] and the [Buyer] concluded Contract #5 with additional conditions and supplements on the delivery of sunflower oilseeds meal.

According to para. 5 of the Contract, the law applicable to the relations of the parties is the legislation of the Republic of Belarus.

2. The [Seller], Ukrainian Ltd., starting from 7 August 1998 is a legal successor of the private undertaker according to its statute.

3. Pursuant to the provisions of Contract #5, on 15 and 21 May 1998 the [Seller] delivered to the [Buyer] 497.1 tons of sunflower oilseeds meal for the price of 497,000 Russian rubles (US $80,552) which is confirmed by the customs declarations and waybills available in the materials of the case and is not denied by the [Buyer].

4. However, the [Buyer] has not paid in full for the delivered goods, violating the terms of the Contract. In particular, the [Buyer] paid:

   -    165,000 Russian rubles on 25 August 1998; and
   -    US $53,614 on 9 March 1999 after the action was lodged with the Tribunal (this is confirmed by the copies of bank documents, including [Buyer]'s order on the transfer of 3 March 1999 with the bank's note on the transfer of US $53,614 to the [Seller]).

In light of the above, the case should be discontinued with regard to recovery of US $53,614. The respective expenses of the [Seller] on payment of the arbitration fee should be borne by the [Buyer].

5. For the following reasons, the Tribunal cannot take into consideration [Buyer]'s statement that it is not the proper defendant in this case.

   -    According to the [Seller], Contract #6 on the assignment of the debts of 6 May 1998 was concluded between the [Seller], the [Buyer] and Russian Ltd. in connection with the ban of Byelorussian National Bank on carrying out settlements of Ukrainian undertakings in Russian rubles. Essentially, this was a simulated contract aimed at concealing the transfer of Russian rubles to the [Seller] with the help of a Russian entity. This is confirmed by the primary payment of 25 August 1998 in the amount of 165,000 Russian rubles transferred by the [Buyer] to the account of Russian Ltd. and the actions of the latter on the transfer of this sum to the [Seller]'s account. The letter of the director of [Buyer]'s company of 28 October 1998 to the Ministry of Food and Agriculture of Belarus with a request to assist in purchase of currency (US $53,824) for the settlement of accounts with the [Seller] and payment of debts to the [Seller], and not to Russian Ltd., in the amount of US $53,614 on 9 March 1999 as well confirm the abovementioned statement.
 
   -    Under such conditions, by virtue of art. 58 of the Byelorussian Civil Code, if the agreement is aimed at concealing another agreement (i.e., it is a simulated contract), the rules which regulate the agreement intended by the parties are applicable, i.e., the rules set forth in Contract #5.
 
   -    Moreover, by its letter of 12 November 1998, Russian Ltd, has notified the [Seller] as well as the [Buyer] of its refusal of the right to claim the debts in the capacity of secondary creditor under Contract #6 of 6 May 1998 on the assignment of the debt. Russian Ltd has stated as well that it would not bring any claims against the [Buyer] for the recovery of the remainder of the debts for the goods delivered to the latter by the [Seller] in the amount of 491.1 tons under Contract #5 of 5 May 1998.

6. According to art. 6 of the Law of Ukraine "On Foreign Commercial Activity", foreign-commercial agreements (contracts) to which Contract #5 belongs are to be signed by two persons. The foreign-commercial agreement can be declared invalid by the court or arbitral tribunal if it does not satisfy the requirements put forward by the Ukrainian laws.

However, Contract #5 of 5 May 1998 was concluded in written form, the parties have reached agreement with regard to all essential conditions of the Contract and it was in fact fulfilled, namely, the [Seller] has delivered the goods which were paid for by the [Buyer]. Under such conditions, the Tribunal holds that [Buyer]'s claim to declare the Contract invalid on a technical basis is unfounded.

