- Arbitral Award
- International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation
SALES CONTRACT - BETWEEN RUSSIAN SELLER AND SOUTH KOREAN BUYER - GOVERNED BY RUSSIAN LAW - CISG APPLICABLE ACCORDING TO ART. 1(1)(B).
DEFECTIVE GOODS - CLAIM FOR DAMAGES BY BUYER - AMOUNT OF DAMAGES AWARDED REDUCED ON ACCOUNT OF THE FACT THAT HARM WAS DUE IN PART TO BUYER'S CONDUCT - REFERENCE TO ARTS. 74 AND 77 CISG AS WELL AS TO ART. 7.4.7 OF UNIDROIT PRINCIPLES (AS WELL AS RELATIVE COMMENT) WHICH EXPRESSLY ADDRESS THIS SITUATION
A Russian company sold to a South Korean company components of “high sensitivity” to be incorporated in final product. Upon inspection of the goods delivered, it turned out that they were to a large extent defective and did not have the characteristics necessary for their intended use. Buyer brought an action for damages; Seller acknowledged the presence of defects but accused Buyer of not having inspected them properly and in good time after delivery.
Since the contract was silent as to the governing law, the Arbitral Tribunal referred to the relevant conflict of law rules of Russian law as the law of the forum and decided that CISG was applicable as part of the law where the seller had its place of business and that questions not settled in CISG should be governed by the Civil Code of the Russian Federation.
As to the merits the Arbitral Tribunal found that both parties had failed to take steps necessary to duly perform their obligations under the contract. In particular they had failed to set forth in the contract the exact procedure and methods of inspection of the goods, and it was above all Buyer who, as a professional manufacturer of the final product, should have made sure that the proper way in which goods were to be inspected be clearly indicated in the contract or at least agreed upon immediately after delivery. For this reason the Arbitral Tribunal, while deciding in favour of Buyer, when assessing the damages, awarded only two thirds of the amount claimed by Buyer whom it held co-responsible for the loss suffered on account of its own omissions and inadequate acts. In so deciding the Arbitral Tribunal applied not only Articles 74 and 77 CISG but referred also to Article 404 (1) of the Civil Code of the Russian Federation and to Article 7.4.7 of the UNIDROIT Principles which expressly provides that where the harm is due in part to an act or omission of the aggrieved party the amount of damages shall be reduced to the extent that these factors have contributed to the harm. The Arbitral Tribunal also referred to Comment 2 to Article 7.4.7 of the UNIDROIT Principles which as an example of such contributory negligence expressly mentions the case where the aggrieved parties failed to give all the necessary instructions to the manufacturer of the defective machinery.
(Reproduced with the kind permission of Albert Kritzer, Pace University, N.Y.)
Translation [*] by Yelena Kalika [**]
Translation edited by Yuliya Chernykh [***]
1. SUMMARY OF RULING
1.1 Where a contract was made by the Claimant [Buyer], whose commercial enterprise is located in a State that is not a CISG Contracting State, and the Respondent [Seller], whose commercial enterprise is located in a CISG Contracting State, the relationships in connection with the dispute [arisen from such contract] are governed by the CISG. Russian laws should apply as subsidiary laws. [This conclusion] was reached since the Russian conflict of laws rule sets forth the applicability of the Russian civil laws as the laws of the seller's state. [The Tribunal] also took into account the provisions of Article 15(4) of the Russian Federation Constitution, Article 7(2) of the Russian Federation Civil Code and Article 1(1)(b) CISG.
1.2 Upon ascertaining defects in the goods delivered and differences in the parties' arguments as to how those defects were created and after establishing that both parties failed to set forth in the contract clear requirements as to the quality of goods and methods of their inspection, the Tribunal concluded that both parties were jointly liable. The Tribunal placed two third of the [Buyer]'s losses on the [Seller]. This conclusion was based on the CISG, the Russian Federation Civil Code and the UNIDROIT Principles of International Commercial Contracts.
