CISG CASE PRESENTATION

The [buyer], while asserting competence of the Tribunal to arbitrate the [buyer]'s claims against the Second Respondent, as well, has pointed out that: (i) the Second Respondent should be considered as a party to the contract and therefore to the arbitration clause, because the [seller], when entering into the contract with [buyer], was acting on behalf of the Second Respondent, contracting to sell the Second Respondent's goods; (ii) the non-delivery of the goods resulted from the Second Respondent's bad faith actions; (iii) the advance payment for the goods was made [directly] to the Second Respondent, which in any event should be held to constitute unjust enrichment, etc.

The Tribunal cannot sustain the position of the [buyer], including the one expressed in [buyer]'s statement of 20 May 1997, that the [seller], in the context of the contract, has been performing the contract of commission concluded between himself and the Second Respondent, because in accordance with the law (Article 396 of the Russian Soviet Federative Socialist Republic Civil Code of 1964) one party to such a contract (agent) should act on behalf of a second party (principal), while in the present case the contract was concluded by the [seller] on his own behalf, [sui juris]; hence, this company, as expressly stipulated in the contract, and not the Second Respondent, should be identified as the party to that contract (i.e., seller). As to the [buyer]'s assertion that the contract was concluded on the basis of a power of attorney of 14 August 1992, issued by the Second Respondent in favor of the [seller]; the Tribunal found that the text of the contract did not contain any references to a power of attorney from the Second Respondent. The power of attorney itself provides that in order to sell the goods owned by the Second Respondent, the [seller] shall enter into the sale contract on his own behalf [sui juris]. Such a direct provision in the power of attorney from the Second Respondent, of which the [buyer] was informed, that the [seller], when he enters into a contract, will be acting on his own behalf rather than on behalf of the Second Respondent, could not have been unknown to the [buyer] with the understanding that the [seller], rather than the Second Respondent, will have rights and obligations to the [buyer] as a seller under the contract; inter alia, [seller] will have the right to have standing before the Tribunal in the event of any arising disputes.

Nor can the Tribunal sustain the submission of the [buyer] that even if clause 8 of the contract were not enforceable against the Second Respondent, the latter should be recognized as having agreed to take part in the present proceedings, because it has submitted a statement of defense to the Tribunal, presenting no objections to the competence of the Tribunal (Article 7(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration), and by this, therefore, should be considered as being estopped from raising further objections against any violations of the requirements under this Law (Article 4 of the Russian Federation Law on the Tribunal of International Commercial Arbitration).

While providing that the arbitration agreement shall be concluded in writing, Article 7(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration prescribes that the arbitration agreement is considered as concluded in writing even when, inter alia, it is concluded "by way of exchanging of the statement of action and the statement of defense, in which one of the parties alleges the existence of an arbitration agreement and the other party does not contest this." In [buyer]'s statement of action against the [seller] and the Second Respondent, the [buyer] pointed to clause 8 of the contract, alleging that although the contract was signed by the [seller], nonetheless, the real seller of the goods was the Second Respondent. The Second Respondent, in its letter of 6 August 1995 to the Tribunal, challenged this assertion of the [buyer], that Second Respondent was "the real seller of the goods", stating that the [seller] was the party to the contract and that "the action brought against the Second Respondent did not have reasonable grounds and should be dismissed." In the Tribunal's opinion, it cannot be held that the Second Respondent in its letter has either expressed its consent to the [buyer]'s position on applicability of clause 8 of the contract, or recognized the competence of the Tribunal over the particular claims brought by the [buyer] against Second Respondent. The Second Respondent's position that it has never had any legal contractual relations with the [buyer] and that "it has not consented to participate in the Tribunal's proceedings", has also been expressed in the subsequent letters (of 29 October 1996, and so forth) to the Tribunal, and during the hearings of the Tribunal. According to Article 13(2) of the Russian Federation Law on the Tribunal of International Commercial Arbitration, "a motion on the lack of the competence of the Tribunal may be submitted to the Tribunal not later than the submission of the objections to the action … The Tribunal may … accept the motion, submitted later, if the Tribunal considers the delay reasonable." In this case, the Second Respondent's letter of 6 August 1995, being its first submission to the Tribunal, did not contain, as is presented above, any confirmation of the consent that the dispute be settled by the Tribunal. The Second Respondent has expressed definitely and unambiguously the absence of such consent in its further assertions as to the Tribunal proceedings.

