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Reproduced with permission of 9 Vindobona Journal of International Commercial Law & Arbitration (2005) 1-16.

Cases on the Sales Convention and the UNIDROIT Principles Decided in the Russian Federation: An Update

Djakhongir Saidov [a1]

  1. General
  2. Application of the Convention
  3. Damages
  4. The claimant's contribution to the breaching party's non-performance
  5. Use of the UNIDROIT Principles of International Commercial Contracts
  6. Conclusion

1. GENERAL

A considerable number of cases governed by the United Nations Convention on Contracts for the International Sale of Goods have been decided in the Russian Federation. In 2003, an overview of many of these cases was published.[1] This article seeks to analyse some of the cases which were not available to the author at the time of writing of the previous overview or were decided after its publication. The cases mostly include those decided by the International Commercial Arbitration Court (hereafter referred to as 'ICAC') at the Russian Federal Chamber of Commerce and Industry during the period from 2001 to 2003. The ICAC is a permanently acting independent arbitration institution, and is one of the oldest and leading international arbitration institutions in the world.[2] However, several decisions of Russian courts have also become available, some of which will be referred to in this article. Despite the relatively high number of cases, only those cases which were thought to be, at least, of some importance, or those where arbitrators have erred either in deciding whether to apply the Convention or in applying its provisions are referred to. These cases include those which have dealt with issues of application of the Convention, the remedy of damages, and the question whether the claimant has contributed to the breach. Finally, this article will also examine cases where the UNIDROIT Principles of International Commercial Contracts were applied or referred to. [page 1]

2. APPLICATION OF THE CONVENTION

2.1 Article 1(1)(a)

In many cases, the Convention has been applied by virtue of its Art. 1(1)(a), i.e. in cases where the parties' places of business were in different CISG Contracting States. In one case, however, the ICAC failed to apply the Convention where it ought to have been applied by virtue of Art. 1(1)(a). In this case,[3] the parties' places of business were in Russia and Finland. As required by Art. 100(2) CISG, at the time when the contract between the parties was concluded, the CISG was in force in Russia [4] and Finland.[5] Further there was no evidence that the parties intended to exclude the application of the Convention.[6] Therefore, since all the conditions for the application of the Convention were met, the tribunal ought to have applied the Convention. Instead, however, the tribunal chose to apply the rules of private international law to determine the applicable law. In making this decision, the tribunal relied on Art. 28(2) of the Law of the Russian Federation 'On International Commercial Arbitration' and Art. 13 of the Rules of the ICAC. According to these provisions, in the absence of the parties' agreement on the applicable law, the arbitration tribunal shall apply those rules of private international law which it deems applicable. On this basis, the tribunal relied on Art. 166(1) of the (Act on) Fundamentals of Civil Legislation 1991 to rule that the law of the seller's country -- the law of obligations of the Civil Code of the Russian Federation -- was applicable.

Some cases provide examples where the decision to apply the CISG was probably correct, but where there was no basis for the tribunal to rely on Art. 1(1)(a). For example, in one case,[7] the contract contained a choice of law clause providing for Russian law to be the law governing the contract. The tribunal stated that this clause did not exclude the application of the CISG, and the CISG was applied because the places of business of the parties were in different Contracting States at the time of conclusion of the contract. It is suggested, with all due respect for the authority of the tribunal, that the reasoning of this decision is improper. When the contract contains a choice of law clause, the proper course for the tribunal to take is to interpret the clause with a view to determine whether it was the parties' intention to exclude the application of the Convention.[8] If it is true that the parties' choice of law clause is 'a [page 2] widely recognised rule of private international law',[9] then in cases where it is the parties' intention to apply the CISG by inserting a choice of law clause referring to the law of one of the CISG Contracting States,[10] the Convention should be applied by virtue of Art. 1(1)(b). Article 1(1)(a) is in the author's view irrelevant in this type of case.[11]

2.2 Article 1(1)(b)

Unfortunately, some cases also demonstrate the failure of the ICAC to apply Art. 1(1)(b) correctly. For example, in one case involving an Israeli seller and a German buyer,[12] the contract was silent as to the applicable law. Referring to Art. 28(2) of the Law of the Russian Federation 'On International Commercial Arbitration' and paragraph 13 of the Rules of the ICAC,[13] the tribunal ruled, without specifying the conflict of law rules it applied, that the Russian Civil Code was the law governing the relations between the parties. It is clear that the Convention and not the Russian Civil Code ought to have been applied in this case. The conflict of law rules referred to the law of a Contracting State which was, at the time of the conclusion of the contract,[14] a party to the Convention. Therefore, there is no reason why the Convention should not have been applied.[15]

The question whether the Convention is applicable seems most interesting where the contract contains a choice of law clause. Cases decided by the ICAC provide a number of examples where tribunals have taken different approaches in dealing with various choice of law clauses. Several types of choice of law clauses can be identified. First, in several cases the contracts referred to the Russian 'legislation' or 'legislative acts.' Although with some inconsistency,[16] the ICAC has generally interpreted these clauses [page 3] as excluding the application of the Convention.[17] The reason for this approach seems to be that international treaties are regarded as part of the Russian 'legal system' but not as part of the Russian 'legislation.'[18] Secondly, the decisions have been inconsistent in cases where contracts referred to Russian 'law' or Russian 'substantive law.' Some tribunals have applied the CISG [19] while others have interpreted such clauses as excluding the CISG.[20] Finally, in one case the reference to the 'civil law of the Russian Federation' has been interpreted as not excluding the application of the Convention.[21]