1.3 When determining the amount of losses suffered by the [Buyer], the Tribunal took into account the computations submitted by the [Buyer]. The [Seller] did not object to [these computations].
1.4 Since in practice both parties deviated from strict compliance with the contractual provisions on the terms and procedure of bringing one's claims, when rendering an award, the Tribunal did not find [such provisions] to be determinative.
2. FACTS AND PLEADINGS
[Buyer], a South Korean company, brought a claim against [Seller], a Russian company, in connection with delivery of defective goods under a contract for the international sale of goods made by the parties on 1 August 2000. The [Seller] shipped the goods to the addressee indicated by the [Buyer]. Since during the inspection of the goods by the addressee it was established that the goods were defective, the [Buyer] demanded recovery of the damages sustained by him.
The damages included:
- The price of the goods;
- Expenses incurred as a result of manufacturing of finished goods from the defective goods delivered by the [Seller];
- Lost profits;
- Expenses incurred in connection with returning defective goods to the [Seller] and delivery of finished goods manufactured from the defective goods.
The [Buyer] also demanded recovery of arbitration fees paid and legal expenses.
The [Seller] objected to the [Buyer]'s claims. In his opinion, the defectiveness of the goods delivered resulted from the improper use by a third party (addressee). The [Seller] also argued that the [Buyer] failed to inspect the goods and bring claims within the period of time set forth in the contract as well as committed violations when inspecting the quality of the goods. The [Buyer] objected to all of [Seller]'s allegations.
3. THE TRIBUNAL'S REASONING
The Tribunal's award contained the following main points.
3.1 [Competence of the Tribunal]
As to the Tribunal's competence to arbitrate the present dispute, the Tribunal ascertained the following. Part 9 of the contract contains the arbitration clause, according to which, if the parties cannot reach an agreement in connection with disputes and disagreements arising out of the contract or in connection with it, the Tribunal should arbitrate the case.
The Tribunal ascertained that the dispute between the parties concerned contractual relationships that arose out of international commercial transactions. The [Buyer]'s enterprise is located abroad. Thus, this dispute falls within the categories of disputes that, according to the Russian Federation Law "On International Commercial Arbitration" and the Rules of the International Commercial Arbitration Court, may be arbitrated by the Tribunal.
For the above stated reasons and pursuant to Article 16 of the Russian Federation Law "On International Commercial Arbitration" and Article 1 of the Rules of the International Commercial Arbitration Court, the Tribunal ruled that it had jurisdiction to arbitrate the present dispute.
The Tribunal was composed in accordance with the Rules of the International Commercial Arbitration Court. No objections to the arbitrators were made.
3.2 [Applicable law]
In connection with the applicable law, the Tribunal established that the contract did not contain any provision on the applicable law. The parties also failed to determine this later on.
According to Article 28 of the Russian Federation Law "On International Commercial Arbitration", failing any designation by the parties, the Tribunal shall apply the law determined by the conflict of laws rules which it considers. The Tribunal finds that Article 166(1) of the USSR Principles of Civil Laws 1991, which was in force at the time when the contract was made, is such a conflict of laws rule. In the present case, according to this rule of law, a contract for the international sale of goods should be governed by the laws of the State, where the seller's company was incorporated, or is located or has its principal place of business. Under the [present] contract the seller is a public joint stock company incorporated in the Russian Federation. Therefore, the law governing the relationships in controversy is the law of the seller's State, i.e., the Russian Federation.
According to Article 15 of the Russian Federation Constitution, the international treaties of the Russian Federation are a component part of its legal system. The provisions of the international treaties prevail over the rules of Russian civil laws. In accordance with Article 7 of the Russian Federation Civil Code, the relationships of the parties, which arose in connection with the performance of the contract, should be governed by the CISG. The provisions of the CISG (see Article 1(1)(b)) support this conclusion. Issues not settled in the CISG or only partially settled in the CISG should be governed by the Russian Federation Civil Code.