In the light of the aforesaid, the Tribunal did not find either that the Second Respondent was bound by the arbitration provisions of clause 8 in the contract, to which it was not a party, or that it had expressed in any other way its consent that [buyer]'s contractual or extra-contractual claims brought against Second Respondent be settled by the Tribunal.

     3.3 [Tribunal's conclusion on competence]

Concerning the issue of competence, the Tribunal eventually decided that the proceedings should be held with respect to the [seller], who is a proper Respondent in the case, and who has made the arbitration agreement with the [buyer]; the proceedings with respect to the Second Respondent should be terminated because the [buyer] does not have an arbitration agreement with the Second Respondent. Although it is clear, the Tribunal nevertheless would like to point out that the decision on the lack of the Tribunal's competence with respect to the [buyer]'s claims against the Second Respondent does not bar in any way the [buyer]'s right to bring her claims before the competent Arbitration Authority; by the way, this possibility was repeatedly pointed out even by the representatives of the Second Respondent during the course of the Tribunal's hearings.

     3.4 [Applicable law]

Concerning the law which governs the relations between the [buyer] and the [seller] under their contract of 19 August 1992 - as the international sale contract - the Tribunal found that the dispute herein might be settled on the basis of the rules of the conflicts law under Article 166 of the Fundamentals of Civil Law of USSR 1991, effective in the territory of Russia since 3 August 1992 (Article 166 of the Fundamentals of Civil Law of USSR 1991 still remains effective at the present time).

According to this Article, the rights and obligations of the parties to the sale contract should be defined, if parties did not agree otherwise, according to the law of the seller's State; whereas there is no agreement on applicable law between the parties, therefore the Tribunal should apply the law of the Russian Federation.

The CISG had been already in force in the Russian Federation at the time of conclusion of the contract on 19 August 1992 (the CISG entered into force for the USSR since 1 September 1991), and, according to Article 1 CISG, applies to contracts between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State.

According to Article 10 CISG, "if a party has more that one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract". In the present case, the seller is a Russian company which has its place of business, i.e., conducts its permanent business activity, in Russia. As to the buyer, it was a British company, which, however, concluded the contract with the [seller] through [buyer]'s representative office or agent in Switzerland. The United Kingdom is not a Contracting State to the CISG, but Switzerland has been a Contracting State to the Convention since 1 March 1991. Under the circumstances of the case, it seems reasonable to consider that, in the context of the contract, the contract had the closest relationship to the Swiss commercial company of the [buyer], the Swiss address of which was specified on the seal attached to the contract, and through which the performance of the contract, namely, the payment for the goods, was to be made (and in fact was made). Therefore, the CISG's provisions apply to the contract of 19 August 1992 on the basis of either of two grounds prescribed in Article 1 CISG, i.e., both because the parties' companies are located in the Contracting States (Russia and Switzerland), and because, by virtue of the rules of private international law, the law of Russia applies here as the law of Contracting State. The [seller] himself does not challenge that the [buyer], its representative office located in Switzerland, is the party to the contract and the proper Claimant in this case, properly represented by counsel who have a relevant power of attorney from the CEO of the Swiss office, whose signature is affixed to the contract and the statement of action.