What conclusions can be drawn from these cases? As noted above, the proper course to take in such cases is to determine whether the parties, by inserting a choice of law clause, intended to exclude the CISG. However, only in relatively few cases did the tribunals expressly attempt to ascertain the intentions of the parties.[22] The remaining cases are silent as to the issue of the intentions of the parties. These decisions can therefore be construed as either implying the arbitrators' interpretation of the intentions of the parties or as demonstrating the arbitrators' failure to examine the intentions of the parties. Be that as it may, the practical lesson to be learnt from these cases is that, so far as such clauses as Russian 'law' or 'substantive law' are concerned, [page 4] those responsible for drafting the contracts should make the parties' intentions clear. The inconsistency of the decisions involving this type of choice of law clauses suggests that the parties whose case is tried by an ICAC tribunal are likely to face uncertainty as to what law will govern their contract. The situation is somewhat different in relation to choice of law clauses referring to Russian 'legislation' or 'legislative' acts. In cases involving these clauses, the tribunals have generally been more consistent by interpreting the clauses as excluding the application of the CISG. However, bearing in mind that there have been decisions where these clauses have been interpreted otherwise, the parties are still advised to express their intentions clearly.

2.3 Article 3

In some cases the arbitrators have applied the Convention too readily. The cases involved situations which are dealt with by Art. 3 of the CISG. One case [23] concerned a contract under which the buyer had supplied the seller with materials necessary for the manufacture of certain equipment, and the seller, in turn, had to supply the buyer with this equipment. Without considering whether the materials supplied by the buyer had constituted 'a substantial part' of the materials necessary for the manufacture of the equipment, as required by Art. 3(1), the arbitrators have ruled that the Convention was applicable because the places of business of the parties were in the CISG Contracting States, and the parties have not excluded the application of the Convention. In another case,[24] the seller -- besides supplying the equipment -- had obligations relating to installation and servicing of the equipment. The arbitrators have not dealt with the question whether provision of these services had constituted 'the preponderant part' of the seller's obligations, as required by Art. 3(2), and simply ruled that the Convention was applicable by virtue of Art. 1(1)(a). From the materials of these two cases it is impossible to determine how Art. 3 ought to have been interpreted. Even if, on the proper interpretation of Art. 3, the CISG ought to have been applied, the decisions can be criticised for having ignored the requirements of the Convention.

3. DAMAGES

3.1 Problem of recoverability of a penalty paid by injured sellers to state authorities as a result of delay in payment

Several cases have concerned the question whether injured sellers could claim damages for a penalty that they had to pay to various State authorities as a result of non-receipt of the contract price in hard currency on time.[25] These penalties included [page 5] payment to Russian customs authorities,[26] the Russian Ministry of Finance,[27] and Ukrainian authorities.[28] In one case,[29] it has been held that this loss is not recoverable under the CISG because the claimant had incurred those expenses not as a subject of private contractual relations but as a taxpayer, i.e. as a subject of administrative public relations. In this regard, it is suggested that although the Convention does not specify which losses are recoverable, the reason given in the decision is neither convincing nor sufficient to hold that this loss is not recoverable. It is not at all clear why the capacity in which the injured party has suffered the loss should be relevant for determining whether the loss is recoverable under the Convention.

It is argued that the better view is that taken in the majority of cases where this type of loss has been regarded as recoverable. [30] First, non-recoverability of this loss seems unfair in relation to the injured seller. If the seller had to pay a penalty to a State authority as a result of the delay in payment, why should he not be allowed to claim compensation for this loss? Secondly, this loss is a real financial loss suffered by the seller. Allowing compensation for this loss would be more in line with a purpose of damages of putting the injured party in the position in which he would have been had the contract been properly performed. Finally, not allowing damages for this loss may deter the parties from applying the Convention or encourage them to exclude its application because they may want to make sure that, if they suffer such losses, they will be able to claim compensation for them. Thus, this loss should be recoverable [page 6] under the CISG provided that the loss is proved and all other requirements for its recoverability are met.

3.2 Interrelationship between damages and agreed damages clauses

Despite the extensive use of the agreed damages (penalty/liquidated damages) clauses [31] in practice, legal scholars do not seem to have paid sufficient attention to the issue of interrelationship between liquidated damages clauses and the remedy of damages under the CISG. In several cases decided by the ICAC, the arbitrators had to deal with this problem. For example, in one case,[32] the seller claimed damages for payment of interest for the credit which he used as a result of non-payment by the buyer. He also demanded payment of liquidated damages provided in the contract for the buyer's failure to pay the price by the due date. The arbitrators allowed the claim for liquidated damages but denied the claim for damages. One of the grounds for this decision was the fact that the amount of damages claimed is compensated by liquidated damages.[33] This decision has been made on the basis of Art. 394 of the Civil Code of the Russian Federation according to which damages are awarded only to the extent to which they are not covered by liquidated damages. The arbitrators have taken the view that Art. 74 does not govern the issue of interrelationship between damages and liquidated damages and, therefore, the question whether damages can be recovered should be resolved on the basis of Russian law. Similar decisions have been reached in several other cases.[34]

Because the Convention is silent as to the issue of liquidated damages and their interrelationship with the remedy of damages, it is not entirely clear whether these decisions are correct. The crucial question is whether this interrelationship is a matter governed by the Convention or is outside its scope. The answer to this question, in turn, depends on whether liquidated damages clauses are governed by the CISG. For instance, if liquidated damages clauses were governed by the CISG, the interrelationship between the two remedies would certainly be within the Convention's scope. Although there is some divergence of opinions,[35] the more prevailing view seems to be that, at least, the issue of validity of liquidated damages [page 7] clauses must be dealt with by the applicable law.[36] However, the issue of validity seems, to a certain extent, to be different from the issue of legal consequences of liquidated damages clauses, and there appears to be no agreement as to whether legal consequences of these clauses are within the Convention's scope.[37]

