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:
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Institute of International Commercial Law - Last updated December 20, 2006