A. Introduction
1. Aluminum Ore/Bauxite is found in various parts of the world. Some is imported into Russia, some is extracted locally.
2. Bauxite is refined to Aluminum Oxide/Alumina. Some is imported into Russia.
3. From Alumina, aluminum smelters extract Raw Aluminum (in ingots) through electrolysis, a process requiring large quantities of energy. [Seller] [a Russian firm] is such an aluminum smelter located in the coal-producing Kuzbass region of Southern Siberia.
4. Raw Aluminum is then cast into aluminum billets, rods, wire and other shapes. In the group of companies of [buyer] [a Swiss firm] there were such aluminum casting works or rod mills in Argentina (first in Córdoba, then in Puerto Madryn on the coast in the south of Argentina), and on Sardinia.
5. The aluminum billets etc. are used by cable works and other manufacturers throughout the world.
6. [Seller] and [buyer] first came into contact in 1990.
7. From 1991 onwards various protocols and contracts were signed . . .
[. . .]
9. [Seller] also was to to supply raw aluminum to a newly formed Argentinen share corporation of which [buyer] was the main shareholder, A__, which operated a new aluminum casting plant at Puerto Madryn. [Seller] became a 20 percent shareholder in that corporation. This will be further discussed in below, N and O.
10. A similar arrangement had originally been contemplated win respect to the plant operated by yet another company in the [buyer] group, A__ in Sardinia, but [buyer] chose to enter into this type of arrangements with another Russian aluminum smelter.
11. The supplies of raw aluminum were made through a company incorporated in Madeira, N__ belonging for 95 percent to [seller]. However, no written contracts exist which would be back to back to contract 60-01, 60-02 and 60-47 and by which N would have sold on the raw aluminum to E__ or A__. This will be further discussed in below, I, R and T.
12. When [seller] was privatized in December 1994, [buyer], together with a Korean partner, Daewoo, entered a bid, and (so [buyer] say[s] and [seller] does not specifically deny) was the preferred candidate of the then management, but the business was acquired by its present owners. This will be further discussed in below, M.
13. [Seller's] new owners stopped all deliveries of raw aluminum to [buyer] from early February 1995 onwards, pending an internal investigation. The deliveries were never resumed. This will be further discussed in below, M.
14. The parties (and several individuals whose names appear in the file) are presently joined in bitter battle in various private and criminal law fora, including the present arbitral tribunal . . .
[. . .]
K. Applicable Law(s)
141. In this international arbitration having its seat in Zürich Art. 187 PIL Statute applies which reads as follows in translation:
"The parties may authorize the arbitral tribunal to decide the case ex aequo et bono."
142. The parties did not choose the applicable law directly, but Art. 4 of the Zürich Rules reads as follows in translation:
"The Arbitral Tribunal decides according to the substantive law declared applicable by the parties.
"If the parties have not chosen an applicable law, the Arbitral Tribunal decides the case according to the law applicable according to the rules of the Private International Law Statute.
"If, however, the application of the PIL at the seat, domicile or habitual residence of all parties leads similarly to a different result, the case must be decided accordingly on motion of one of the parties."
143. This refers to Art. 116 to 118 PIL Statute which read as follows:
Art. 116
"Contracts are governed by the law chosen by the parties.
"The choice of law must be explicit or clearly evident from the agreement or from the circumstances. Moreover, it is governed by the chosen law.
"The choice of law can be made or altered at any time. If made or altered after the conclusion of the contract, it takes effect retroactively from the time of the conclusion of the contract. The rights of third parties are reserved."
"If no law has been chosen, a contract is governed by the law of the country most closely connected with it.
"The closest connection is presumed to exist with the country where the party which must make the characteristic performance has its habitual residence, or, if the contract is based on a business activity, has its business establishment.
"The characteristic performance is, in particular:
(b) in contracts to grant the use of a thing or a right, the performance of the party that grants the use;
(c) in mandates, construction, and similar contracts for services, the service;
(d) in contracts for storage, the performance of the keeper;
(e) in guarantee and surety contracts, the performance of the guarantor or surety.
Art. 118
"For contracts to sell movable goods the Hague Convention of 15 June 1955 on the Law Applicable to the International Sales of Goods applies."
Article 120 PIL Statute is excepted.
144. Art. 2 and 3(1) of the Hague Convention read as follows in the original French:
"La vente est régie par la loi interne du pays désigné par les parties contractantes.
"Cette désignation doit faire l'objet d'une clause expresse, ou résulter indubitablement des dispositions du contrat.
"Les conditions, relatives au consentement des parties quant à la loi déclarée applicable, sont déterminées par cette loi."
