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CISG CASE PRESENTATION

Russia 27 July 1999 Arbitration proceeding 302/1996 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/990727r1.html]

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

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Case identification

DATE OF DECISION: 19990727 (27 July 1999)

JURISDICTION: Arbitration ; Russian Federation

TRIBUNAL: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry

JUDGE(S): Prof. Crespireghizzicre of Italy (Chairman), A. Kostin of Russia and K. Hober of Sweden (Arbitrators)

CASE NUMBER/DOCKET NUMBER: 302/1996

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: Switzerland (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: Goods


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 4 ; 7 ; 46 ; 71(3) ; 74 ; 77 ; 78

Classification of issues using UNCITRAL classification code numbers:

4B1 [Scope of Convention (issues excluded): validity under domestic law (authorization to contract)];

7A3 [Principles of interpretation: observance of good faith];

46A [Buyer's right to require performance];

71C1 [Suspension of performance (obligations of party suspending performance): immediately notify other party];

74A ; 74A1 ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Includes loss of profit; Foreseeability of loss;

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

78B [Rate of interest]

Descriptors: Scope of Convention ; Validity ; Burden of proof ; Good faith ; Estoppel ; Specific performance ; Suspension of performance ; Damages ; Reasonableness ; Foreseeability of damages ; Profits, loss of ; Mitigation of loss ; Penalty clauses ; Interest; Unidroit Principles

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Editorial remarks

Estoppel. "In this decision, the ICAC stated that 'on the basis of Article 7 of the Vienna Convention and requirement of "observance of good faith in international trade", international arbitration practice has come to the conclusion that Anglo-American principle of estoppel or German Verwirkung could be applied to contracts of international sales'.

"The decision can be criticized on several counts:

"First, ... critical points ... as to ... referring to applying national concepts in relation to the issues capable of being resolved by the CISG ... It is argued that such references to domestic concepts are inadmissible. Even if it is possible to develop such a principle on the basis of the provision in Article 7(1), its essence cannot be defined from the standpoint of or with reference to domestic legal concepts. No meaning in which a particular notion is used in some national law can be read into the concept which is provided for by the Convention or is said to exist (as is the case here) in the Convention's legal framework.

"The second critical point pertains to application of a principle of estoppel in this case. The ICAC, in this case, has come to the conclusion as to the applicability estoppel of basing itself upon the 'need to observe good faith'. It seems that more thorough analysis should have been carried out before such conclusions should be examined. Therefore a simple statement that estoppel is based upon good faith cannot suffice.

"Finally, taking into account Article 7(1) which alls upon the 'need to promote uniformity' in interpretation of the Convention, it can be said that international arbitration practice can potentially serve as a strong support for certain conclusions. However, it is argued that such statements as 'international arbitration practice has come to the conclusion' can be regarded as unsubstantiated if they are not supported by cases decided by other arbitration institutions indicating a clear trend in taking the said position. In this decision, no references were made to other relevant decisions." Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at pp. 33-34 (citations omitted)

Suspension of performance. "In [this] case ... the Tribunal did not support the seller's position that it had the right to suspend performance of its obligations because the buyer had failed to open a letter of credit. The Tribunal correctly held that the seller did not have this right as it failed to give the buyer a notice of suspension as required by Article 71(3)." Id. at p. 40.

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

English: Unilex database <http://www.unilex.info/case.cfm?pid=2&do=case&id=671&step=Abstract>

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. 27 [141-147]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

English: 14-11 Mealey's International Arbitration Report 7 (1999); Liu Chengwei, Recovery of interest (November 2003) n.201; Djakhongir Saidov, 7 Vindobona Journal of International Commercial Law and Arbitration (1/2003) 1-62 at nn. 68, 70, 144, 211, 266, 270; [2005] Schlechtriem & Schwenzer ed., Commentary on UN Convention on International Sale of Goods, 2d (English) ed., Oxford University Press, Art. 7 para. 30 Art. 9 para. 26; CISG-AC advisory opinion on Calculation of Damages under CISG Article 74 [Spring 2006] n.28 (related cases cited in addendum to opinion)

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Case text (English translation)

Queen Mary Case Translation Programme

Russian Federation arbitration proceeding 302/1996
of 27 July 1999

Translation [*] by Gilyana Bovaeva [**]

Translation edited by Mykhaylo Danylko [***]

1. SUMMARY OF RULING

      1.1 The claim having as its objective to alter provisions of the contract, does not fall within competence of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry (hereinafter Tribunal), because such claim lies outside the scope of contractual relations between the parties, embraced by the arbitration clause of the contract.