The ICAC cases involving the question of interrelationship between damages and liquidated damages highlight a difficult problem. On the one hand, the cases such as these involve claims for damages -- a remedy which is undoubtedly governed by the CISG and is therefore based on the policies and aims which are peculiar to the Convention. On the other hand, policies and considerations underlying treatment of penalty/liquidated damages vary significantly from one legal system to another.[38]

Suppose a situation where a liquidated damages clause leads to the amount which is lower than the loss actually suffered. In English law, for example, if this clause has been the result of a genuine attempt by the parties to prove a pre-estimate of losses, the innocent party will not be able to claim compensation for the amount of losses not covered by liquidated damages.[39] On the other hand, the innocent party may argue that since Art. 74 CISG entitles him to claim damages for the loss suffered, he should be able to recover damages to the extent not covered by liquidated damages. Should the question of interrelationship be resolved on the basis of English law, which will not allow a claim for damages, or by using Art. 74 CISG?

It is suggested that the first step should be to determine the intentions of the parties. Since Art. 6 CISG allows the parties to vary or derogate from its provisions, it may be the case that the parties have intended to derogate from the Convention's provisions on damages and to designate liquidated damages as the exclusive remedy. If this is the case, the question of interrelationship will probably not arise because the provisions on damages will simply not apply. The situation gets more complicated in cases where, for example, the parties have expressly agreed that they do not intend to derogate from the Convention's rules on damages. Suppose that, in this case, the applicable mandatory rules of domestic law do not allow the parties to claim damages in addition to liquidated damages. In this case, although the intentions of the parties are clear, we are still faced with the problem of the interrelationship between the two remedies. Some scholars would probably argue that, in such cases, the applicable domestic law must govern the problem and, therefore, no damages should be awarded [page 8] under Art. 74.[40] It is suggested, however, that in cases where the parties did not intend to derogate from the Convention's provisions on damages, the rules of domestic law on the interrelationship between penalties/liquidated damages and damages should not be allowed to extinguish the right to damages provided for by the CISG. Certainly, this solution may, in some cases, mean that the implementation of public policy underlying liquidated damages in a particular legal system will be undermined. To do otherwise, however, will mean that, in some cases, a policy of a domestic legal system will be allowed to prevail over the availability of the right to damages provided for by an international treaty. Since international treaties generally prevail over national law of the countries which are parties to these treaties [41] and since the CISG requires that regard should be had to its international character and the need to promote uniformity in its application, the right to damages under the CISG must prevail over a rule of domestic law.

Thus it is submitted that where it was not the parties' intention to derogate from the damages provisions of the CISG, the issue of interrelationship between damages and liquidated damages should be dealt with by the Convention on the basis of its general principles relating to the law of damages. One of the necessary conditions for claiming damages under Art. 74 is proving the loss. If the amount of liquidated damages exceeds the amount of loss suffered by the injured party, the party cannot be said to have suffered any loss and, therefore, there can be no claim for damages.[42] In the same vein, if the amount of liquidated damages is lower than the amount of loss suffered, damages can be claimed to the extent the loss is not covered by the liquidated damages. On this basis, it is suggested, with respect, that the arbitrators in the cases referred to above ought to have applied the CISG (and not Russian law) to deal with the question of interrelationship between damages and liquidated damages.

3.3 Foreseeability

Some cases provide good examples of the application of the rule on foreseeability contained in Art. 74 CISG and raise some important questions relating to this rule. In one case,[43] the buyer claimed compensation in connection with the payment of the penalty to Russian customs authorities for non-receipt of the contract price in hard currency. This claim has been rejected on the ground that the seller could not have foreseen this loss, which has arisen as a result of operation of public law of the Russian Federation, particularly in view of the fact that the buyer had not presented any evidence that he had informed the seller of the existence of such rules of law. This decision seems correct. The case involved a non-typical type of loss relating to some special provisions in the Russian legislation. Unless the seller in this case could [page 9] reasonably be expected to be aware of the existence of such rules, he could not be said to have been in the position to foresee the possibility of the occurrence of this loss.

