- Arbitral Award
- International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation
SALES CONTRACT - BETWEEN A RUSSIAN SELLER AND A GERMAN BUYER - GOVERNED BY CISG AND, WITH RESPECT TO ISSUES NOT COVERED BY IT, BY RUSSIAN LAW AS THE LAW OF THE SELLER (ART. 7 CISG IN CONJUNCTION WITH ART. 166 OF THE FUNDAMENTAL PRINCIPLES OF CIVIL LEGISLATION OF 1991)
CONTRACT PROVIDED FOR A PENALTY IN CASE OF DELAYED PAYMENT OF THE PRICE - PENALTY AMOUNTING TO 0.5% OF PRICE FOR EACH DAY OF DELAY - CONSIDERED TO BE MANIFESTLY EXCESSIVE - PENALTY REDUCED BY COURT IN ACCORDANCE WITH CISG, ARTS. 333 AND 394 OF THE RUSSIAN CIVIL CODE AND ART. 7.4.13 OF THE UNIDROIT PRINCIPLES DEFINED AS "A CODE OF THE WELL-ESTABLISHED RULES OF INTERNATIONAL TRADE REFLECTING THE APPROACHES OF THE PRINCIPAL LEGAL SYSTEMS”.
Claimant, a Russian seller, entered into a contract with Defendant, a German buyer. The contract contained a penalty clause according to which Defendant had to pay 0.5% of the price of the goods for each day of delay in payment. When a dispute arose due to late payment by Defendant the parties submitted the dispute to the Arbitral Tribunal which ordered Defendant to pay Claimant 42% of the price of the goods as penalty for the delayed payment. Defendant delayed compliance with the award by paying the sum due only two and a half years after the award was rendered. When Plaintiff brought a new action against Defendant claiming the payment of a penalty for that period of time, Defendant while acknowledging its late payment objected that the new penalty claimed by Claimant was manifestly excessive and should therefore be reduced.
The Arbitral Tribunal held that the contract was governed by CISG and that in accordance with Art. 7(2) CISG issues not settled by the Convention shall be governed by the law of the seller’s State, i.e. Russian law.
As to the merits of the case the Arbitral Tribunal, considering that the penalty claimed by Claimant amounted to no less than 487% of the contract price, found that such amount was manifestly excessive and decided to reduce it taking into account among other things the contract price for which the delay of payment occurred, the losses Claimant sustained as a consequence thereof and the fact that Defendant was willing to pay a penalty though less than what Claimant had claimed. In so doing the Arbitral Tribunal invoked the general principle of “proportionality and conformability with the negative consequences of the breach of the obligations to the sum of the penalty claimed” which, as pointed out by the Tribunal, is at the basis of CISG as well as of Arts. 333 and 394 of the Russian Civil Code, and is also expressed in Art. 7.4.13 of the UNIDROIT Principles which the Tribunal defined as “a code of the well-established rules of international trade reflecting the approaches of the principal legal systems”.
1. SUMMARY OF RULING
1.1 The dispute between Russian and German private entrepreneurs relates to the untimely execution of an award of the MKAC (hereinafter referred to as the Tribunal). The award, which arose from a dispute between the parties having to do with an international sales contract, was resolved on the basis of the arbitration clause contained in the contract.
1.2 In the absence of the specification in the contract of the law applicable to the relations of the parties, the Tribunal held that the dispute is governed by the Vienna Convention of 1980 to which Russia and Germany are Contracting States. Russian civil law is considered to be applicable as a subsidiary statute, by virtue of art. 166 of the Basics of Civil Legislation of 1991.
1.3 The [Seller]'s claim for the recovery of the contractual penalty for the payment delay for the period [from 21 September 1999] through 1 March 2002, the date of the factual execution of the earlier award of the Tribunal, is recognized as well-founded. However, upon the petition of the [Buyer], the amount of the contractual penalty is reduced on the basis of art. 333 of the Civil Code of the Russian Federation in view of its obvious disproportion to the committed breach.
1.4 Having essentially admitted that the [Seller]'s claim for the recovery of losses incurred was due to the [Buyer]'s fault -- it was due to the [Buyer]'s fault that [Seller] had to pay a fine for the untimely receipt of currency, based on the decision of the tax authority -- the Tribunal nevertheless rejected this claim on the grounds of art. 394 of the Civil Code of the Russian Federation, taking into consideration that the amount of the losses is less than the sum of the contractual penalty.