      1.2 In virtue of principle "independence of arbitration clause", fixed in the Rules of Tribunal and the Russian Federation Law On Tribunal of International Commercial Arbitration, the arbitration clause of the contract should be applied notwithstanding the proof of validity of the contract.

      1.3 Having applied, on the basis of parties agreement reached during the hearings of the case, the Vienna Convention 1980 [U.N. Convention on Contracts for the International Sale of Goods (1980); hereinafter CISG], and subsidiary Russian substantive law, the Tribunal when rendering the decision referred to lex mercatoria, the UNIDROIT Principles of International Commercial Contracts, gradually gaining status, as discussed in decision, of international trade usages, and also principles of foreign law (Anglo-American and German law), employed in international arbitration practice.

      1.4 Despite assertions of the [seller], who alleged that the contract between the parties was not in compliance with respective requirements of law and other rules of legal instruments and was therefore void, the contract is recognized as valid considering, inter alia, the fact that [seller], who, according to the Rules of Tribunal, bears the burden to prove his assertions, did not prove illegality of conclusion of the contract and abused his right, having asserted his arguments a long time after the moment when he learned or could have learned of the facts, about which only he could have been aware.

      1.5 Signing of the contract by an officer of the company in violation of restrictions set by its by-laws, neither leads to nullity of the contract nor means non-observance of writing requirements, specified in Article 162 of the Russian Federation Civil Code for international sales contracts.

      1.6 On the basis of Article 71(3) CISG, the reference by the [seller] to the fact that he had suspended performance of obligations as to shipment, in connection with non-issuance by [buyer] of the duly made letter of credit, was not found reasonable because the [seller] did not notify the [buyer] about the fact of suspension of performance or demand assurance of [buyer]'s performance.

      1.7 The Tribunal, while hearing claims for recovery of damages, took into attention all the relevant circumstances as required by CISG, in particular: reasonableness of [buyer]'s actions; proof of the fact which caused, as [buyer] alleged, losses to her; foreseeability by [seller] of the losses at the moment of conclusion of the contract.

      1.8 Having recognized as proved the fact of non-performance by the [seller] of his obligations to ship the goods under the circumstances that do not relieve him from liability, the Tribunal granted the claim of the [buyer] for recovery from [seller] of the lost profit in the amount, found reasonable and foreseeable, which was not contested by [seller].

      1.9 On the basis of ad verbum interpretation of the language of the contract, the Tribunal came to the conclusion that, in the event of non-delivery, penalties provided by the contract for late delivery cannot be applied.

2. FACTS AND PLEADINGS

The action was brought by [buyer], a Swiss company, against [seller], a Russian company, in connection with partial non-performance of a contract for international sale of goods, concluded between the parties in July 1993 and which provided for delivery to be made not later than the end of October 1993 in few installments on "FOB - particular Ukrainian port" terms. The [seller] delivered only one lot of the goods (20% of the total quantity required by contract).

     2.1 [Buyer's position]

The [buyer] claimed:

-   recovery of damages suffered due to non-performance of [seller]'s obligations;
fiat for specific performance by [seller] on the terms as was agreed, or, alternatively, recovery of the lost profit;
recovery of arbitration fees and expenses in connection with present proceeding.

      2.2 [Seller's position]

The [seller] disputed the validity of the contract and the arbitration clause contained therein. [Seller] also challenged the reasonableness of the particular claims asserted by [buyer].

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points:

     3.1 [Validity of the contract]

The contract should be deemed valid in virtue of the following circumstances.

The actions of the person who signed the contract on behalf of the [seller] cannot be considered as a contract "not complying to the requirements of the law or other rules of legal instruments …" (Article 168 of the Russian Federation Civil Code). The law and other legal instruments invoked by the [seller] (paragraph 9.3. Model Charter of Stock Companies, which is integral part of the Russian Federation Presidential Order No. 721), impose a duty on founders of a company established in the process of privatization to provide in the [company's] by-laws special procedure for making decisions regarding certain agreements dealing with company's property. These requirements were entirely met when the company of [seller] was established, in by-laws for which there are corresponding articles. The burden of proof of illegality in the conclusion of the contract and, accordingly, of its invalidity on the part of [seller], who is a stock company, is imposed on [seller] (§ 34 of the Rules of Tribunal). However, the [seller] did not provide any evidence that prior to the actions of his officer, who signed the contract in the name of the [seller], there were no relevant shareholders' meetings (e.g., minutes of meetings kept for these periods were not presented). Therefore, it is not proved that the officer of [seller] had acted in violation of the law or other legal instruments. Accordingly, the contract concluded by him cannot be considered void.