Art. 3(1)
"A défaut de loi déclarée applicable par les parties, dans les conditions prévues à l'article précédent, la vente est régie par la loi interne du pays où le vendeur a sa résidence habituelle au moment où il reçoit la loi interne du pays où est situé cet établissement."
Translation:
Art. 2
"A sale shall be governed by the internal law of the county designated by the contracting parties.
"Such designation must be contained in an express clause, or unambiguously result from the provisions of the contract.
"Conditions affecting the consent of the parties to the law declared applicable shall be determined by such law."
Art. 3(1)
"Failing a law declared applicable by the parties under the conditions provided in the preceding article, a sale shall be governed by the internal law of the county in which the seller has his habitual residence at the time when he receives the order. If the order is received by an establishment of the seller, the sale shall be governed by the internal law of the country in which the establishment is located."
145. If one reads the above statutory texts it becomes clear that normally the whole contract is governed by one law. Only by way of exception would one split up the various elements in the contract and have different laws applicable to these different elements in the contract, what the French call dépeçage.
146. In order to apply one law one has to ask oneself what is the main thrust of the Protocols. The main thrust is long term supply of raw aluminum. There is an ancillary aspect (above, point 108), which is given [seller] minority participation in E__ and A__ and some other ancillary obligations. Therefore the entire contract as a rule, is governed by the law of the vendor, that is Russian law.
147. In Russian law, the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention) applies to the international sale of goods for contracts made on or after September 1, 1991. Raw aluminum is goods.
148. While it is true that Art. 6 of the Vienna Convention states that "the parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions," the parties in this case did not exclude the application of the Vienna Convention nor did they derogate from or vary the effect of the provisions here relevant.
149. The Vienna Convention does not deal with the sale of participations such as parts in a company in Hungary or securities, such as shares in a company in Argentina (Art. 2 (d) Vienna Convention). Neither does it deal with the question of fundamental error, mistake, fraud and other aspects of the making of the contract (Art. 4 (a) and Art. 7 (2) Vienna Convention). For these, general Russian law applies.
150. There is no good reason to operate a dépeçage. Then, some questions, particularly questions concerning the corporate structure of E__ and the sale of those parts and the corporate structure of A__ and the sale of those shares might be governed by a law different from Russian law.
151. This would lead to difficulty. There were different sellers of E__ parts. Some of these sellers are in Argentina, some are possibly in Italy, some perhaps in some other countries. So, should one apply different laws to these various sales of these component parts of the 15 percent? That would then really be dépeçage in the extreme.
152. Or should one try to find one unitary law to these sale of parts in the Hungarian company? The unitary law that one then obviously would apply would be Hungarian law.
153. Similarly, for the sale of the shares in A__, if one had to apply one law to some aspects and different laws to other aspects, it would again be the laws of the various sellers of the shares in A__ S.A.
154. Or then, one would apply just one law, and that would then be Argentine law, while all the supply obligations would be governed by Russian law (that is the Vienna Convention).
155. The Arbitral Tribunal finds it appropriate to apply Russian law to all aspects of the contractual relationship between the parties in order to protect the coherence of the contract.
156. Now, whether it all makes any difference is still another question. The laws of Russia, Hungary, Argentina are all laws within the civil law family. Theories of general mistake and fraud and similar theories exist in all these laws.
157. The Arbitral Tribunal however, need not discuss general law (that is the law apart from the Vienna Convention) any further because [seller's] allegation of fraud allegedly committed by [buyer] will turn out to be baseless no matter whether Russian or some other law applies.
L. Non-Delivery by [seller]
158. Art. 30 Vienna Convention reads as follows:
159. Art. 45(1) and (2) Vienna Convention read as follows:
(b) clam damages as provided in articles 74 and 77.
"(2)The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies."
160. Art. 49 Vienna Convention reads as follows:
(b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within die period so fixed."
161. Art. 25 and 26 Vienna Convention read as follows:
"A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result."
Art. 26
"A declaration of avoidance of the contract is effective only if made by notice to the other party."
162. Art. 72 Vienna Convention reads as follows:
"(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.
"(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations."
163. Art. 73 . . . Vienna Convention read[s] as follows:
"(2) If one party's failure to perform any of his obligations in respect of any installments gives the the other party grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future, provided that he does so within a reasonable time.
"(3) A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence, those deliveries could not be used for the purpose contemplated by the parties at the time of the conclusion of the contract."
164. Art. 81(1) Vienna Convention reads as follows:
165. The basic question in this arbitration is, is there a fundamental breach of the Protocols and the further agreements, and if so, by whom? It is undisputed that at the beginning of February 1995 [seller] deliberately stopped supplying tonnage to E__ and A__.
166. [Buyer] on the basis of an alleged fundamental breach by [seller] sue[s] for specific performance of [seller's] obligations. Alternatively, [buyer] measure[s] its damage by the failure to supply the agreed tonnages into the future. These are Claims 1, 2, 3a, and 3b.