7. According to para. 7.2 of Contract #5, the [Buyer] is obligated to pay a penalty in the amount of 0.1% for each day of delay. The [Seller] has delivered goods:

   -    On 15 May 1998, for the price of US $33,802.73 (with the payment deadline set at 1 June 1998); and
   -    On 21 May 1998, for the price of US $46,750.20 (with the payment deadline set at 8 June 1998).

Payment delay with regard to the first delivery constitutes 86 days (the sum of the penalty is US $2,907). With regard to the second delivery, the delay constitutes 269 days (the penalty amounts to US $9,686.90 with due regard to the reduced statute of limitation of 180 days (art. 73 of Byelorussian Civil Code) and partial indebtedness in relation to the first consignment of the goods constituting US $9,686.90).

Taking into account that the amount of the penalty may not exceed 8% of the cost of the non-paid sum for the goods (para. 7.2 of the Contract), [Seller]'s claim for recovery from the [Buyer] of the penalty for the payment delay in the amount of US $6,444 should be satisfied.

However, the [Seller]'s claim to increase the penalty sum up to US $19,280.12 cannot be taken into account by the Tribunal since, with regard to this part of the claim, the [Seller] has not paid the arbitration fee.

8. According to para. 220 of the Byelorussian Civil Code and Art. 77 of the UN Convention on Contracts for the International Sale of Goods (Vienna, 1980), Contracting States of which are States of the parties to the dispute, the Tribunal may reduce the debt of the debtor if the creditor deliberately or negligently contributes to the increase of the size of the losses caused by the improper fulfillment of the obligations. The creditor must take such measures as are reasonable in the circumstances to mitigate the loss. Had the [Seller] lodged its claim with the Tribunal in time, the [Seller] would have prevented calculation and levy of the fines by the State Tax Administration for the delay in return of the currency under Contract #5 of 5 May 1998. Thus, the [Seller] could have prevented the losses which it seeks to recover from the [Buyer]. Therefore, the [Seller]'s claim to recover from the [Buyer] US $15,321.54 for losses related to the payment of the financial fine for the delay in return of the currency earnings shall not be satisfied.

9. In compliance with the Regulations on Arbitration Fees and Expenses, each new action claim is to be paid for by an arbitration fee. Thus, the claim for the recovery from the [Buyer] of US $31,537 related to the maintenance of the loan under Credit Contract #11-98 of 24 April 1998 concluded by the [Seller] and a commercial bank and not paid for by the [Seller] shall not be taken into consideration.

10. According to S. V(2) of the Regulation on Arbitration Fees and Expenses, in case of partial satisfaction of the action the arbitration fee is imposed on the Respondent [Buyer] in proportion to the satisfied action claims and on the Claimant [Seller] in proportion to the part of the claims which were rejected.

AWARD

Following the provisions of Contract #5 of 5 May 1998, the Supplement and Additions to it, arts. 58, 220 of the Byelorussian Civil Code, art. 77 of the UN Convention on Contracts for the International Sale of Goods (Vienna, 1980), art. 31 of the Law of Ukraine "On the International Commercial Arbitration", and arts. 8.4-8.9 of the Rules of the Tribunal, S. V(2) of the Regulations on Arbitration Fees and Expenses, the Tribunal has decided:

The [Buyer] is obliged immediately after receipt of the present award to pay to the [Seller]:

   -    US $6,444 [the penalty for the delay in the payment]; and
   -    US $2,190.05 [reimbursement of the expenses on payment of the arbitration fee]

In total, the amount of the satisfied claims constitutes US $8,634.05.

The case shall be discontinued with regard to the recovery of US $53,614 since the [Buyer] has voluntarily paid this sum of the debts.

The remainder of the [Seller]'s claim is rejected.

The judgment is final.


FOOTNOTES

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

** Gayane Nuridzhanyan, junior associate at the law firm Danylko, Kushnir, Solltys & Yakymyak, Attorneys & Counselors at Law, Kyiv, Ukraine <http://www.dksylaw.com/>, student at Kyiv International University with major in private international law; participant of Canada-Ukraine Parliamentary Program, member of Ukrainian team at 2005 Telders International Moot Court Competition, The Hague.

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