At first sight, the same could be said with respect to another case. However, this case cannot be analysed just as simply because it raises a number of difficult questions. In this case, the buyer claimed damages for the sums he had paid to his customers to compensate them for 'moral harm' they had suffered as a result of receiving defective goods. Compensation for 'moral harm' is provided for by the Law of the Russian Federation 'On the Protection of the Rights of Consumers.'[44] The arbitrators rejected this claim because, in their view, this loss had not been reasonably foreseeable by the seller especially taking into account the fact that the buyer had paid that compensation voluntarily. Although, similar to the previous case, the buyer's claim involved a non-typical and somewhat peculiar type of loss, putting forward the same arguments as in the previous case will not be sufficient to demonstrate that the decision has been correct. On the contrary, it could be argued that a seller should be generally considered to be in the position to foresee that a buyer may be liable to his customers for the supply of defective goods and, therefore, that although compensation for 'moral harm' is non-typical, the seller in this case ought to have been held liable because some sort of possible liability to buyer's customers was foreseeable. This argument raises the question, touched upon to a certain extent in legal literature, as to what foreseeability in Art. 74 refers to precisely. Although there is a divergence of opinions as to whether foreseeability refers to the extent of the loss,[45] there is a general agreement that foreseeability of a certain type of the loss is required by Art. 74. On this basis, it would seem, at first sight, that even if it were foreseeable that a buyer might be held liable to his customers, it does not necessarily mean that the seller ought to have paid damages for this loss because this particular type of loss was not foreseeable to the seller in the circumstances of the case. However, there remains another major question which relates to what exactly is meant by the type of loss. Is any form of liability to customers a type of loss in itself, foreseeability of which is sufficient for meeting the foreseeability requirement of Art. 74? Or should the type of loss be interpreted as meaning more specific losses such as 'moral harm' in this case? Although this article is not the place for a detailed examination of these issues, it is [page 10] submitted that the latter interpretation should be adopted. Adopting the former view is likely to lead to an undue extension of the potential liability of the breaching parties. It will be remembered that one of the main purposes of the foreseeability rule is to allocate the risk between the parties. This allocation is generally based on the notion of fairness according to which it is not fair to hold the breaching party liable for the losses for which he has not assumed the risk. Will it be fair to hold a seller, such as the one in this case, liable in damages for any form of the buyer's liability regardless of whether the specific type of the liability was foreseeable to the seller? It is argued that, unless there are indications that the seller has assumed the risk for any type of buyer's liability to his customers, interpreting the notion of the type of loss as referring to more specific forms of loss is more in line with a purpose of the foreseeability rule of fair allocation of risks.

4. THE CLAIMANT'S CONTRIBUTION TO THE BREACHING PARTY'S NON-PERFORMANCE

In one case,[46] the seller claimed payment of the price and the liquidated damages provided in the contract for failure to pay the price on the due date which was 24 November 1997. The buyer attempted to make a payment of a part of the price on 21 April 1998. However, the payment could not be made because, by that time, the seller had changed his bank details and had not informed the buyer of the respective changes. At the time of arbitration proceedings the delay in payment was 821 days and, therefore, liquidated damages were due for this period. The arbitrators held that both parties were responsible for this state of affairs. The buyer had failed to take additional measures to make the payment while the seller's failure to notify the buyer of his new bank details had made it difficult for the buyer to make the payment. Relying on the concept of 'joint responsibility' provided for by Art. 404 of the Russian Civil Code, the arbitrators ordered the buyer to pay only fifty percent of the accrued amount of the liquidated damages.

This case raises several questions. First, should the arbitrators have applied Art. 80 CISG? It would generally seem that, since the Convention was applicable to the case, the issue of consequences of the claimant's contribution to the other party's breach ought to have been decided on the basis of Art. 80. The question arises, however, as to whether Art. 80 is applicable to the claim for liquidated damages. As mentioned above, there is uncertainty as to whether liquidated damages are governed by the CISG. The prevailing view suggests that the issue of validity of such clauses is outside the Convention's scope. This work has also argued that some of the legal consequences of liquidated damages clauses, such as their interrelationship with damages, should be governed by the Convention whereas some others, such as the court's power to reduce liquidated damages,[47] should not be. These arguments lead to the conclusion that liquidated damages are partly governed by the CISG and partly by [page 11] a domestic law. However, since this article has suggested that liquidated damages should be governed by the CISG only so far as their interrelationship with damages is concerned, it appears that in other cases they will be governed by domestic law. The question is, therefore, whether the remedy which is largely governed by domestic law should be affected by Art. 80. Does 'reliance on the failure to perform' under Art. 80 comprise such remedies? On the one hand, it could be argued that Art. 80 can affect only the remedies under the CISG and therefore cannot be relevant for a claim for liquidated damages because it is a matter governed, to a considerable extent, by domestic law. The exercise of a remedy is directly connected to the basis for the right to exercise this remedy. If liquidated damages are an issue largely governed by domestic law, then the preconditions for claiming liquidated damages should also be governed by domestic law. Therefore, Art. 80, which refers to 'a failure to perform' under the Convention, should not govern preconditions for exercising a remedy which is largely governed by domestic law.

On the other hand, it could be argued that Art. 80 should apply not just to remedies under the CISG but to all legal consequences resulting from a breach.[48] Firstly, to the extent that the claimant has contributed to the other party's breach, the breaching party's failure to perform will not be regarded as a 'breach.'[49] Since a breach is usually a necessary precondition for a claim for liquidated damages, the effect of Art. 80 will be that a necessary precondition for claiming liquidated damages will cease to exist. Secondly, Art. 80 refers not to remedies but to reliance on a failure to perform. What seems important under Art. 80 is not the nature of the remedy but the fact that the claimant relies on the other party's failure to perform. Finally, even if the argument expressed in the previous paragraph is correct, i.e. that Art. 80 cannot govern preconditions for exercising a remedy governed by domestic law, it needs to be remembered that liquidated damages owe their existence not only to a domestic law but also, primarily, to the will of the parties. It is therefore primarily a contractual remedy grounded in the contractual notions of a breach. However, because the contract is also governed by the Convention, this contractual remedy should be treated with regard for the Convention's notion of a 'breach' to the extent that the breach is not defined in the contract itself. On balance, the author is inclined to take this view.