     3.5 [Provisions on payment of the price for the goods]

Notwithstanding the apparent haziness of the contractual provisions concerning the shipment of and payment for the goods, these provisions were construed in the following way: the goods were to be transferred to the shipping company for shipment to be made at the [buyer]'s expense (clause 3); however, the payment for the goods was to be made only against the shipment documents issued by this shipping company (clause 6), which were to be provided to the buyer by the seller, and the right of title and transfer of risks were to pass from the seller to the buyer upon signing of the certificate of transfer simultaneously with [seller] providing the documents received from the shipping company (clause 10). As to the price of the goods, it is "to be in U.S. dollars and should be defined on the basis of average quotations, which are published with respect to these goods in the periodical specified in the contract" (clause 4).

Although according to clause 4 of the contract, the payments, as mentioned above, should be made "against the shipment documents", the parties, in Appendix 1 to the contract (without date), have agreed that the buyer had to make an advance payment to the seller upon the invoices and that the goods had to be shipped upon the advance payment having been made.

The [seller] in his letter of 24 August 1992, referring to the "agreement reached on the advance payments" for the goods, asked the [buyer] to make the payment for the goods to particular companies and by a certain method.

     3.6 [Verdict in criminal lawsuit]

The Tribunal found in this case that the [buyer] had made payments for the goods, but the [seller] had not made the shipments of the goods. This conclusion is based on the case materials, including the data of the factual circumstances which are contained in the verdict of the People's Court on 14 November 1996.

As to the significance of that verdict for the present proceedings, the representatives of the Second Respondent, during the hearings and in their written submission, have expressed their point of view that the verdict in the criminal case concerned only the guilt of the former officers of the Second Respondent with respect to their company and, therefore, cannot affect the commercial dispute in any way. In turn, the [buyer] asserted, including [buyer]'s submission of 20 May 1997, that by virtue of Article 55 of the Russian Soviet Federative Socialist Republic Code of Civil Procedure, the circumstances stated in the verdict need not be proved at all in the present case. The Tribunal held that the rules of evidence, contained in the Code of Civil Procedure as well as in the Russian Federation Code of Arbitration Procedure, including Article 55 of the Code of Civil Procedure and analogous Article 58 of the Code of Arbitration Procedure, concern the order of proof of evidence in the case in the State Courts (General Competence Courts and Arbitration Courts, respectively), and do not directly affect Arbitration Tribunals, particularly those of International Commercial Arbitration, where the order of proceedings is determined by the rules of the law on arbitration tribunals, which do not provide that the Tribunal be constrained to the provisions of the Code of Civil Procedure and the Code of Arbitration Procedure. Pursuant to Article 19 of the Russian Federation Law on the Tribunal of International Commercial Arbitration, the Tribunal observing the provisions of the Russian Federation Law on the Tribunal of International Commercial Arbitration may hold the proceedings in the manner which the Tribunal considers reasonable, and the Tribunal's competence comprises "determination of admissibility, relevance and importance of any evidence." Within the framework provided by the Russian Federation Law on the Tribunal of International Commercial Arbitration, however, the Tribunal may, however, settle the relevant issues according to the general principles of procedure. Article 55 of the Code of Civil Procedure and Article 58 of the Code of Arbitration Procedure provide that the verdict in a criminal case is binding only in the part concerning whether or not some acts have been done and who has done them. Such issues do not appear in this dispute, although if they had appeared, they would have been considered by the Tribunal in accordance with the general principle of binding precedent of the verdict as provided in Article 358 of the Russian Soviet Federative Socialist Republic Code of Criminal Procedure and underlain in Article 55 of the Code of Civil Procedure and Article 58 of the Code of Arbitration Procedure. As to the other data concerning other issues in the verdict, that data also have evidentiary significance but no prejudicial force in determining whether the circumstances are important for the dispute arbitrated by the Tribunal, i.e., they may be contested by the parties. In the present case, however, the relevant facts in the verdict that may be considered in the case presented for hearing are not contested by the parties.

