Case text (English translation)
Queen Mary Case Translation Programme
Russian Federation arbitration proceeding 385/1998 of 18 October 1999
Translation [*] by Yelena Kalika [**]
Translation edited by Mykhaylo Danylko [***]
1. SUMMARY OF RULING
1.1 Taking into consideration the principle of freedom of contract, when a contract contains a general provision on the delivery of goods in accordance with a certain basic term of Incoterms, a specific provision of the contract, if different from a provision of Incoterms, shall apply -- not the Incoterms provision.
1.2 Since the parties did not agree otherwise, the agreement of the parties that the Russian civil laws shall apply to their relations under a contract for the international sale of goods means that such relations shall be governed by the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods 1980 (hereinafter CISG)] which is a part of Russia's legal system.
1.3 Pursuant to Russian law, a contract for the international sale of goods, being an international transaction, can only be modified in writing. Therefore, the actions of one of the parties to the contract cannot modify the terms expressed by parties in writing in the contract.
1.4 Seller's failure to perform his obligation, which is clearly stated in the contract, makes him liable for breach of contract, unless he proves that such a breach was due to force majeure circumstances which could relieve him from liability.
1.5 Since, while exercising her right set forth in the contract, the buyer failed to take necessary steps to mitigate the seller's losses, the parties were found mutually liable.
2. FACTS AND PLEADINGS
The contract between the parties, a Russian company and an Indian company, stated that the shipment of goods sold under the term "CIF - particular Russian port of destination" pursuant to Incoterms-1990, should be made onboard the vessel, which will go in this port as the first port of loading, and that the seller must take all possible steps to make sure that the time of delivery to that port would not exceed 25 days.
While the contract set forth that the goods should be paid for by a letter of credit issued upon receipt of shipping documents, it was specifically provided in the contract that, in case of non-delivery of the goods into the customs territory of Russia within 180 days after the payment was made, the seller should return the payment to the buyer. The price for the goods was received by the buyer from the irrevocable letter of credit opened by the buyer.
The Respondent, [seller], breaching the terms of the contract, shipped the goods 16 days later than the agreed terms of the contract. The chartered vessel left an Indian port 38 days later than the agreed terms. The [seller], when concluding the freight contract, did not include the conditions he had accepted due to his contractual obligations [under the present contract], and, as a result, a linear bill of lading was issued, according to which the shipping company had a right to determine the order of unloading and the schedule of arrival of the vessel at certain ports. Thus, at the time the goods were being loaded aboard the vessel, it was already impossible for the vessel to arrive at the Russian port of destination, as a first port of unloading, in accordance with provisions of the aforesaid contract and on a term not exceeding 25 days after the vessel left the Indian port. The vessel, after leaving the above said port, put into few other ports. On the date when the [buyer] brought the action to the Tribunal of International Commercial Arbitration [at the Russian Federation Chamber of Commerce and Industry (hereinafter Tribunal)], the vessel carrying the goods had not arrived at the Russian port of destination.
Referring to the terms of the contract, the [buyer] claimed recovery of the price of goods. The [seller] denied the action and in his statement of defense argued that he had performed his obligations under the contract by shipping the goods under the "CIF - Russian port" specified in the contract pursuant Incoterms-1990, i.e., chartered a vessel, uploaded the goods aboard, and paid the insurance. The [seller] also asserted that the title to property as well as the risks had passed to the [buyer] and, therefore, the [seller]'s obligation to refund the price of goods in case of non-delivery of the goods into the customs territory of the Russian Federation within 180 days, contradicted international practice and the rules of law. The [seller] also made additional arguments, which were considered by the Tribunal.
It was found during the hearings of the case that the captain of the vessel carrying the goods in dispute had announced a general emergency and a rescue boat towed the vessel to a Turkish port. The owners of the rescue boat turned to the Turkish court with a request to arrest the vessel. In its decision, the Turkish court ordered the arrest of the vessel and determined the cost of the salvage works. The goods transported by the vessel were sold and the amount realized from the sale was used to cover the salvage costs. The insurance company, with which the [seller] had made a contract to insure the goods, refused to pay the insurance requested by the [buyer].
3. TRIBUNAL'S REASONING
The decision of the Tribunal, inter alia, stated the following:
3.1 [Applicable law]
The choice by the parties of Russian law as the applicable law under the contract leads to application of the provisions of the CISG in virtue of Article 1(1)(b), since the parties did not agree otherwise in the contract they have concluded.