The next question is whether the result would have been the same had the Convention been applied. The first problem that needs to be considered is whether the seller can be said to have contributed to the buyer's failure to pay. It is suggested that the answer should depend on whether it was the seller's responsibility to notify the buyer of his new bank details or whether it was the buyer's duty to contact the seller after his failed attempt to make a partial payment. The CISG does not contain an express answer to this question, and it is difficult to find a proper solution to the problem. At first sight, it seems that the seller is under no obligation to take any steps to inform the buyer. [page 12] Since the remedies relied on by the seller included payment of the price and liquidated damages, the duty to mitigate would not apply since it only concerns damages. It is suggested, however, that the question whether the parties relying on non-performance, such as the seller in this case, have contributed to the breach should be decided taking into account such factors, for example, as fairness and reasonableness.[50] If reasonableness is a general principle underlying the Convention, it could be argued that this principle requires that the seller act reasonably which, in this situation, could mean that the seller ought to have supplied the buyer with the new bank details because seller was expecting the payment and knew that the buyer would need those details to make a payment.[51] On the other hand, it could also be argued that Art. 54 requires that it was the buyer's responsibility to inquire, after the failed attempt to pay, about the new bank details. [52] These conflicting arguments seem to suggest that, indeed, both parties should be held responsible for the failure to make a partial payment. The greater difficulty is to determine the extent of each party's contribution and, clearly, without being directly exposed to the details of the case, the author is at a disadvantageous position to form a comprehensive opinion. It is submitted, however, that the factors referred to in this paragraph are also relevant for determination of the extent of each party's contribution to the buyer's failure to make payment.

Another point that needs to be touched upon relates to the fact that the seller's contribution to the buyer's breach has been held to affect only the seller's right to liquidated damages and not the seller's right to the contract price. However, on 21 April 1998 the buyer attempted to pay only a part of the price and not liquidated damages. So why was it that the arbitrators have thought that the seller's contribution was relevant only for the reduction of the liquidated damages but not for the reduction of the price? The answer is not at all clear. It is argued that the seller's contribution was relevant for both the claim for the price and for liquidated damages. Since the buyer attempted to pay a part of the price and the seller has contributed to the failure to pay, the question whether the seller has contributed to the failure to pay cannot be ignored and should be examined on the proper application of Art. 80. If the arbitrators thought that the seller's failure to notify the buyer of his new bank details was relevant for the purposes of the reduction of liquidated damages, there is no reason why this omission was not relevant for the purpose of the reduction of the price.

So far as payment of liquidated damages is concerned, it is true that on 21 April 1998 the buyer attempted to pay only a part of the price. However, the payment of the price [page 13] and liquidated damages for the failure to pay on time are closely interlinked. If the buyer had succeeded in paying a part of the price, the amount of liquidated damages would have been reduced accordingly. It is submitted that the seller's contribution to the buyer's failure to pay a part of the price is a proper basis for applying Art. 80 to reduce the amount of liquidated damages.

5. USE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS

In view of the seemingly increasing interest in and amount of attention paid to the UNIDROIT Principles of International Commercial Contracts, it is sensible to discuss the cases decided by the ICAC in which the arbitrators have applied or referred to this instrument. These cases provide examples of different functions which the UNIDROIT Principles can serve. First, in one case, the UNIDROIT Principles have been applied as the law governing the dispute in the situation where the arbitrators have interpreted the contract as not containing the choice of law clause.[53] The arbitrators have stated that the 'general principles of lex mercatoria' would be sufficient to resolve the dispute and decided to apply the UNIDROIT Principles as evidence of these general principles.[54]

Secondly, the Principles have been applied to supplement the applicable domestic law.[55] In one case,[56] although Russian law was applicable to the case and Art. 431 of the Civil Code has been used to interpret the contract, the UNIDROIT Principles seem to have been used because the rules of interpretation of the Civil Code do not contain a provision which specifically deals with the situation which has arisen in this case.[57] [page 14] The case involved the situation where the contract had been concluded in two languages -- Russian and English -- both being equally authentic. The texts in two languages contained different formulations of an arbitration clause. To determine which of the two texts had to be relied upon, the arbitrators used Art. 4.7 of the UNIDROIT Principles according to which '[w]here a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.' Since the contract had been originally drafted in Russian, the arbitrators have relied on the Russian version of the arbitration clause.

Thirdly, the UNIDROIT Principles seem to have been referred to add legitimacy to the decision. In case No 88/2000,[58] the arbitrators have rejected the claim for payment of liquidated damages for late payment, essentially because the claimant had already had the right to claim interest for the same late payment. In making this decision, the arbitrators have referred to Art. 333 of the Russian Civil Code,[59] Resolution of the Plenary Sessions of the Supreme Court and the Supreme Arbitration Court of the Russian Federation No 13/14 dated 8 October 1998,[60] and Art. 7.4.13(2) of the UNIDROIT Principles.[61] Clearly, it was not necessary for the arbitrators to refer to the UNIDROIT Principles to reach this decision as the provisions of the Resolution and the Civil Code were sufficient. It seems, therefore, that the reference to the Principles has been made to demonstrate that the decision made on the basis of domestic law was in line with the internationally accepted standards.

6. CONCLUSION

This article has considered the cases decided in the Russian Federation which have dealt with the issues of the application of the CISG, damages, the claimant's contribution to the other party's non-performance as well as with the application of the [page 15] UNIDROIT Principles. So far as the CISG is concerned, these cases demonstrate that although Russian arbitrators and judges are aware of the existence and provisions of the Convention, on a number of occasions, they have failed either to apply the Convention or some of its provisions where they ought to have been applied, or to apply certain provisions correctly. The arbitrators have also been somewhat inconsistent in relation to the interpretation of choice of law clauses. Nevertheless, some of the cases referred to in this article may still prove to be useful. The cases involving Art 74. have raised important issues of recoverability of certain types of loss, the interrelationship between the remedy of damages and liquidated damages clauses and some questions relating to the foreseeability rule. The case discussed in the context of Art. 80 has raised the question of how Art. 80 ought to have been applied to a set of interesting facts. Finally, the cases where the UNIDROIT Principles have been applied or referred to provide examples of the different functions this instrument can serve. [page 16]


FOOTNOTES

a1. Djakhongir Saidov, Lecturer, University of Birmingham, United Kingdom.