Actions of the [seller] towards performance of the contract (i.e., delivery of the first installment of goods and receipt of the respective payments, correspondence about procedure of delivery of the remaining part of the goods) "…evidence the further approval of the contract by the stock company, [seller's company]" (See Resolution of the Board of Russian Federation Supreme Tribunal of Arbitration of 03 June 1997 No. 4374/96). With this, the correspondence mailed by the [seller] to the [buyer] after 13 September 1993 (the date when the CEO of [seller]'s company came back from vacation) cannot be regarded as a refusal by [seller] to approve the contract. On the contrary, repeated notifications that the goods were not ready for shipment and requests to extend the deadline for shipment, mailed by [seller] after that date (in September - October 1993) evidence the existence of the contractual relations between the parties.

Claims of the [seller] to declare the contract void contradict provisions of Article 10 of the Russian Federation Civil Code about good faith in civil matters. Actions of a person who committed a violation while concluding a contract, concealed this violation from the other party and received performance from the "good faith counter agent" (Article 302(1) of the Russian Federation Civil Code) under this contract and thence trying to - after three years (during which only he knew about the possible reason of nullity of contract) - assert declaration of nullity of the contract, cannot be qualified otherwise than "abuse of right".

[Seller]'s arguments are inadmissible also in light of the lex mercatoria which denies legal and judicial defense of a party who employs an own right (in this case - right to declare contract void) in a unreasonable manner or in contradiction to his previous conduct (nemo potest venire contra factum proprium).

Inter alia, in accordance with Article 7 CISG and the requirement of "observance of good faith in international trade", the international arbitration practice has concluded to apply to contracts for international sales the Anglo-American principle of estoppel or the German Verwirkung.

The contract makes reference to the Power of Attorney, on the basis of which the officer of a stock company, who signed the contract in its name, has acted. The [seller] did not present proof of undue context or non-existence of the Power of Attorney. Issuance of the Power of Attorney by a stock company prior the registration of by-laws of this stock company cannot be deemed as non-existence of Power of Attorney, whereas the stock company was established in the process of reorganization of a previous industrial company and [this stock company] is "a successor to rights and obligations of the reorganized company" (See Article 10 of Resolution on Commercialization of State-owned Companies Reorganized in Open Stock Companies, approved by Russian Federation Presidential Decree of 1 June 1992 No. 721).

Signing of the contract in violation of restrictions set by by-laws, neither leads to nullity of the contract nor means non-observance of writing requirements, specified in Article 162 of the Russian Federation Civil Code for international sales contracts.

     3.2 [Applicable law]

During the course of hearings, parties agreed that CISG should be applied to their relations, as to issues not governed by CISG - Russian substantive law.

     3.3 [Jurisdiction competence of Tribunal]

The Tribunal's competence concerning this dispute follows from the language of arbitration provision in clause 9.2 of the contract, in accordance with which "… if parties cannot settle the dispute by themselves, it should be settled by the Tribunal of Arbitration at the Russian Chamber of Commerce and Industry in Moscow, the ruling of which should be binding for the parties". By Resolution of the Supreme Council of the Russian Federation of 7 July 1993, No. 5339-1 (paragraph 2), the Tribunal of Arbitration at the Russian Federation Chamber of Commerce and Industry was renamed the Tribunal of International Commercial Arbitration at the same chamber. [Seller]'s assertions on the lack of Tribunal's competence are with no grounds for the following reasons:

-   The arbitration clause of the contract should be applied independently from proof of the validity of the contract, in virtue of principle "independence of arbitration clause", fixed in § 1(5) of the Rules of Tribunal and Article 16.1 of the Russian Federation Law On Tribunal of International Commercial Arbitration of 7 July 1993;
Notwithstanding interpretation of the above-mentioned rules, the [seller] did not prove nullity of the contract which contains an arbitration clause (See clause 2.1).

     3.4 [Seller's non-performance of contract]

The [seller] delivered to the [buyer] only one lot of goods, having left undelivered about 80% of the entire quantity required by the contract. This fact was not disputed by the [seller] and was accepted by the Tribunal as proven.

     3.5 [Buyer's non-performance of contract - Art. 71(3) CISG]

Reference by the [seller] to suspension of performance of his obligations under the contract because of the breach by [buyer], who did not issue duly made letter of credit, cannot be considered as circumstance that justifies failure of delivery of the most part of the goods required by the contract, whereas the [seller] has never notified the [buyer] about the fact of suspension nor demanded adequate assurance of performance (Article 71(3) CISG).