167. [Seller] claims that [seller] was justified under the circumstances by a previous fundamental breach by [buyer]. This is [seller's] main defense.
168. For the Arbitral Tribunal it is clear that [seller's] deliberate stop of supplies to E__ and A__ was a fundamental breach by the seller under Art. 30 Vienna Convention, namely an anticipatory repudiation of an installment contract under Arts. 49, 72 and 73 Vienna Convention, unless it was justified under the circumstances as [seller] claims.
169. If the seller was in fundamental breach, the buyer was not required to set the seller a further deadline for deliveries. The buyer could declare the contract avoided in respect of the overdue and of future deliveries.
170. This is what [buyer] did in this case. Less than two months later, which the Arbitral Tribunal deems a reasonable time under the circumstances involving an installment contract for deliveries over a period of still another seven or eight years, [buyer] commenced arbitration against [seller].
171. The claim was for specific performance, alternatively for damages. One of the principles of Vienna Convention is that the aggrieved party is not required to make an election of remedies and is not prevented from claiming damages if it has claimed performance (Art 45(1) Vienna Convention; compare Art. 61(2) Vienna Convention). In the present case, performance was claimed only as an alternative. Since, for reason that the Arbitral Tribunal will explain in below, point Q, the claim for specific performance must be denied, the alternative claim for damages must be understood to be a declaration of avoidance which was timely made. Hence, the effects of Art. 81(1) Vienna Convention come into play, and damages become due (see below, point R).
172. All this is however on the assumption that [buyer] as buyers were not in fundamental breach themselves, in which case seller would, under Art. 81 Vienna Convention just cited, be excused from performance. The Arbitral Tribunal now turns to the various defenses that [seller] presents (below; points M, N, and 0).
M. [Seller's] Defenses - Non-Payment by [Buyer]
(a) Facts
173. The various contracts for deliveries of raw aluminum from 1991 onwards have already been mentioned, and their performance did not lead to substantial problems until 1995.
174. The events that led up to the present dispute were as follows:
175. In December, 1994, or early in January, 1995, Mr A. met Mr. Z. Mr. Z told him that [seller] and its new owners would not supply a single kilogram of raw aluminum to [buyer's] group. This allegation was not denied by [seller]. It was confirmed by Mr. A's testimony on April 4, 1996. Mr. Z announced exactly what subsequently happened: [seller] stopped supplying.
176. On January 5, 1995. Mr. K sent the following telex to [buyer]:
177. On January 13, 1995, Mr. A sent the following telex to Mr. K.
"We would like to remind you of your binding contractual commitment concerting this transactional agreement no. 60/47 signed by both parties for the supply of 30.000 mt. of aluminum to Hungary.
"Please advise by return when shipments to Tatabánya will start, as well as tonnages and grades.
"We need this information urgently for the production planning at E, we would suffer substantial prejudices if the metal were not to arrive in time.
"We would also like to remind you the following issues:
- your debit towards A
- new investments at A
"In addition, as you know, you have other pending commitments with us which date from 1993 and 1994.
"In order to discuss above, we suggest a meeting with you in Hungary over the next few weeks.
"Please suggest a date or dates by return."
178. On January 19, 1995, Mr. K sent the following telex:
179. On January 20, 1995, Mr. K sent the following telex to Mr.__:
"The contract no. h 008343672/40300-05 with Transworld Metals Ltd's company have been prepared instead of the contract no. 60-47. The new staff of the directors council have confirmed the possibility of aluminum providing for E__ on account of the metal from Transworld commodities', but the council have demanded to present urgently the balances and reports about the works of E__ during 1992, 1993 and the decisions of the shareholders according to the annual results of the work. I consider that it is necessary to send these documents as fast as possible and to inform us when the results of the 1994 will become known. In addition we will agree the meeting in Hungary for decision all these questions jointly with the representatives of the companies and the directors council. As it was mentioned earlier the payments in A__ have not been made, that is why the plant have not got yet the license of the Central Bank of Russian Federal for transferring the capital from Russian Federation. Then it will be necessary to have the decision of the directors council to carry out the investments for A__.
180. Mr. K testified that he remembered sending the above telexes.
181. On January 26, 1995, Mr. K apparently wrote this to Dr. B:
[Note: Seller, however, emphasises that Transworld is not presently a shareholder of seller . . .]
182. Mr. K could not remember having sent the January 26, 1995, telex, and when asked whether it was thinkable that his name might have been used by somebody else to send a telex he did not provide an answer.