1. Saidov, D., 'Cases on CISG Decided in the Russian Federation' (2003) 7 VJ 1.

2. General information on the ICAC (available in Russian at: <http://www.tpprf.ru/ru/main/court/mkac/obsh/>).

3. ICAC Case No 101/2001 decision dated 27 February 2002 (Rozenberg, M.G., Practice of International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry in 2001-2002 (2004) 249, at pp. 252-253/Rozenberg, M.G., Praktika mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 2001-2002 gg. (2004) (title translated by the author).

4. Russia became a party to the CISG on 1 September 1991.

5. Finland became a party to the CISG on 1 January 1989.

6. See Art. 6 CISG.

7. Case No 129/2000 decision dated 19 January 2001 (Rozenberg, supra fn. 3, at pp. 42-43).

8. For a similar view see, for example, Schlechtriem, P. Uniform Sales Law -- The UN-Convention on Contracts for the International Sale of Goods (Manz Verlag: Vienna, 1986), at p. 25.

9. Bernstein, H. and Lookofsky, J., Understanding the CISG in Europe (2nd edn, Kluwer Law International, 2003), at p. 15.

10. There seems to be a general agreement that, in the absence of indications to the contrary, a choice of law clause providing for the law of a Contracting State should be interpreted as not excluding the application of the Convention (see sources referred to in Saidov, supra fn. 1, at p. 5, fn 28).

11. Similar decisions have been taken in cases No 60/2001 decision dated 22 January 2002 (Rozenberg, supra fn. 3, at pp. 207, 211); No 151/2002 decision dated 25 June 2003 and No 24/2003 decision dated 17 September 2003 (both cases are reported in Rozenberg, M.G., Practice of International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry in the year 2003 (2004) (title translated by the author) at pp. 136, 138 and 188 respectively/Rozenberg, M.G. Praktika mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 2003g. (2004)).

12. Case No 118/2001 decision dated 27 February 2002 (Rozenberg supra fn. 3, at p. 257).

13. For the requirements contained in these provisions, see above.

14. The contract was concluded on 23 February 2000.

15. A similar decision has been taken in case No 209/2001 decision dated 14 May 2002 (Rozenberg, supra fn 3, at p. 323).

16. Case No 276/1999 decision dated 27 February 2001 (Rozenberg, supra fn. 3, at pp. 72, 74). Cases No 99/2002 decision dated 16 April 2003 (Rozenberg, supra fn. 11, at pp 78, 80 and 135/2002 decision dated 16 June 2003, ibid, at pp. 123, 125) also involved choice of law clauses referring to 'Russian legislation' In these cases, the arbitrators have ruled that the CISG was applicable. By contrast with case No 276/1999, these decisions were, however, based on the examinations of the actual intentions of the parties not to exclude the CISG.

17. Cases No 73/2000 decision dated 26 January 2001 (Rozenberg, supra fn. 3, at pp. 51, 52; No 222/2000 decision dated 20 August 2001, ibid, at pp. 130, 132; No 12/2001 decision dated 31 January 2002, ibid, at pp. 230- 231; No 150/2001 decision dated 30 March 2002, ibid, at p. 306; No 227/2001 decision dated 15 May 2002, ibid, at pp. 326-327; 217/2001 decision dated 6 September 2002, ibid, at pp. 408, 417; No 62/2002 decision dated 11 October 2002, ibid, at pp. 429, 431).

18. Cases No 217/2001, supra fn. 17: '[ ... ] the Convention is [ ... ] a constituent part of the legal system of Russia but not of its legislation.'; No 276/1999, supra fn. 16, where the arbitrators have relied on Art. 15 of Constitution and Art. 7 of the Russian Civil Code in reaching this decision; for further references see Saidov, supra fn. 1, at p. 6.

19. Cases No 222/2001 decision dated 16 April 2002 (reference to 'substantive law of the Russian Federation'); Rozenberg, supra fn. 3, at pp. 313, 315; No 18/2002 decision dated 2 December 2002 (reference to the 'norms of the substantive law of the Russian Federation'), ibid, at pp. 454-455; No 37/2002 decision dated 24 December 2002 (reference to the 'law of Russia'), ibid at pp. 469-470); No 176/2002 decision dated 12 August 2003 (reference to the 'substantive law of the Russian Federation'), Rozenberg, supra fn. 11, at pp. 158-159.

20. Cases No 110/2001 decision dated 5 February 2002 (reference to the 'substantive law of the Russian Federation'), Rozenberg, supra fn. 3, at pp. 238-239; No 199/2001 decision dated 26 March 2002 (reference to the 'norms of the substantive law of the Russian Federation' ibid at p. 287; No 40/2002 decision dated 26 December 2002 (reference to the 'substantive law of the Russian Federation'), ibid at p. 474.

21. Case No 161/2000 decision dated 9 February 2001, Rozenberg, supra fn. 3, at pp. 53-54.

22. Cases No 99/2002 (n 16) 78, 80) and No 135/2002 (n 16) 123, 125). In case No 185/2000 decision dated 30 May 2001, Rozenberg, supra fn. 3, at p. 111, the choice of law clause in the contract referred to 'norms of substantive law of the claimant.' Replying to the arbitrators' question whether the parties intended to exclude the application of the CISG, both parties stated that it was not their intention to exclude the Convention. A similar situation has occurred in cases No 99/2002 and 135/2002 (n 16). In case No 62/2002 (n 170) where the choice of law referred to 'the legislation of the Russian Federation', the arbitrators have made an attempt to ascertain the intentions of the parties and ruled that the CISG was not applicable.

