Data

Date:: 10-02-2000
Country:: Arbitral Award
Number:: 340/1999
Court:: Tribunal of International Commercial Arbitration at the Russian Federation
Parties:

Keywords

APPLICATION OF CISG – SALES CONTRACT – CISG PART OF THE RUSSIAN FEDERATION’S LEGAL SYSTEM AND THUS PREVAILS OVER DOMESTIC LAW CHOSEN BY THE PARTIES

BUYER’S OBLIGATION TO TAKE DELIVERY (ART. 60)

OBLIGATIONS ASSOCIATED WITH PAYMENT OF PRICE (ART. 54) – FAILURE TO INCREASE THE AMOUNT OF THE LETTER OF CREDIT

OBLIGATION TO MITIGATE LOSSES – ADOPTION OF MEASURES REASONABLY NECESSARY TO LIMIT LOSS - REDUCTION OF DAMAGES BY AMOUNT OF MITIGABLE LOSS (ART. 77)

OBLIGATION TO SELL PRESERVED GOODS (ART. 88 (2))

RATE OF INTEREST (ART. 78)- TO BE DETERMINED BY DOMESTIC LAW GOVERNING THE CONTRACT IN THE ABSENCE OF CISG – REFERENCE TO CURRENT RATE OFFERED BY BANKING INSTITUTIONS IN THE SELLER'S COUNTRY

Abstract

A Pakistan seller and a Russian buyer entered into a contract providing for delivery of certain goods to be shipped to the latter on the term ‘C.I.F. Russian port’. Notwithstanding that a significant quantity of the goods in the first lot was defective, the buyer did not exercise its contractual right to suspend performance and confirmed instead its intention to take delivery of the second lot of goods by notifying the seller that the amount of the letter of credit would be automatically increased upon shipment of each successive lot of goods. The buyer nevertheless refused to take delivery of, and make payment for, the second lot of goods which the seller had already prepared for shipment. Instead of shipping the goods, the seller left them stored in its warehouse.

The seller claimed payment of the price for the second lot of goods (plus interest), recovery of the expenses incurred for warehouse storage of the second lot and recovery of the cost of the raw materials it had purchased in order to manufacture the second lot. The buyer explained that it had not increased the amount in the letter of credit because it was unaware that the goods were ready for shipment and had not received the agreed samples of goods.

The parties had referred to the law of the Russian Federation as the law applicable to their contract, but the Arbitral Tribunal affirmed the applicability of CISG by virtue of Art. 15 of the Russian Federation’s Constitution which considers CISG part of the Russian Federation’s legal system. The Tribunal held that reference to Russian law could be made only for issues not governed by CISG.

The Tribunal found that the buyer was aware that the second lot of goods was ready for shipment (as it had either been informed thereof directly or by its representative) and had received the samples of the goods; the buyer’s representative, moreover, had been able to carry out a pre-shipment examination of the goods at the manufacturer’s factory. Notwithstanding that more than 10% of the goods it received were defective, the buyer had not formally availed itself of its contractual right to refuse any subsequent delivery.
The Tribunal held therefore that the buyer, by virtue of Art. 60 in combination with Art. 54 CISG, had to take delivery and pay the price of the goods.

The seller did not submit evidence that it had taken reasonable measures to mitigate the loss, as required by Art. 77 CISG, in particular to sell the goods as they were subject to rapid deterioration (Art. 88 CISG). A significant part of the goods in storage spoiled and the rest was given free of charge to charity oganizations. The Tribunal found that insofar as the seller had breached the contract it was entitled to recover only 25% of the price (after deducting expenses for insurance and transportation costs).

The Tribunal rejected the seller’s claim for recovery the price of raw materials for manfacturing the goods, holding that the contract provided for the delivery of final products and that the seller, however, in accordance with the aforementioned Art. 88 (2) CISG, should have taken reasonable measures to sell raw materials in order to avoid deterioration. The seller had submitted no evidence as to its inability to sell the raw materials, nor had it proved that it had not used them to manufacture goods for other buyers. The Tribunal finally granted recovery of interest on the sum in arrears, calculated – in the absence of any specific provision in CISG (Art. 78) and by virtue of Art. 395 (1) of the Civil Code of the Russian Federation – on the basis of the current credit rate of interest offered by banking institutions in the seller’s country.

Fulltext

1. SUMMARY OF RULINGS

1.1 Whereas the parties have agreed to apply the law of the Russian Federation to their relations under the contract of international sale of goods, it is recognized that the contract is governed by the Vienna Convention of 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG] and by subsidiary application of the provisions of Russian law.

1.2 Whereas the [buyer] did not exercise the right provided by the contract to suspend performance of the contract upon discovering a significant quantity of defective products in the first lot of delivered goods, therefore [buyer] is obliged to take delivery of and make payment for the second lot of the goods prepared for shipment by the [seller]. The buyer did not take any measures to increase the amount of the letter of credit; therefore, [buyer] is liable for failure to perform contractual obligations.

