Data

Date:: 27-04-2005
Country:: Russian Federation
Number:: 5/2004
Court:: Tribunal of Int'l Commercial Arbitration at the Russian Federation Chamber of Commerce
Parties:: --

Keywords

PENALTY CLAUSE - MATTER NOT COVERED BY CISG - RECOURSE TO DOMESTIC LAW

BUYER'S RIGHT TO REDUCE THE PRICE IF GOODS NOT CONFORMING TO CONTRACT SPECIFICATIONS (ART. 50)

Abstract

An Estonian seller and an Austrian buyer entered into a contract for the sale of goods produced by a Russian factory. The seller delivered the goods but the buyer, after expert examination, discovered them not to be conforming with the contract and therefore paid a lower price. The seller sued the buyer claiming, inter alia, payment of the entire price and the penalty agreed upon by the parties in case of payment delay.

The parties had chosen the contract to be regulated by Russian law. However, since the Russian Federation and Austria are Contracting States of CISG, the Court held the Convention to be applicable to the merits of the dispute (Art. 1(1)(a) CISG) and Russian law to be applicable to solve matters not expressly settled by CISG (Art. 7(2) CISG).

As to the merits, the Tribunal rejected both the seller's argument that the buyer had lost its right to rely on lack of conformity and the expert examination was not reliable, holding the buyer entitled to a reduction of price according to Art. 50 CISG.

The Tribunal also ordered the buyer to pay the penalty, though reduced in amount as provided by the Russian Civil Code.

Fulltext

1. SUMMARY OF RULING

1.1 The additional agreement to the contract concluded by the parties by virtue of art. 414 of the Civil Code of the Russian Federation can be regarded as a substituted obligation only if it foresees replacement of the primary obligation with another obligation between the same parties envisaging different subject and fulfillment order.

1.2 The declaration of the lack of the competence of the MKAC Arbitral Tribunal (hereinafter: Tribunal) according to the Law of Russian Federation "On International Commercial Arbitration" can be submitted not later than statement of defense is submitted.

1.3 A contract provision on the regulation of the contract relations by the Russian law is interpreted to imply application of the Russian law as the subsidiary law taking into account that location of the parties to the contract are Contracting States to the Vienna Convention of 1980 which as their international agreement shall be applicable as principal statute.

1.4 In accordance with art. 50 of the Vienna Convention of 1980, on the grounds of the expert examination of the quality of the goods, the [Buyer] is entitled to reduce the price.

1.5 In view of the obvious disproportion between the calculated contractual penalty and the consequences of the breach committed by the [Buyer], the amount of the penalty is reduced on the basis of art. 333 of the Civil Code of the Russian Federation.

2. FACTS AND PLEADINGS

The claim was lodged by the [Seller], an Estonian firm, against the [Buyer], an Austrian company, in connection with partial payment for the goods delivered under an international sale contract concluded by the parties on 15 June 2003.

In its claims, the [Seller] sought:

- Recovery of the debts;
- Payment of the contractual penalty for the payment delay;
- Reimbursement of the cost of the arbitration fee and expenses on the services of legal representatives in the conduct of the case.

The subject of the delivery under the contract was goods produced by a Russian factory.

Initially, the [Seller] lodged the action against two respondents (according to the [Seller] the second respondent had participated in the conclusion of the contract). Later, the [Seller] asked to exclude the second respondent from the trial process.

In its statement of defense, the [Buyer] did not admit the action claims referring to defects of the goods which were discovered at the destination place and are confirmed by two expert examinations carried out at the [Buyer]'s initiative and expense, expenses incurred by [Buyer] because of the delivery of defective goods. In [Buyer]'s opinion, the agreement concluded by the parties on 15 January 2004 constituted a substituted obligation and, consequently, replaces the Accounts Revision Act signed earlier by the parties in which the [Buyer] recognized its obligation to pay the total cost of the goods and the penalty. Since this agreement precisely determines the sum of the [Buyer]'s indebtedness (it is essentially reduced comparing to the sum specified in the Accounts Revision Act) and does not envisage [Buyer]'s obligation to pay the [Seller] the penalty the indebtedness of the [Buyer] amounts to this sum and the demands for the payment of the penalty ceased. The [Buyer] declared its right to reduction of the price of the goods by virtue of which the [Buyer] is not obliged to pay off the indebtedness to the [Seller]. In additional statements of defense, the [Buyer] contested the Tribunal's competence to adjudicate the present dispute since, as a consequence of conclusion of the agreement of 15 January 2004, a substitution of the obligation took place and therefore the arbitration clause of the contract became invalid and the [Seller] has brought the action on the basis of this arbitration clause.