3.2 [Interpretation of Incoterms - CIF term]
While giving correct interpretation to the meaning of CIF terms under Incoterms, the [seller] does not take into consideration that, in the contract made by the [seller] those terms were modified by the parties; inter alia, it was set forth that the buyer had a right to claim a refund of the payment for the goods should the goods fail to arrive at the port of delivery within 180 days after the date of loading. The [buyer] has explained these modifications by the peculiarities of the currency regulations in the Russian Federation, but, aside from this, the parties to the contract had a right to make such legally binding modifications due to the concept of freedom of contract widely accepted in commercial relationships. In the Commentary on Incoterms-1990, published by the International Chamber of Commerce, the above mentioned modification of the terms of delivery is described as a modification used in practice, and, although the author of the Commentary considers it to be inexpedient, its legitimacy is not being questioned. (See Commentary on Incoterms-1990 by Prof. Jan Ramberg, - M., 1995, pp. 101 - 102).
3.3 [Impossibility of arrival of the goods at Russian port as the first port]
It was found that, at the time of loading of the goods aboard, it was already impossible to have the goods arrive at the Russian port of destination, as the first port of unloading, in accordance with the terms of the contract.
3.4 [Unilateral modification of the terms of the contract]
The [seller]'s argument that the [buyer]'s untimely claim of a refund of the amount paid for the goods means the [buyer]'s loss of her claim in accordance with the law applicable to the dispute, does not have any grounds. Pursuant to the Civil Code of the Russian Federation, international transactions, like the contract between the parties here, shall be made and modified in writing (Article 162(3) of the Civil Code of the Russian Federation). [Otherwise such transactions shall be void]. Therefore, the actions of one of the parties in an international transaction cannot modify the terms expressed by the parties in a written contract. The position of the [buyer] demonstrates that she insists on the realization of her right set forth in a written contract that she concluded with the [seller].
3.5 [Right of the buyer for refund]
When there is a clearly written provision in a contract that a seller is obligated to refund the price for the goods if the goods do not arrive [at their destination], the fact that the goods were insured and that the [buyer] contacted the insurer cannot serve as a sufficient ground barring the [buyer] from claiming that the [seller] should return the payment for the goods never received [by the buyer]. However, the [buyer], who now claims the refund of the payment for the insured goods from the [seller], should have immediately handed over the insurance policy and the bill of lading to the [seller] so that the [seller] could settle the dispute with the insurer of the goods as well as with the shipping company.
3.6 [Seller's responsibility for the goods shipped]
The Tribunal believes it is also necessary to take into account the fact that after the goods had been shipped, the [seller] took some actions in order to locate the goods and sent his representative to the judicial hearing on the goods in dispute as well as informing the [buyer] of possible fraudulent acts committed by the shipping company. This fact serves as evidence that the [seller] did not consider himself relieved from any responsibility for the goods and their safety.
3.7 [Mutual liability of parties]
Taking into account the above mentioned reasons, the Tribunal has concluded that the [seller] voluntarily accepted liability for the consequences of non-delivery of the goods into the customs territory of Russia, i.e., to the Russian port stated in the contract, within 180 days. According to the current Russian legislation (the Civil Code of the Russian Federation), such failure to perform one's obligations makes him liable. The [seller] has not presented any evidence of force majeure circumstances which could relieve him from liability (Article 401 of the Civil Code of the Russian Federation). For the above mentioned reasons, the [buyer]'s claim shall be held reasonable since it has been proven by the documents of the case.
However, while acting under the terms of the contract, the [buyer] did not hand over the insurance policy and documentation on the goods to the [seller]. Neither did [buyer] require the [seller] to refund the payment immediately after the 180-day period ran out. This serves as evidence that the [buyer] did not observe the requirements stated in Article 77 CISG. Taking into consideration the [buyer]'s faulty actions and pursuant to Article 77 CISG and, analogous to it, Article 404 of the Civil Code of the Russian Federation, the Tribunal has found the parties mutually liable and held to divide equally between the [buyer] and the [seller] the amount of losses suffered as a result of the breach.
3.8 [Annual interest]
Pursuant to article 395 of the Civil Code of the Russian Federation, the [buyer] shall be awarded the annual interest for the use of funds by the [seller], starting on the date of [buyer]'s claim of a refund of the payment, taking into account the proof of the amount presented by the [buyer].
3.9 [Dictum - claims against third parties]
It has been separately noted that the Tribunal does not find it possible to hear the relations of the parties in this case with the insurance company as well as with the shipping company, since these relationships are outside the scope of the arbitration provision which the parties to the dispute agreed upon in the contract. The parties have other opportunities to institute actions against the mentioned organizations and to recover respective compensation.
FOOTNOTES
* This is a translation of data on the award in Proceeding 385/1998, dated 18 October
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. 32 [159-163]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of the Russian
Federation is referred to as [buyer]; Respondent of India is referred to as [seller].
** Yelena Kalika, a law student at the Pace University School of Law, has studied at the
Moscow State Law Academy, interned with a Moscow law firm, and is a Research
Assistant at the Pace Institute of International Commercial Law.
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