     3.7 [Seller's obligation to hand over documents relating to the goods]

Contesting his liability for non-delivery, the [seller] asserted, including in his letter of 28 July 1994 to the [buyer]'s counsel and in the statement of defense of 6 June 1995, that non-delivery resulted not due to any fault of [seller], who had performed all his obligations, but due to fault of [buyer], who had not concluded a contract for shipment of the goods with the shipping company, and, that such shipment was to be paid by the [buyer] under the contract; the certificate of transfer of goods was not signed due to the same reason.

Although clause 3 of the contract stipulates that the seller transfers the goods for shipment to the shipping company, it follows from clauses 6 and 10 that the seller's obligations include both providing the buyer with the shipment documents issued by the shipping company (against which the payment is to be made) and signing with the buyer the certificate of transfer of goods simultaneously with the provision of the documents. Notwithstanding that the term of payment of the price "against the shipment documents" had been altered by Appendix 1 to the contract in favor of making shipment only "upon payment", the Tribunal found that the obligations of the seller - concerning the provision of the documents for the shipment of the goods, i.e., securing of the shipment (albeit at the buyer's expense) and signing of the deed of transfer of the goods with the buyer - had not been altered.

According to the CISG, the seller must deliver the goods and "hand over any documents relating to them […] as required by the contract and this Convention" (Article 30 CISG), providing that such documents must be handed over "at the time and place and in the form required by the contract" (Article 34 CISG). In fact, the [seller] did not perform these obligations either at the time required by clause 5 of the contract (3rd-4th quarter of 1992) or later, notwithstanding the [buyer]'s demands.

     3.8 [Alteration of the price]

The Tribunal found unreasonable the arguments of the [seller] expressed, inter alia, in his letter of 28 July 1994, mentioned above, that the [Tribunal] should accept as the reason for non-delivery, which would release [seller] from his liability, the refusal of the [buyer] to make an additional payment for the goods due to the increase in their price, as was requested by the Second Respondent, who threatened not to deliver the goods, and about which the [seller] informed the [buyer] by fax of 18 November 1992. According to Article 53 CISG, the buyer's obligations include payment of the price for the goods "as required by the contract", i.e., in the amount agreed by both parties and which cannot be altered by the will of one party without consent of the other; there was no such consent in this case. The price to be paid for the goods was specified not in the language of the contract itself; rather, it was agreed in the separate agreement between the buyer and the seller. The price was proved by the series of evidence contained in the case materials. The advance payment was calculated and made according to this price. The seller could not claim anything else from the buyer with respect to the price of the goods.

As to the relations with third parties, upon whom the delivery of the goods depended, the seller rather than the buyer had the obligation to settle all claims of such third parties, etc., as well as to take other general steps in order to receive the goods, obtain necessary permits et al., to secure the transfer of the goods to the buyer.

     3.9 [Exemption from liability]

The [seller] did not provide any other explanations of his reasons as to the failure to perform the contract; neither his submissions nor the case materials contain any such explanations. Whereas the [seller] failed to prove that failure to perform the contract was caused by circumstances beyond his control, which he could not reasonably be expected to take into account at the time of the conclusion of the contract, or exclude, or overcome, therefore he cannot be exempted from liability, including compensation of the losses suffered by the [buyer], under Article 79 CISG.

     3.10 [Declaration of avoidance and its effects]

It cannot be doubted that, in the light of the circumstances of the present case, seller's failure to deliver the goods was a fundamental breach of the contract in the meaning of Article 25 CISG and that entitled the buyer to avoid the contract pursuant to Article 49(1)(a) CISG. According to Article 26 CISG, a declaration of avoidance of the contract by one party must be made by notice to the other party. Study of the materials presented to the Tribunal allows the conclusion that, in any event, the [buyer], has demonstrated by [buyer]'s statement of action, if not earlier, that [buyer] had considered the contract as avoided and on this ground has claimed the recovery of the price paid, rather than the delivery of the goods.