183. On January 27, 1995, Mr. K wrote this to Dr. B:
"It is a pity but it is impossible for me to take part in the meeting in Tatabánya and in Milano from 27th up to 29th of January. We have no possibility to determine the date of the mutual discussing of the questions. It is necessary to agree the date with the directors council. Apply to the contract on 30.000 tons for 1995, we have reported to you that after our final meeting with shareholders on the 20th of January the directors council only has the right to realize the actual contracts and to sign the new one. On this reason the authorities of the plant must discuss these problems with the directors council.
"Additionally the Ministry of economics and the Ministry of foreign economical relations have not decided the question of the quota 60.000 tons for the purposes of the plant reconstruction. We are taking measures that it will possible to provide E__ by metal deliveries. Most probably it will not be the direct contract with [seller] is probably that our meeting will take place in the second ten-day period of February. The place of the meeting and the date will be agreed additionally."
(b) Arbitral Tribunal's Opinion
184. Art. 53 Vienna Convention reads as follows:
185. Articles 61 to 64 of the Vienna Convention read as follows:
"(1) If the buyer fails to pal any of his obligations under the contract or this Convention, the seller may:
(b) claim deluges as provided in articles 74 to 77.
"(2) The seller is not deprived of any right he may have to claim damages by exercising his right to other remedies.
"(3) No period of grace may be granted to the buyer by a court or arbitral tribunal when the seller resorts to a remedy for breach of contract."
Art. 62
"The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with his requirement."
Art. 63
"(1) The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations.
"(2) Unless the seller has received notice from the buyer that he will not perform within the period so fixed, the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performances."
Art. 64
"(1) The seller may declare the contract avoided:
(b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed.
"(2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so:
(b) in respect of any breach other than late performance by the buyer, within a reasonable time;
(i) after the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance win paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period."
186. Art. 71 Vienna Convention reads as follows:
"(1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of:
(a) a serious deficiency in his ability to perform or in his creditworthiness; or
(b) his conduct in preparing to perform or in performing the contract
"(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.
"(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance."
187. Art. 80 Vienna Convention reads as follows:
"A party may not rely on a failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission."
188. [Seller's] defense is that [buyer] [was] were in fundamental breach of [its] obligation because [it] had not finished paying for the goods delivered under Contract 60-2.
189. The Arbitral Tribunal disagrees. The Arbitral Tribunal does accept that the various yearly Contracts 60-1, 60-2, 60-47 and those that would have followed (or rather, the contracts between N__ and [buyer] which would have been back to back to all these contracts, see chart on page 40) must be considered, for the purposes of the Vienna Convention, to be one large installment contract in the sense of Art. 73 Vienna Convention as foreseen under the Protocols.
190. However, the failure by a buyer to perform one installment (i.e. paying the price for one installment) gives the seller the right to avoid the contract only where the buyer's breach is a fundamental breach (Art. 73(2) Vienna Convention). The Arbitral Tribunal has no indication that [buyer] [was] unable or unwilling to meet [its] payment obligations under the various contracts (art. 71(1)(a) Vienna Convention, see also Art. 78 Vienna Convention), let alone had committed an anticipatory repudiation of these contracts (Art. 72 Vienna Convention).
191. In such a situation, moreover, the seller must set the buyer an additional deadline as provided in Art. 64(1)(b) Vienna Convention. This [seller] did not do.
192. In fact, even [seller's] original demands for payment of January 5, 13, and 19, 1995, were unclear since [seller] asked for the payment of USD 6,060,000, a sum according to their own words an "approximate debt" based on "preliminary calculations."
193. In March and June 1994, [buyer] had settled their debts after having sorted out all discrepancies with [seller]. When in January, 1995, they asked repeatedly for a meeting to discuss various points in connection with the approximate debt claimed by [seller], this was denied by [seller] all of a sudden. This was inconsistent with the previous course of dealing between the parties in the sense of Art. 8(3) Vienna Convention.
194. The Arbitral Tribunal further considers that the following action, attributable to [seller], caused in the sense of Art. 80 Vienna Convention [buyer] to withhold payments: Mr. Z in advance informed Mr. A that the [buyer] would not receive any more aluminum from [seller]. One could call this an anticipation of an anticipatory breach. Under such circumstances no reasonable business person would pay.
195. [Seller] attempts to say that it did not stop deliveries because in its telex of January 20, 1995 (above, point 179) it suggested to [buyer] that they could purchase the aluminum from somewhere else (Transworld) [see, above, point 181] and that [seller] might even help them to do that. This is without merit. The only way to discharge an obligation to deliver aluminum is to deliver aluminum, not words.
196. Accordingly, the Arbitral Tribunal can only disagree with [seller] if it now claims that it was justified in interrupting its supplies of raw aluminum to [buyer] and never resuming its supplies because [buyer] had failed to pay the earlier shipments. This defense is rejected.