In its explanations with regard to the [Buyer]'s statement of defense, the [Seller] rejected virtually all the arguments of the [Buyer]. In particular, the [Seller] stated that the [Buyer] lost the right to claim in respect to the defects of the goods since the [Buyer] sent notification of the defects after expiry of the respective term fixed in the contract.

At the Tribunal's hearing, the [Seller]'s representative stated that:

- The [Seller] does not recognize expert examination findings presented by the [Buyer] since the expert examination was carried out without the notification of [Seller] and without regard to the consent of the parties to the conduct of a joint expert examination. Moreover, the findings do not specify the amount of the goods examined or examination procedure;

- The goods did not posses any defects except for the slight rust of the first consignment about which the [Buyer] was notified. Both of the consignments had Russian Certificates of quality which did not specify any defects.

3. TRIBUNAL'S REASONING

The award of the Tribunal contained the following basic points.

3.1 The competence of the Tribunal

Considering the issue of the competence of the Tribunal to adjudicate the present dispute, the latter found that para. 6.4 of the contract provides that, if the parties failed to reach agreement by negotiations, any disputes which may arise between the parties during the conclusion, fulfillment and/or avoidance of the contract shall be submitted to the International Commercial Arbitral Tribunal at the Chamber of Commerce and Industry of the Russian Federation (Moscow, Russia) for settlement in accordance with the Rules of the Tribunal.

Having examined the [Buyer]'s statement on the lack of the Tribunal's competence to adjudicate present dispute, declared on 4 February 2005 with a reference to the agreement of the parties of 15 January 2004 as a substitution in the context of art. 414 of the Civil Code of Russian Federation the Tribunal, concluded the following.

3.1.1 The agreement of 15 January 2004 does not contain provisions which could be regarded as a replacement of the initial obligation by other obligation between the parties envisaging another subject or fulfillment order as contemplated under art. 414 of the Civil Code of Russian Federation.

[Buyer]'s reference to the presence of the arbitration clause and the provision for the acceptance of the returned delivered goods cannot be regarded as proof of a novation (substitution). The Tribunal finds that this agreement constituted an accord on the means of legal protection which in particular includes return of the consignment of the goods determined by the parties. Moreover, the Tribunal notes that the intent of the parties to cease the obligations under the contract by concluding this agreement cannot be inferred from the text of the agreement and other materials of the case.

Based on above the Tribunal holds that agreement of 15 January 2004 cannot be regarded as substitution and that the contract continues to be in force.

3.1.2 In addition, the Tribunal points out as well that [Buyer]'s declaration about the lack of Tribunal's competence was fixed in the supplement of 4 February 2005 to the statement of defense of 24 November 2004, i.e., after the [Buyer] had notified in its statement of 13 October 2004 of its complete disagreement with the [Seller]'s claims and after the [Buyer] had presented its statement of defense of 24 November 2004 with regard to the merits of the action claims. However, according to art. 16(2) of the Law of the Russian Federation "On International Commercial Arbitration", a declaration of the lack of the competence of the arbitration tribunal may not be filed later than the date on which the statement of defense is submitted. This requirement of the Law was not adhered to by the [Buyer].

3.1.3 Moreover, the Tribunal notes that [Buyer]'s statement on the lack of the Tribunal's competence to adjudicate the present dispute since the [Seller] brought the action on the basis of the arbitration clause of the contract which, in [Buyer]'s opinion, ceased to be effective because of the substitution of the obligations by the date of the payment of the arbitration fee does not take into account that, according to para. 14(2) of the Rules of the Tribunal, the date of the submission of the action is the date of its delivery to the Tribunal and in case the action is sent by the mail -- the date of the stamp of the postal authorities of the place of mailing and not the date of the payment of the arbitration fee.