1.3 The [seller] failed to ship the goods and instead left them stored in his warehouse, although under the CISG [seller] should have taken such measures as are reasonable in the circumstances to mitigate the loss resulting from [buyer]'s breach of contract.

1.4 The Tribunal of International Commercial Arbitration at the Chamber of Commerce & Industry of the Russian Federation (hereinafter Tribunal) ruled that [seller] has not taken such reasonable measures to mitigate his loss and thus the Tribunal decided to essentially reduce the amount of compensation recoverable from the [buyer] for the price of the goods and expenses for warehousing of these goods.

1.5 The Tribunal denied the [seller]'s claim as to compensation for the purchase of the initial raw materials for manufacturing the next lot of goods, inter alia, because the seller did not prove an inability to sell the raw materials at either domestic or international market.

2. FACTS AND PLEADINGS

This action was brought by [seller], a Pakistani company, against [buyer], a Russian company, in connection with failure to take delivery of the second lot of goods prepared for shipment under the contract concluded between the parties on 22 March 1995.

2.1 [Seller's position]

The [seller]'s claims included:

Recovery of the price for the second lot of goods at the price of the contract, plus interest on that sum;
Recovery of the expenses incurred for warehouse storage of the second lot of the goods; and
Recovery of the cost of raw materials bought by the [seller] for the manufacture of the next lot of the goods.
2.2 [Buyer's position]

The [buyer] objected to the claims upon which of the [seller] based its assertions, inter alia, on [buyer]'s breach of the contract conditions.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

3.1 [Jurisdiction competence of the Tribunal]

The competence of the Tribunal to arbitrate the dispute herein is stipulated in the arbitration clause of the contract concluded between the parties and is not disputed by the parties.

3.2 [Applicable law]

Clause 10 of the contract stipulates the agreement between the parties on application of Russian Federation law for settlement of the disputes arising from the contract. Based on this and also paying attention to the fact that the dispute herein arose from the sales contract, the CISG should be applied to settle this dispute because pursuant to Article 15 of the Russian Federation Constitution the CISG constitutes part of the Russian Federation legal system. Questions which are not governed by the CISG should be settled by subsidiary application of the rules of domestic Russian law, inter alia, the rules of Part 1 of the Russian Federation Civil Code which were effective at the date of conclusion of the contract of 22 March 1995.

3.3 [The merits of the case]

3.3.1 [Recovery of the price for unshipped goods and costs for warehouse storage]
While hearing the [seller]'s claim as to recovery from the [buyer] of the price of the goods manufactured under the contract for shipment to Russia, the Tribunal proceeded from the following.

The [buyer] explained its refusal to increase the amount in the letter of credit for the specified price of the goods based on the fact that the [seller] did not notify [buyer] about the readiness of goods for shipment, as was required by clause 8.3 of the contract, i.e., the [buyer] on the merits explained the lack of credit on the particular readiness of the goods for shipment. However, this argument of the [buyer] is negated by the case materials.

The [buyer]'s representative by fax of 28 September 1995, subsequent to the [buyer]'s order, has informed the [buyer] of the results of examination in the factory of the manufacturer of goods notifying of the [seller]'s ability to ship the lot of goods to the [buyer] on time in October 1995 (the copy of the fax is in the case materials). Also, during the hearings on 10 February 2000, the [seller] presented before the Tribunal a copy of written notification of 2 October 1995 of readiness of the lot of goods for shipment.

The Tribunal could not accept the assertion of the [buyer] that this notification was not addressed directly to the [buyer] but to a company not party to the contract, and, moreover, that it was not transmitted by telex as was required by the contract, but was sent by fax. Firstly, as it was revealed during the Tribunal hearings, the correspondence about performance of the contract was conducted between the parties directly and through the mentioned third party as well. Secondly, the circumstance that some of [seller]'s notifications, including the one mentioned above, were transmitted not by telex but by fax, simply does not affect the validity of the correspondence. The contract does not provide that the correspondence between the parties has to be conducted by means of telex only, thus, does not exclude correspondence between them by other means.

Regarding the [buyer]'s assertion that it, as the buyer, did not have possession of the agreed samples of the goods and that this could have provided the basis for [buyer] to refuse the delivery in case the delivery had been made, [the Tribunal found] that as it followed from the correspondence documents provided to the Tribunal by the [seller], the [buyer] had received the samples and the parties were in the process of negotiations on matching [of the samples]. Besides this, the [buyer]'s representative essentially confirmed in its fax of 28 September 1995, mentioned above, the results of the pre-shipment examination of the goods at the factory of manufacturer, that the second lot of goods was ready for shipment. Therefore, no proof was found during the hearings of [buyer]'s assertion that parties had not agreed on the goods which had to be shipped by the [seller].