3.3 [Substantive issues: Quality of the goods; Inspection; Notice; Damages]
After reviewing the claims on the merits, the Tribunal ascertains that the dispute between the parties concerns the quality of goods delivered by the [Seller]. Pursuant to Article 35 CISG, the seller must deliver goods which are of the quantity, quality and description required by the contract. However, notwithstanding the "high sensitivity" of the goods delivered, numerous ways of their [possible] use and the multiple physical influences required for switching on, the parties failed to set in the contract the quality characteristics of the goods to be delivered considering their further use. Nor did the parties set forth the procedure of quality control of the said goods and the methods of such control. The contract also does not contain any references to such technical documentation as the standards set by international organizations and the national standards.
3.3.1 The Tribunal believes that, notwithstanding the absence of the quality requirements both in the contract itself and appendixes to it No. 1 and 2 of 3 November 2000 and 5 December 2000 respectively, they were set in fact. Such requirements were stated in the document sent by the [Seller] to the [Buyer] by fax on 21 August 2000, i.e., before the said appendixes specifying the goods to be delivered were signed. The [Buyer] lawfully viewed this document as the [Seller]'s obligation in connection with the quality of goods delivered by him. The representative of the [Seller] confirmed such an interpretation of this document at the hearing held on 14 April 2003. The [Buyer]'s claims were entirely based on the fact that all the results of the tests made by him did not match the quality requirements stated in the said document.
3.3.2 As stated by the representative of the [Seller], 100% of the goods were checked at the factory prior to being shipped. The assembled goods also underwent a 100 hour long test. The results of the tests were to be stated in a special document that, according to article 34 CISG, must be handed over to the buyer with the rest of the documents relating to the goods sold. The [Seller] failed to do so.
Taking into account that the contract did not contain the provisions on the quality control of the goods delivered and that the [Seller] did not provide the said information, the [Buyer] exercised his right to inspect the goods received by referring to the established practice between the parties. Such practice was established when performing the previous contracts with the [Seller] to deliver other models of the goods. The [Buyer] did not object to [such established practice]. In the past the goods were inspected in accordance with the same method as [the one used to inspect] the goods in controversy. The inspection was made taking into consideration the design of the model [in controversy].
Such approach meets the requirements stated in Article 474(2) of the Russian Federation Civil Code which provides that if the procedure of inspection of the quality of the goods is not set forth in the contract, such inspection should be performed in accordance with "trade usages or other customs used to inspect the quality of the goods delivered under a contract of sale."
Besides the [Buyer] sent the [Seller] the terms and [computer] program of the inspection performed by the addressee's company. The [Buyer] also sent the samples of both the goods suitable for use and defective goods. However, the [Seller] failed to object to such a program and to suggest an alternative method of inspection of the quality of the goods delivered by him.
In such circumstances, the Tribunal concludes that the [Seller] in fact accepted the method [of inspection] used by the addressee. [In addition], both in the reply to the complaint and in the oral argument, the [Seller] failed to present evidence that the method used by the [Buyer] in inspecting the goods could not reflect their factual quality. Besides, when attempting to explain the negative results of the tests performed with the increased impedance, the representative of the [Seller] could not explain why the goods tested within the normal range of impedance also became defective.
3.3.3 That the goods delivered under the contract were defective is a fact established by the [Buyer] and admitted by the [Seller]. However, the parties failed to reach an agreement as to the reasons that caused such defects. The Tribunal notes that the [Seller], while formally not admitting his liability, nevertheless agreed to the [Buyer]'s returning of the defective goods. [Such goods] were sent back to the [Seller]. The goods returned by the [Buyer] -- including the goods assembled into the finished products -- are in the custody of the [Seller].
The Tribunal cannot agree with the [Seller]'s argument that the liability for the defective goods is on the [Buyer] who is allegedly trying to shift his liability to a third party to the [Seller].