     3.6 [Buyer's claim for performance of the contract (specific performance)]

The [buyer's] request for delivery of the undelivered quantity of goods at the prices specified in the contract [specific performance], is based on the provision that, in event of non-performance of such a delivery within a year from the day of rendering the ruling by this Tribunal, the [buyer] would be entitled to purchase this quantity of goods on the international market, [cover], and the [seller] would be liable to compensate the [buyer] with the difference between expenses factually spent by [buyer] and the price in the contract. This provision is outside the scope of parties' contractual relations, which does not allow Tribunal to try this claim of [buyer] as a claim towards "performance of the contract". This circumstance by itself is an encumbrance to granting the claim of [buyer], because the Tribunal does not have authority to render a ruling changing the agreed will of parties. Such alteration of the original will of the parties would mean granting of the request of performance of the contract in the manner unilaterally stipulated by [buyer].

     3.7 [Losses of buyer]

  3.7.1 [Mitigation of loss - Article 77 CISG]

The Tribunal found unreasonable to grant [buyer]'s claim for recovery from [seller] of the losses related to non-performance of the contract between the [buyer] and shipping company, whose vessel was chartered by [buyer]. The [buyer] relied on the award of the London Tribunal of Arbitration and amicable agreement concluded between the [buyer] and shipping company. In the light of general principles of the lex mercatoria (see, e.g., Article 7.4.8 UNIDROIT) the Tribunal recognized conduct of the [buyer], who chartered the vessel despite the repeated notifications of [seller] about impossibility to make timely shipment, as non-complying to Article 77 CISG (obligation to mitigate damages), and also to Article 404 of the Russian Federation Civil Code (fault of creditor). Accordingly, the Tribunal denied the claim for recovery of [buyer]'s expenses spent for arbitration settlement of the dispute with shipping company. Moreover, the Tribunal noted that [buyer] did not present proof and explanations of the necessity to participate in that arbitration proceeding.

  3.7.2 [Buyer's consequential damages - Article 74 CISG]

[These are] damages which resulted from non-performance by [buyer] of the contract with [third] company, to which [buyer] used to re-sell the goods purchased from [seller]. The Tribunal denied recovery of these damages based on the following. Firstly, no proof was presented that the company which [purchases] the goods from [buyer], in fact issued to her counter-agent a performance bond, claimed by the buyer, in event of non-delivery of the goods. The Tribunal also noted that, taking into attention provisions of Article 74 CISG and the particular circumstances of such an event at the time of conclusion of the contract, the [seller] did not foresee and could not have foreseen that breach of his obligations would result in such damages, having in mind, inter alia, that a multilevel system of dealers would participate in the re-sale of the goods delivered to [buyer].

  3.7.3 [Recovery of penalties to be paid to third parties]

[This is a claim for] recovery by [buyer] of the sum of penalties that she has to pay for late delivery to the final purchaser. The Tribunal found unproven the possibility to grant the [buyer] the performance bond penalties for total non-delivery of the goods (10%) and, at the same time, the penalties for late delivery (5%). This possibility neither follows from the language of the contract nor finds any reasonable bases on other documentary sources. Moreover, ad verbum interpretation of the language of the contract led to the conclusion that the penalties for late delivery could not be applied in case of non-delivery. In any event, this consequence of the breach of contract neither could nor should not have been foreseen by [seller] at the time of the conclusion of the contract.

  3.7.4 [Buyer's loss of profit]

Lost "profit of [buyer]" is claimed by [buyer] alternatively to the claim of [specific performance]. The Tribunal ruled to grant this claim holding that the amount of lost profit follows from the rate of expected profit and was not disputed by [seller]. The Tribunal found it [the amount of lost profit] reasonable and foreseeable.

  3.7.5 [Annual interest - Article 78 CISG]

The Tribunal granted the claim of the [buyer] to recover annual interest on the granted sum of lost profit at the LIBOR rate plus 2% per annum, on the basis of Article 78 CISG and Article 395 of the Russian Federation Civil Code that refers to the rate of bank loan at the place of creditor. The Tribunal found that the mentioned rate of interest accorded to the rate which prevailed in Switzerland (place of [buyer]'s company) respectively. The Tribunal has also taken into account that [seller] raised no objections regarding the issue of rate of interest.

4. [Arbitration fees]

The Tribunal granted to [buyer] the recovery from [seller] of the arbitration fees, proportionally to the amount of claims granted.

5. [Buyer's legal expenses]

[Buyer]'s expenses as to the arbitration proceedings were recognized to be partially compensated by the [seller] in the amount determined by the Tribunal as reasonable.


FOOTNOTES

* This is a translation of data on Proceeding 302/1996 of 27 July 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. 27 [141-147]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Plaintiff of Switzerland is referred to as [buyer]; Defendant of the Russian federation is referred to as [seller].

** Gilyana Bovaeva, a scholar from the Russian Federation, Kalmyk Republic, earned her LL.M. degree in Environmental Law from the Pace University School of Law, 2002. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

*** 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.

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