In connection with the aforesaid, the [buyer]'s arguments mentioned above are not sufficient to prove that the goods were not ready for shipment and cannot affect the legal validity of the [seller]'s notification of 2 October 1995 on the readiness of goods for shipment.

It should be noted that the [buyer], when receiving more than 10% of defective products in the first lot of goods, on the basis of clause 11 of the contract was entitled to refuse to take any further delivery of goods or performance of the contract prior to notifying the [seller]. However, the [buyer] has admitted during the hearings that she had not exercised those rights. Under such circumstances, the buyer pursuant to Article 60 CISG should have taken the delivery, including acceptance of the goods, and pursuant to Article 54 CISG, the buyer should have paid the price for the goods as required by the contract.

The [buyer] has admitted during the hearings that it had not refused to take the delivery of the second lot of the goods, but in the letter of 11 September 1995 [buyer] had even confirmed its obligation stipulated in clause 3 of the contract to increase automatically the amount of letter of credit upon shipment of each successive lot of goods by the [seller]. Upon receiving this confirmation, the [seller] by fax of 2 October 1995 had notified the [buyer] of the readiness of manufactured goods for shipment to the [buyer]. However, in fact, the [buyer] had not performed its obligation and had not increased the amount of the letter of credit for the price of the goods which had to be shipped. The [seller], in turn, based on [buyer]'s failure to perform contract provisions, had not shipped the second lot of the goods to the [buyer] and instead left them in his warehouse.

In connection with this it has to be mentioned that in accordance with Article 77 CISG, the [seller], as the party relying on a breach of contract, should have taken such measures as are reasonable in the circumstances to mitigate the loss resulting from the breach. Pursuant to Article 88 CISG, if the goods are subject to rapid deterioration or their preservation would involve unreasonable expenses, the party who is bound to preserve the goods (the [seller] in this case) must take reasonable measures to sell them. However, the [seller] has not provided any evidence of any measures taken to sell the goods or inability to make such a sale, and admitted during the hearings that due to long preservation a significant part of goods was spoiled and the rest was given without payment to charity organizations. Resulting from this, the price of the goods manufactured by the [seller] cannot be imposed fully on the [buyer]. It should be also considered that from the price of the goods should be deducted expenses for insurance and transportation costs, which are components of the price of the goods to be shipped under the contract on the term "C.I.F. Russian port (St. Petersburg)".

Considering the aforesaid and taking into account that both parties had breached both the contractual provisions and the rules of applicable law, the claims of the [seller] as to recovery of the contract price of this lot of goods have to be granted in the amount proportional to 25% of the price.

3.3.2 [Recovery of the price of raw materials]
Concerning the [seller]'s claims as to recovery from the [buyer] of the price of raw materials for manufacturing the goods specified in the contract, the Tribunal found the following.

There are documents in the case materials evidencing the purchase of the raw materials by the [seller] for manufacturing the goods. However, the subject of the contract between the parties is ready-products to be bought by [buyer], not the raw materials for manufacturing them. Besides this, it must be considered that under these circumstances the Claimant, as [seller] of the ready products, in order to avoid or mitigate the loss resulting from the purchase and preservation of the raw materials in accordance with Article 88(2) CISG mentioned above, should have taken reasonable measures to sell the raw materials to either domestic or international markets. The [seller] did not present any evidence of inability to sell the raw materials, explaining at the hearings that the raw materials were for manufacturing of the next lot of goods for shipment to the [buyer]. Taking into account the information of the [buyer]'s representative which it sent to the [buyer] by fax of 28 September 1995 notifying of [seller]'s difficulties with purchasing the raw materials, it cannot be excluded that raw materials or at least part of them had been used for manufacturing the goods in order to ship them to the [buyer] or to other buyers [or consumers]. With attention to the aforesaid, this claim of the [seller] cannot be granted.

3.3.3 [Recovery of annual interest]
[Seller]'s claim as to recovery of annual interest is based on Article 78 CISG, according to which the seller is entitled to recover interest on the sum that is in arrears, which the [buyer] had failed to pay. Considering that the CISG does not provide the rate of interest, the amount of interest should be calculated in accordance with the rules of subsidiary applicable Russian law. Under Article 395(1) of the Russian Federation Civil Code, the amount of interest for failure to perform a monetary obligation is calculated according to the actual credit rate of interest offered by banking institutions at the place of location of the creditor. From the calculation provided by [seller], it follows that he had calculated the interest in the amount of 22% per annum based on the reports of three banks. The Tribunal has granted the seller's claim as to recovery of the interest in the mentioned amount on the sums granted by the Tribunal in favor of the [seller] for the relevant periods of time.

3.3.4 [Arbitration fees and expenses]
The [buyer] has to reimburse the [seller] for expenses of arbitration fees proportionally to the amount of granted claims.}}

Source

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. 45 [222-227]}}