23. Case No 134/2001 decision dated 22 October 2003, Rozenberg, supra fn. 11, at pp. 197-209.

24. Case No 58/2003 decision dated 30 December 2003, Rozenberg, supra fn. 11, at pp. 248-256.

25. The cases involving payments to state authorities of Russia did not contain references to relevant pieces of legislation. The rules which are relied upon by the arbitrators in these cases seem to be those which required the Russian exporters to sell a part of the contract price in hard currency and which imposed penalties for the failure to do so within the stipulated period (some of these rules are provided for in art 6(5) of the Law of the Russian Federation 'On the Currency Regulation and Currency Control'; Art. 273 of the Customs Code of the Russian Federation; Decree of the President of the Russian Federation No 629 dated 14 June 1992 (changes made by the Decree of the Russian Federation No 410 8 April 2003 establishing not a financial, but an administrative responsibility). One decision (see infra fn. 28) has referred to art 4 of the Law of Ukraine 'On the order of making payments in foreign currency.' According to the provisions of the Law in force at the time of the conclusion of the contract, the Ukrainian residents had an obligation to deposit the contract price in hard currency into their currency accounts in the authorised banks at the due date of payment and, in any event, not later than ninety days from the moment of customs legalisation of the goods (art 1 of the Law). In case of failure to comply with this requirement, the Ukrainian residents had to pay a penalty in the amount of 0.3% from the contract price for every day of delay (Art. 4 of the Law) (the text of the law in Russian is available at: <http://www.sta.gov.ua/rus/content.php3?news192>).

26. No 234/2000 decision dated 1 February 2002, Rozenberg, supra fn. 3, at pp. 234, 236-237); No 225 decision dated 22 March 2002, (ibid, at pp. 278, 281-282; No 2/2002 decision dated 5 June 2003, Rozenberg, supra fn. 11, at pp. 108, 110; No 134/2002 decision dated 4 April 2003, ibid at pp. 66, 72; No 168/2001 decision dated 17 February, ibid at pp. 52, 58-59.

27. Case No 142/2001 decision dated 25 April 2002, Rozenberg, supra fn. 3, at pp. 318, 321.

28. Federal Arbitration Court for the Moscow Circuit (Resolution of the cassation instance on whether the decisions of arbitration courts are legal and substantiated), No KG-A40/5498-00 dated 6 December 2000 (available at: <http://cisgw3.law.pace.edu/cases/001206r1.html>). By not receiving the payment from the buyer on time, the claimant was in breach of Art. 4 of the Law of Ukraine 'On the order of making payments in foreign currency.'

29. Federal Arbitration Court for the Moscow Circuit No KG-A40/5498-00, supra fn. 28.

30. Cases No 142/2001, supra fn. 27; No 225/2002, supra fn. 26; No 37/2002, supra fn. 19; No 234/2002, supra fn. 26 237; No 2/2002, supra fn. 26; No 134/2002, supra fn. 26; No 168/2001, supra fn. 26.

31. There is a difference in terminology so far as the agreed damages clauses are concerned (Treitel, G., Remedies for Breach of Contract: A Comparative Account (Oxford, 1998), at p. 208). For the sake of convenience, the term 'liquidated damages' will be used generally in this work.

32. Case No 165/2001 decision dated 18 February 2002, Rozenberg, supra fn. 3, at pp. 246, 248.

33. The other ground was that, in the arbitrators' opinion, the claimant had failed to prove the causal connection between the conclusion of the credit contract and the buyer's failure to pay on time.

34. For similar decisions, see cases No 134/2002, supra fn. 26); No 2/2002, supra fn. 26.

35. Koneru, P., 'The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles' [1997] Minnesota J Global Trade 141-145; Bridge, M., The International Sale of Goods: Law and Practice (Oxford University Press, 1999), at pp. 53, 62.

36. See, for example, Stoll, C.H. in Schlechtriem, P. (ed), Commentary on the UN Convention on the International Sale of Goods (CISG) (2nd edn, Oxford University Press, 1998), at pp. 572, 607; Hartnell, H.E., 'Rousing the Sleeping Dog: The Validity Exception to the Convention on Contracts for the International Sale of Goods' [1993] Yale J Int'l L 79; ICC case 9978, 1999, available at: <http://www.cisg-online.ch/cisg/urteile/708.htm>.

37. See Koneru, supra fn. 35, at p. 142, who, by stating that liquidated damages clauses should be given full effect, seems to imply that no restrictions under domestic law could apply to such clauses. For the contrary view, see Stoll, supra fn. 36, at p. 607.

38. Treitel, supra fn. 31, at pp. 208-244; Benjamin, P., 'Penalties, Liquidated Damages and Penal Clauses in Commercial Contract: A Comparative Study of English and Continental Law' (1960) 9 ICLQ 600.

39. See, for example, McKendrick, E., Contract Law: Text, Cases, and Materials (Oxford University Press, 2003), at pp. 1095-1104.

40. Stoll, supra fn. 36, at p. 607.

41. Articles 26, 27 of the Vienna Convention on the Law of Treaties.

42. In this case, the regulation of such clauses (for example, the court's power to reduce the amount of liquidated damages) should be based on the applicable domestic law.