1.5 During the distribution of the expenses on the payment of the arbitration fee between the parties it was taken into account that the [Seller] claimed recovery of the penalty in full conformity with conditions of the contract concluded by the parties and reduction of the penalty amount was carried out due to the causes for which the [Seller] cannot be liable. Consequently, the [Buyer] was obligated to pay the expenses on the arbitration fee equivalent to the amount of the penalty claimed by the [Seller].
2. FACTS AND PLEADINGS
The claim was lodged by the [Seller], a Russian private entrepreneur (which carries out its activities without establishment of a legal entity), against the [Buyer], a German private entrepreneur in relation to non-payment of the penalty and reimbursement of losses caused due to the untimely execution of the Tribunal's award handed down on the dispute between the same parties arising out from the same international sale contract concluded by the parties on 22 March 1999.
In addition to the penalty, the [Seller] sought:
- Repayment of the expenses for its payment for legal services; and
- Recovery of the expenses for the arbitration fee.
[Buyer] objected to the satisfaction of the [Seller]'s claims. [Buyer] alleged that delay in the execution of the Tribunal's award occurred owing to reasons dependent on the [Seller]. In the course of the consideration of the dispute, the [Buyer]'s representatives also raised the question of obvious incommensurability of the [Seller]'s claim for the recovery of the penalty and the consequences of the breach of contract and lodged a petition for the reduction of the amount of the penalty on the grounds of art. 333 of the Civil Code of the Russian Federation.
3. TRIBUNAL'S REASONING
The award of the Tribunal contained the following basic points.
3.1 The competence of the Tribunal
Para. 9 of the contract (in German) specifies that all disputes and disagreements which may arise from the contract shall be adjudicated in the court at the Russian Chamber of Trade and Commerce. Although the Russian copy of the contract provides another procedure for the settlement of disputes, the Tribunal states that there is no other center at the Chamber of Trade and Commerce of the Russian Federation for the adjudication of disputes relating to contractual relations that arise during the conduct of foreign economic activities, if the place of business of one of the parties is located abroad.
Acknowledgement of the Tribunal's competence to adjudicate the dispute by the parties is confirmed by the fact that on 30 June 2000, the parties participated in the Tribunal's hearing of Case # 334/1999 on the dispute arising from the same contract. At the hearings of 30 June 2000, the [Buyer] withdrew its objections to the Tribunal's competence and subsequently executed the Tribunal's award. In the present case, the dispute is related to the consequences of the untimely fulfillment of the abovementioned award of the Tribunal. At the hearings of the present case on 4 April 2003, the representatives of the parties as well as the [Seller] did not contest the Tribunal's competence and the arguments presented related solely to the consequences originating due to the untimely fulfillment of the Tribunal's award with regard to Case # 334/1999.
The Tribunal concluded that there was a written agreement between the [Seller] and [Buyer] for the submission of the dispute to the Tribunal's adjudication. The Tribunal's competence was admitted in Case # 334/1999 as well as in the present case in which, as stated above, the parties did not challenge the Tribunal's competence regardless of the differences in the wordings of the arbitration clauses. The dispute emerged from the civil relationships established between the parties during the conduct of foreign economic ties. The place of business of one of the parties is located abroad.
These circumstances conform to the provisions of art. 7 of the Law of the Russian Federation "On International Commercial Arbitration" and para. 1 of the Rules of the Tribunal with regard to the category of disputes which can be submitted for adjudication by the Tribunal. As it follows from art. 7 of this Law, the right to submit a claim to the Tribunal is enjoyed by private entrepreneurs, carrying out their activities without the establishment of legal entities which are equal to undertakings, on grounds of art. 23(3) of the Civil Code of Russian Federation with regard to legal capacity.
The Tribunal -- on the basis of true certificate of state registration of the Russian private entrepreneur carrying out its activity without establishment of a legal entity as well as the certificate of 26 February 1999 of registration with the tax authority which examined its entrepreneurial legal capacity -- recognized [Seller]'s right to address the Tribunal with a claim.