Taking into consideration the aforesaid and following arts. 1 and 16 of the Law of the Russian Federation "On International Commercial Arbitration" and paras. 1(2), (3) and (5) of the Rules of Tribunal, the latter holds that it is competent to adjudicate the present dispute.

3.2 The absence of the [Buyer]'s representatives

Addressing the issue of the possibility to consider the case and hand down the award in the absence of the [Buyer]'s representatives, the Tribunal found that the [Buyer] was properly notified of the date and place of the hearings of the Tribunal which is confirmed by the notifications of the courier service with the note of the handing of the summons to the [Buyer] available from the materials of the case.

The Tribunal points out that consideration of the present case appointed on 14 February 2004 was postponed to 4 April 2005 due to the receipt by fax of the petition from the [Buyer] for the adjournment of the proceedings because of the sickness of the [Buyer]'s representatives.

At the hearings on 4 April 2005 the Tribunal stated that the Registry of the Tribunal had not received from the [Buyer] any other petition for further postponement of the proceedings in the case. Moreover, the Tribunal took into account that [Buyer]'s representative confirmed the receipt of the action and enclosed documents and sent the Tribunal written statement of defense and later supplements to it containing reasoned objections to the action.

Therefore, the Tribunal finds that written documents presented by the parties suffice for the determination of the factual circumstances of the present case and its proper qualification.

Taking into account the above and in view of the [Seller]'s petition for the hearing of the case in the absence of the [Buyer] based on para. 28(2) of the Rules of the Tribunal, the latter held that the absence of the [Buyer] cannot impede the proceedings of the case and passing of the award.

3.3 Applicable law

Considering the issue of the law applicable to the relations of the parties under the contract, the Tribunal found that para. 6.4 of the contract foresees application of Russian law.

Following art. 28(1) of the Law of the Russian Federation "On International Commercial Arbitration" and para. 13(1) of the Rules of the Tribunal, according to which the Tribunal settles the disputes on the basis of the applicable norms of substantive law determined by the agreement of the parties, the Tribunal holds that Russian law is the applicable law.

The Tribunal takes into account that the contract from which the present dispute arose is an international sale contract, and that the Russian Federation is a Contracting State to the Vienna Convention of 1980 which, as an international agreement to which the Russian Federation is party, is a constituent part of its legal system by virtue of the Constitution of Russian Federation (art. 15(4)).

According to art. 1(1)(a) of the Vienna Convention, "This Convention applies to contracts of sale of goods between parties whose places of business are in different States when the States are Contracting States."

Based on the aforesaid, the Tribunal finds that the provisions of the Vienna Convention apply to the present dispute.

Taking into account that according to art. 7(2) of the Vienna Convention, "Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law", in the course of the adjudication of the present dispute, as Russian law was selected by the parties, it shall apply as the subsidiary law.

Based on the above and following para. 13(1) of the Rules of the Tribunal, the latter concluded that the provisions of the Vienna Convention of 1980 and subsidiary Russian law shall apply to the dispute between the parties.

3.4 [Seller]'s claim for the recovery of the main sum in arrears

Considering the [Seller]'s claim for the recovery of the main sum in arrears, the Tribunal found that.

- The [Seller] and the [Buyer] acknowledge that in the performance of the contract concluded by the parties the [Seller] delivered two consignments of the goods -- on 30 June 2003 and 11 July 2003 -- to the total sum of euros specified in the action claim.

- The [Buyer] partially paid the cost of the delivered goods by two payments -- on 8 September 2003 and 31 October 2003.

- In the performance of the agreement of 15 January 2004, the [Buyer] carried out return of the part of the delivered goods under the contract to the territory of the Russian Federation. In view of this fact, the [Seller] reduced the size of its action claims.

- The amount of the claimed sum of the indebtedness constitutes the difference between the sum for which the goods were delivered and the sum of the partial payment of the cost of the goods delivered by the [Seller] as well as the sum allocated to the goods were returned to the [Seller].

- The claimed sum includes as well the sum which, as follows from para. 2 of the agreement of 15 January 2004, the [Buyer] admitted and undertook to pay to the [Seller].

- The disputed sum constitutes an indebtedness as to the payment of the cost of the goods with regard to which the [Buyer] has lodged a claim for replacement. In this regard, the parties agreed to conduct an expert examination as follows from para. 3 of the agreement of 15 January 2004.