43. Case No 234/2000, supra fn. 26, at pp. 233, 236-237.

44. Article 15 of the Law.

45. In the majority of cases, the foreseeability rule has been interpreted as referring to the extent of the loss: ICAC case No 406/1998, decision dated 6 June 2000, available at: <http://cisgw3.law.pace.edu/cases/000606r1.html>; Lower Court München, 23 June 1995 (Germany) ('[seller] could have [ ... ] foreseen the extent of [the] expenses'), available at: <http://cisgw3.law.pace.edu/cases/950623g1.html>; District Court of Kuopio, 5 November 1996 (Finland), available at: <http://cisgw3.law.pace.edu/cases/961105f5.html>. Some scholars have also adopted this view (see Stoll, supra fn. 36, at p. 569; Saidov, D., 'Methods of Limiting Damages under the Vienna Convention on Contracts for the International Sale of Goods' (2002) 14 Pace Int'l L Rev 343). On the other hand, the view has also been expressed that the foreseeability rule only refers to the type of the loss (Comment on Art. 7.4.4 of the UNIDROIT Principles of International Commercial Contracts; Eiselen, S., 'Remarks on the Manner in which the UNIDROIT Principles of International Commercial Contracts May Be Used to Interpret or Supplement Article 74 of the CISG', available at: <http://www.cisg.law.pace.edu/cisg/principles/uni74.html#editorial>).

46. Case No 234/2000, supra fn. 26.

47. See supra fn. 42.

48. Some commentators seem to have interpreted Art. 80 in this way (see, for example, Stoll, supra fn. 36, at p. 631).

49. Ibid, at p. 628; Comment 1 to Art. 7.1.2 UNIDROIT Principles.

50. Saidov, D., 'Causation in Damages: The Convention on Contracts for the International Sale of Goods, the UNIDROIT Principles of International Commercial Contracts, the Principles of European Contract Law' (forthcoming in the Review of the Convention on Contracts for the International Sale of Goods, Pace International Law Review, ed., Kluwer Law International, 2005).

51. Those who believe that the duty to co-operate is a general principle of the CISG or that the CISG could be supplemented by Art. 5.1.3 of the UNIDROIT Principles 2004 (Art. 5.3 in the 1994 edition) would probably also argue that this duty required the seller to inform the buyer (see, for example, Magnus, U., 'Remarks on Good Faith', available at: <http://www.cisg.law.pace.edu/cisg/principles/uni7.html#um>).

52. 'The buyer's obligation to pay the price includes taking such steps [ ... ] as may be required under the contract [ ... ] to enable payment to be made.'

53. Case No 11/2002 decision dated 05 May 2002, Rozenberg, supra fn. 3, at pp. 353-359. The arbitrators have applied Art. 4.1(1) to determine the common intentions of the parties and, in doing so, have taken into account the nature and purpose of the contract as required by Art. 4.3(d); Art. 7.2.1 to order the respondent to pay the price; Art. 7.4.9(1) to order the respondent to pay interest.

54. The UNIDROIT Principles have been increasingly applied in this manner (Bonell, M.J., 'UNIDROIT Principles 2004 -- The New Edition of the Principles of International Commercial Contract adopted by the International Institute for the Unification of Private Law', available at: <http://www.unidroit.org/english/principles/contracts/principles2004/2004-1-bonell.pdf>). To reflect this practice the new 2004 version of the UNIDROIT Principles now provide for the possibility of the Principles being applied in this situation (see Preamble of the UNIDROIT Principles 2004).

55. The Principles are also increasingly applied in this way (Bonell, supra fn. 54). The 2004 version of the Principles now provide for this possibility (see Preamble of the UNIDROIT Principles 2004).

56. No 217/2001, supra fn. 17, at p. 413.

57. Article 431 of the Russian Civil Code provides:

"In interpretation of the contract, the court shall take into account the literal meaning of words and expressions contained therein. In case of ambiguity, the literal meaning of the term of the contract shall be ascertained by means of comparison with other terms and meaning of the contract as a whole.

"If the rules contained in the first part of the present Article do not allow one to ascertain the meaning of the contract, the true common will of the parties shall be ascertained taking into consideration the purpose of the contract. At that, all relevant circumstances of the case including negotiations and correspondence prior to the contract, practice established in the mutual relations of the parties, business usages, subsequent conduct of the parties shall be taken into consideration" (translation of the author).

However, the legal ground on the basis of which the UNIDROIT Principles have been used in this case was Art. 431(2) of the Civil Code which requires taking into account of a relevant usage. The arbitrators have stated that the rules of interpretation of the UNIDROIT Principles are acquiring the 'character of a trade usage.' It is suggested that the question whether this is really the case can only be answered on the basis of further study. For the works where authors seem inclined to regard the UNIDROIT Principles as evidencing international usage see Goode, R., 'Usage and Its Reception in Transnational Commercial Law' (1997) 46 ICLQ 1 (stating at p. 26 that the UNIDROIT Principles can be used as a 'tool for courts and arbitrators seeking to identify current norms of contract established by mercantile usage [ ... ]'); Bamodu, G., 'Extra-National Legal Principles in The Global Village: A Conceptual Examination of Transnational Law' (2001) 4(1) Int'l Arbitration L Rev 6, at p. 13.

58. Decision dated 25 January 2002, Rozenberg, supra fn. 3, at pp. 45-50.

59. According to this provision, the court has a right to reduce the amount of liquidated damages in case they are manifestly disproportionate to the consequence of the breach.

60. According to the Resolution, in cases where the creditor has the right to claim liquidated damages and interest, he should generally be allowed to exercise only one of these remedies.

61. Under this provision, 'notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.'


Pace Law School Institute of International Commercial Law - Last updated August 17, 2006
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