As to the legal standing of the [Buyer], the Tribunal took into consideration [Buyer]'s information from its letter of 31 January 2002 about termination of the private entrepreneurship activity on 2 July 2001 and exclusion of the [Buyer] from the existing registry. The Tribunal took into account that, as of the moment of the conclusion of the contract which gave rise to the obligations under the contract and at the time of the handing down of the award in Case 334/1999 on 30 June 2000, the [Buyer] possessed entrepreneur status. After its exclusion from the respective registry, the [Buyer] executed the mentioned award of the Tribunal. Neither in its written statement of defense nor at the Tribunal's session on 4 April 2003, did the [Buyer] or its representatives contest the Tribunal's competence for the adjudication of the case decided earlier or to decide the case concerning the untimely execution of the award arising from the same contract. Consequently, the Tribunal admitted the [Buyer]'s right to participate in the case to be adjudicated by the Tribunal.
On the basis of the above and following art. 7 of the Law of the Russian Federation "On International Commercial Arbitration" and para. 2 of the Rules of the Tribunal, the latter acknowledged its competence to adjudicate the present dispute.
3.2 Applicable law
Finding that the contract does not specify the applicable law, the Tribunal stated that:
In view of the fact that the Russian Federation as well as the Federal Republic of Germany are Contracting States to the Vienna Convention of 1980, the Tribunal concluded on the basis of art. 1(1)(a) of the Vienna Convention that provisions of the Convention shall apply to the adjudication of the present dispute. On the basis of art. 199 of the Basics of Civil Legislation and in accordance with art. 7, issues not settled by the Vienna Convention shall be governed by the law of the seller's State, i.e., Russian law.
The [Seller] in its action claim and the [Buyer] in its statement of defense and at the Tribunal's session of 4 April 2003 (both parties) referred to the provisions of the Vienna Convention and the Civil Code of the Russian Federation.
3.3 Consideration of the case on the merits
In its principal claim, the [Seller] sought to recover from the [Buyer] a penalty in Deutsche Marks equal to the sum claimed by the [Seller] in Euros. The sanction on which the [Seller] relies was foreseen by the parties in para. 7 of the contract: it constitutes the penalty for the delay of the payment of the delivered goods. The amount of the penalty is 0.5% of the cost of the goods for each day of delay.
As follows from the award of 30 June 2002 in Case # 334/1999, the Tribunal obliged the [Buyer] to pay to the [Seller] (in addition to the cost of the non-paid goods and other expenses of the [Seller]) the penalty for the delay of the payment for the goods for the period of 29 June till 29 September of 1999. The term for the execution of the Tribunal's award was not established. Under such circumstances, according to para. 44 of the Rules of the Tribunal, the award shall be subject to immediate execution. According to the notification of the [Seller], the [Buyer] transferred the equivalent of the specified sum in Euros indicated by the [Seller]'s lawyer only on 1 March 2002. Therefore the [Seller], on the basis of para. 7 of the contract, accrued the right to the penalty for the period from 21 September to 1 March 2002. However, in [Buyer]'s opinion it carried out the payment on 7 November 2001 but its payment order on the remittance of the monetary funds to the [Seller]'s account was not executed by the [Buyer]'s bank in view of the impreciseness of the [Seller]'s bank details.
On the basis of the materials presented at the Tribunal's session on 4 April 2003 as well as documents available from the materials of the case, the Tribunal found that [Seller] had not changed the number of its account and the remittance of the monetary funds was not carried out because the [Buyer] did not specify in its payment order some of the details provided in para. 4 of the contract. Taking into consideration that the payment order on the transfer of the respective sum with regard to the abovementioned case that was given by the [Buyer] to its bank on 7 November 2001 was not executed by the bank because of reasons dependent on the [Buyer], the Tribunal concluded that the delay of the execution of the Tribunal's award in Case #334/1999 occurred due to the [Buyer]'s fault. Taking into consideration the facts of the case and explanations of the representatives of the parties, the Tribunal concluded that the obligation for the payment of the respective sums was carried out by the [Buyer] not earlier than 28 February 2002. Evidence confirming [Buyer]'s attempts to clarify the payment details of the [Seller] were not presented.
The [Seller] specified in its action and confirmed at the Tribunal's session that it regards 1 March 2002 as the date for the fulfillment of the monetary obligation. Thus, the delay constituted the period starting from 21 September 1999 till 1 March 2002 or 891 days and [Buyer] is obliged to pay the penalty in the amount claimed to be recovered.