The Tribunal considers that agreement of the parties as to the issue of the payment for the goods after conduct of the expert examination precludes the [Seller] from taking the position that the [Buyer] missed the term foreseen by the contract for the lodging of claims as to the quality of the goods. Instead, it reflects the agreement of the parties as to the possibility of a price reduction as is envisaged by art. 50 of the Vienna Convention -- which in the contract is made dependent on the results of the expert examination.

Considering the size of the price reduction sought by the [Buyer], the Tribunal found that only one of the expert examinations of 6 November 2003 out of two examinations conducted by the [Buyer] determines the specific amount of the goods subject to price reduction in view of the defects revealed by the expert. The price reduction amounted to 20 % of the cost of the goods.

Evaluating the objections of the [Seller] as to the admission of the results of this expert examination, the Tribunal considered that [Seller]'s statement about uncertainty of the expert examination findings was not well-founded. Moreover, the Tribunal notes out that the documents sent to the Tribunal by the [Seller] did not contain Russian quality certificates or their copies. Therefore, the [Seller] did not properly confirm its statement on the availability of the Russian quality certificates for both consignments of the goods.

In view of this, the Tribunal finds that the [Buyer]'s reduction of the sum of indebtedness by 20% is well-founded.

Taking into account the above and following arts. 50 and 53 of the Vienna Convention of 1980, the Tribunal finds it possible to satisfy [Seller]'s claim for the recovery from the [Buyer] in favor of the [Seller] of the main sum in arrears which includes the sum admitted by the [Buyer] and the sum of the price reduction.

3.5 Claim for recovery of the penalties

Having considered the [Seller]'s claim for the recovery of the penalties from the [Buyer], the Tribunal held the following.

In its initial action claim, the [Seller] indicated a certain sum of penalties, accrued in euros, because of the [Buyer]'s payment delay. In its petition for the alteration of the action claims of 25 May 2004, the [Seller] presented a calculation of the penalties as of 25 May 2004 according to which the total sum was doubled.

According to para. 6.1 of the contract, in case of payment delay the [Buyer] shall pay the [Seller] penalty in the amount of 0.1 % of the sum of the delayed payment for each day of delay, which conforms to arts. 330 and 331 of the Civil Code of the Russian Federation.

The [Buyer], objecting to the claims for the penalty payment, believes that since the agreement of 15 January 2004 was a novation of (substitution for) the obligation which entailed termination of the contract, the additional obligations -- in particular obligations as to the payment of the penalty -- were ceased.

As is stated in para. 3.1 of the present Award, the Tribunal does not consider that the agreement of 15 January 2004 constitutes a novation (substitution) and finds that the [Buyer]'s objection to the claim for the payment of the penalties is unfounded. Evaluating the amount of the penalties claimed by the [Seller], the Tribunal, taking into account the circumstances of the present dispute, states that penalties accrued in accordance with the contract conditions are manifestly disproportionate to the consequences of the breach committed by the [Buyer].

Moreover, the Tribunal notes that the sum of the accrued penalties includes a penalty for the delay of the payment for the goods which were returned to the [Seller] under the agreement of 15 January 2004.

Taking into account the above and following art. 333 of the Civil Code of the Russian Federation which entitles the Tribunal to reduce the penalty under such conditions, the Tribunal held that reduction of the penalty was appropriate.

3.6 As to the [Seller]'s claim for the recovery from the [Buyer] of its expenses incurred due to the protection of its interests by the legal representative, the Tribunal finds that this issue may not be considered since the [Seller] had neither confirmed these expenses nor specified the amount of such expenses.

3.7 Recovery of the arbitration fee

Having considered the [Seller]'s claim for the recovery from the [Buyer] of the sum of the arbitration fee paid by the [Seller] the Tribunal, following para. 6.2 of the Regulations on Arbitration Fees and Expenses (Supplement to the Rules of Tribunal), imposes on the [Buyer] reimbursement of the [Seller]'s expenses for the arbitration fee in proportion to the amount of the satisfied action claims.}}

Source

Original in Russian:
- published in M.G. Rozenberg, Praktika Mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF 3a 2005 z., Statut, 2006, Case No. 20, pp. 171-178

English translation:
- available at the University of Pace website, http://www.cisg.law.pace.edu/}}