3.3.4 As to the issue of the terms and procedure of bringing one's claims, the Tribunal notes the following:
a) Originally the parties tried to resolve the issue of the quality of goods without the strict application of the provisions of Part 6 of the contract ("Reclamation");
b) The [Buyer]'s letters of 15 December and 25 December 2000, as well of 15 January and 18 January 2001, represent the claims duly brought within the set period of time;
c) In his lengthy correspondence concerning the quality the [Seller] did not raise a question of violation of the formal procedure of bringing the claims; only in the letter of 12 April 2001, in which he agreed to accept the returned defective goods, the [Seller] requested that a reclamation be sent to him, and the [Buyer] did so.
Therefore, in practice the parties deviated from the strict observance of the provisions set in part 6 of the contract. In such circumstances, taking into consideration the provisions of the CISG allowing the buyer to give notice regarding non-conformity of the goods within a reasonable time after he has discovered it or ought to have discovered it, but at the latest within a period of two years (see Article 39 CISG), the Tribunal does not see any reasons to find the issue of the terms and procedure of bringing the claim to be determinative in this case.
3.4 Since the [Seller] has not made any objections to the computation of the amount sought by the [Buyer], the Tribunal finds that the amount of damages sustained by the [Buyer] is established in the amount stated by the [Buyer] in the claim. At the same time, the materials of the case and oral arguments of the parties allow the Tribunal to point out the following. Both parties failed to take steps necessary to duly perform their obligations under the contract. First of all, they failed to set forth the procedure and methods of inspection of the goods. The [Buyer], as a professional participant in the market of such goods, as a seller with the knowledge of requirements set for finished products, in which the purchased goods are used, did not use due care either when making the contract or when performing it. The [Buyer] did not insist on setting the clear provisions concerning the quality of the purchased goods and the methods of their inspection. When evaluating the actions of the [Buyer], based on Articles 74 and 77 CISG, the Tribunal took into account the provisions of the UNIDROIT Principles of international commercial contracts which were published by the International Center for Financial and Economic Development in 1996, pp. 235-237. [The UNIDROIT Principles] set forth the general rules for international commercial contracts. As provided in the Commentary to Article 7.4.7 of the Principles, its own actions or omission to act may demonstrate the participation of the wronged party in the creation of damage. As any defense, the defense in the form of claiming damages should meet the provisions set forth in the Russian Federation Civil Code. [Such provisions] set forth the proportionality of the property damages to each party's breach of its obligations.
In such circumstances, the Tribunal finds it proper to apply the principle of joint liability as set forth in article 404(1) of the Russian Federation Civil Code. The Tribunal finds it reasonable to place two third of the [Buyer]'s claims on the [Seller]. The rest of the [Buyer]'s claims of damages should be dismissed.
3.5 [Arbitration fees and costs]. Since the [Buyer]'s claims are not fully granted, pursuant to § 6(2) of the Schedule on Arbitration Fees and Costs, the [Seller] should pay such fees and expenses in proportion to the claims granted.
3.6 [Legal expenses]. Pursuant to § 9 of the Schedule on Arbitration Fees and Costs, a winning party may demand that the other party reimburse reasonable expenses incurred in connection with the arbitration and, in particular, legal expenses. However, the [Buyer] did not present evidence of his legal expenses. Therefore, the Tribunal denies such claim.
* This is a translation of data on Proceeding 97/2002, dated 6 June 2003, of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, reported in Rozenberg ed., Arb. Praktika (2003) No. 19 [111-118].
For purposes of this translation, Claimant of South Korea is referred to as [Buyer] and Respondent of the Russian Federation is referred to as [Seller]; the International Commercial Court at the Chamber of Commerce and Industry of the Russian Federation is referred to as [Tribunal].
** Yelena Kalika, JD Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Moscow law firm, and is an Associate at the Pace Institute of International Commercial Law.
*** Yuliya Chernykh graduated from the National University of Kyiv-Mogyla Academy (Ukraine, 2004) and Stockholm University (LL.M. in International Commercial Law, 2005), Intern at UNCTRAL (2005).}}