At its session on 4 April 2003, the Tribunal considered the petition lodged by the [Buyer]'s representatives, on the basis of art. 333 of the Civil Code, for reduction of the amount of the penalty claimed by the [Seller] and found the following.
The [Buyer], on the grounds of the Tribunal's award in Case # 334/1999, paid the penalty in the amount of 42% of the cost of the goods with regard to the payment delay for which the penalty was accrued. The penalty paid in the present claim taking into consideration the penalty paid earlier will constitute 487% of the cost of the goods with regard to the payment for which the delay occurred.
Taking into account that a penalty constitutes a guarantee of the fulfillment of the obligation for the compensation of the creditor's losses incurred due to the breach of its obligations by the debtor, in the Tribunal's opinion, the amount of the penalty claimed by the [Seller] is clearly not in proportion to the consequences of the breach of the obligation with regard to the payment and shall be subject to reduction on grounds of art. 333 of the Civil Code of the Russian Federation. As to the amount of the reduction of the penalty, the Tribunal took into consideration the cost of the property in relation to payment for which the delay occurred, losses incurred by the [Seller] in this respect and other property and non-property rights which the [Seller] was entitled to expect. While determining the amount of the penalty, the [Buyer]'s consent to the payment to the [Seller] of the penalty in the claimed amount was taken into consideration.
As any other means of protection, this kind of the guarantee of the fulfillment of an obligation shall correspond to the criteria of proportionality and conformability with the negative consequences of the breach of the obligations to the sum of the penalty claimed by the [Seller]. These criteria are set forth in the Vienna Convention of 1980 and the Civil Code of the Russian Federation. The same approach is fixed in para. 7.4.13 of the UNIDROIT Principles of International Commercial Contracts which constitute a code of the well-established rules of international trade reflecting the approaches of principal legal systems to the legal settlement of relations arising out from the mentioned agreements. Based on the above, the Tribunal finds it fair and well-founded to satisfy the [Seller]'s claims for the recovery of the penalty in the amount specified by the [Buyer].
3.4 Having considered the [Seller]'s claim for the recovery of losses incurred due to the payment of the fines on the decision of the customs authority for untimely receipt of the currency earnings from the export of goods, the Tribunal found that in its legal nature this sum constitutes losses incurred by the [Seller] in the context of art. 74 of the Vienna Convention.
Issues with regard to the penalty and correlation of the losses and the penalty are not settled by the Vienna Convention. Para. 61(2) of the Vienna Convention entitles the parties to negotiate other means of guaranteeing the fulfillment of the obligations of the buyer under the contract. Issues not settled by the Convention in full or partly shall be governed by the provisions of the Civil Code of the Russian Federation. Taking into consideration that art. 394 of the Civil Code of the Russian Federation foresees the offset penalty and the parties did not agree on any other, as well as the fact that the penalty which is to be paid on the basis of the present award considerably exceeds the sum of the losses, the Tribunal concludes that it is not possible to satisfy this claim of the [Seller] for the recovery of the mentioned losses and refuses to satisfy this claim.
3.5 As to the claims for the recovery from the [Buyer] of the expenses on the payment of the arbitration fee incurred by the [Seller], the Tribunal held that while lodging the action the [Seller] overpaid for the arbitration fee. The sum of the overpayment is subject to repayment according to para. 1.2 of the Regulation on Arbitration Fees and Expenses.
According to para. 6(2) of the Regulation on Arbitration Fees and Expenses, the arbitration fee shall be imposed on the [Buyer] in proportion to the amount of the satisfied claims. However, the Tribunal took into account that [Seller] had lodged the claim for the recovery of the penalty in complete correspondence with the contract concluded by the parties and that its reduction by the Tribunal was carried out in view of the reasons for which the [Seller] is not responsible. Under such circumstances, following para. 10 of the Regulation, the Tribunal imposed on the [Buyer] sum of the arbitration fee equivalent to the amount of the claimed recovery of the penalty.
3.6 Having considered [Seller]'s claim for the recovery from the [Buyer] of the expenses on the payment for the services of the legal representatives, the Tribunal following para. 9 of the Regulation, states that this claim is well-founded, is confirmed as to its amount and shall be subject to satisfaction.
Translation by Gayane Nuridzhanyan.}}