Article 81 CISG regarding the effects of avoidance of the contract, provides for release of both parties from their obligations under the contract, subject to the right to recover any damages which may be due (paragraph 1), and expressly provides that the party who has performed the contract may claim restitution from the other party of whatever the first party has performed (paragraph 2), i.e., in this case, restitution from the seller of the payment made by the buyer.

     3.11 [Restitution of buyer's payments to be made]

As to the amount of sums paid by the [buyer] to the [seller] and which [buyer] is entitled to claim under Article 81 CISG, the Tribunal found the following. As a foreign legal entity, the [buyer] had to pay for the goods in foreign currency (in this case, in U.S. dollars) and therefore she is entitled to claim restitution from the [seller] in U.S. dollars, notwithstanding that the payments were made in Russian rubles to the accounts of Russian companies specified by [seller].

According to the case materials, those payments were made by means of transit payments on the basis of several agreements. The Tribunal does not think it should delve deeper in the discussion of these agreements whereas they were concluded between or with the third parties who do not participate in the present proceedings, and refers to these agreements only to reflect the facts which show that the payments were made to the accounts specified by [seller].

As to the payments themselves, they were made by three payment orders [three installments].

As proved by these payment documents and other case materials, the sum in the dispute was wired in Russian rubles to the accounts specified to the [buyer] by [seller], and, therefore, notwithstanding that the payees were different companies, the [seller], in the context of contractual relations between the [buyer] and [seller], should be considered as having received the specified sum under the contract, which he is obligated to return to the [buyer].

     3.12 [Currency and conversion rate for restitution payments]

The Tribunal cannot grant [buyer]'s claim as to recovery from the [seller] of the sum paid by the [buyer] not to [seller] but to the bank under the loan agreement which was concluded under the guarantee of another bank and which is not presented and is not the subject of the proceedings of this case.

As to the equivalent sum in Russian rubles actually received by the [seller], this sum must be returned to the [buyer] in U.S. dollars (in which currency according to the clause 4 of the contract the price for the goods was to be determined), based on the exchange rate of Russian ruble to U.S. dollar that was agreed by the parties for the payments under the contract and which is confirmed by the [buyer], including in [buyer]'s statement of action and in the audit report on calculation of the amount of claims of 30 September 1994 attached to the statement. Based on the terms of calculation of the price agreed by the parties, and considering that the [buyer] has limited its claims to the recovery of only what was paid to the [seller], without claiming losses and annual interest, the Tribunal recognizes that the [seller] is obliged to pay to the [buyer] the sum in U.S. dollars determined in accordance with the method mentioned above.

     3.13 [Arbitration fees and legal costs]

According to § 9 of the Rules of Tribunal on Arbitration Fees and Expenses, the [buyer]'s claim as to recovery from the [seller] of the expenses incurred in connection with representation of [buyer]'s claims by the attorneys should be granted in the amount which is reasonable considering the circumstances of the case and the time spent for providing the legal services.

FOOTNOTES

* This is a translation of the award in Proceeding 2/1995, dated 11 May 1997, of the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, reported in: Rozenberg ed. Arb. Praktika 1996 - 1997, No. 72 [244-254]. All translations should be verified by cross-checking against the original text. For purposes of this translation, Claimant of Switzerland is referred to as [buyer]; First Respondent of the Russian Federation is referred to as [seller].

** Mykhaylo Danylko is a Partner with the law firm Danylko, Kushnir, Soltys & Yakymyak, Attorneys & Counselors at Law, Kiev, Ukraine <http://www.dksylaw.com>. He holds a Masters of Laws (European Studies Program) from the Law School of International Science and Technology University, Kiev, Ukraine (July 2000); a Master of Management in Business of the Business School of International Science and Technology University (June 2002); and has received his LL.M. in International and Comparative Law at the Pace University School of Law. The second-iteration redaction of this translation was by Dr. John Felemegas of Australia.

*** Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Mascow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.