Source: http://cisgw3.law.pace.edu/cases/971225r1.html
Timestamp: 2019-04-22 18:28:06+00:00

Document:
1.1 The review of the arbitration clause of the contract, which is somewhat unclear, brought the Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Trade (hereinafter Tribunal) to the conclusion that it has competence to arbitrate this dispute.
1.2 Russian law, as the law of country of the seller, was applied to the dispute between the Russian company and the British company by virtue of Art. 166(1) of the Fundamentals of Civil Law 1991. According to Art. 1(1)(b) CISG, the provisions of this Convention are found applicable to the relations of parties.
The Tribunal found Russian law applicable to the Agreement on order of settlement of payments (with elements of novation) (the Agreement), as the law of the country, where the party which has most importance for performance of the contract is established or has its main place of business (Art. 166(5) of the Fundamentals of Civil Law 1991).
1.3 Since the contract clearly defines the functions of the Russian companies, which collectively were on the side of seller, they cannot be considered as a cumulative seller; therefore they cannot be brought as joint respondents.
1.4 The review of the Agreement, signed by the parties, brought the Tribunal to the conclusion that the parties had agreed to the application of a penalty on top of the amount of [possible] losses.
1.5 The contract has two bases for recovery of the penalty; attention should be given to the basis which accords with the relevant obligation.
1.6 By virtue of Art. 174 of the Russian Federation Civil Code, there must be an action filed by a person on which the limitations are put in order to arbitrate the issue of nullity of a contract signed by a person alleged to have exceeded the limitations put on him.
The action was brought by Claimant [Buyer], a British company, against Respondents, two Russian companies, in connection with partial delivery of goods for which the price was paid in advance under a contract concluded in October 1995.
The First Respondent was nominated in the contract as aShipper, the Second Respondent as Seller.
Since the obligations to deliver the goods were not performed, the [Buyer] and the Respondents [Shipper and Seller] signed an Agreement on 5 July 1996, according to which the [Shipper] assumed the obligation to pay back to the [Buyer] the prepaid sum and to pay the penalty in the amount stipulated in the Agreement. The Respondents also assumed an obligation to resolve the claims of the owner of a vessel to compensate for losses caused by demurrage. In case of non-performance of the obligations stipulated in the Agreement, the First Respondent [Shipper] assumed the obligation to pay to the [Buyer] the whole sum of debt including the penalty prescribed in the contract, as well as compensate the losses suffered by a creditor.
Since the First Respondent [Shipper] failed to fulfill obligations under the Agreement the [Buyer] asked from him: recovery of the prepaid sum; recovery of the penalty for delay of delivery of the goods; compensation of losses of the lost profit and compensation of arbitration fees. Besides this, the [Buyer] asked recovery of annual interest from the Second Respondent [Seller] to whom he made a prepayment. The Claimant [Buyer] calculated the interest also on the sum of penalty.
During the hearing the [Buyer] amended his claims by increasing the sum of the penalty, calculating it on the date of hearing and by decreasing the amount of annual interest to be recovered from the Second Respondent [Seller].
Claimant [Buyer] alleges that both Respondents should be considered joint respondents under the signed contract, without separation of obligations between them.
The First Respondent [Shipper] objected to the claim alleging that the contract in dispute was concluded between the Claimant [Buyer] and the Second Respondent [Seller] and that the name of First Respondent in the preamble to the contract as a Shipper is only an informative note and does not put any obligations of seller on him. This point of view is confirmed, by First Respondent's belief, also by the circumstance that the prepayment was made by wiring money to the account of the Second Respondent [Seller], but not to the account of First Respondent [Shipper]. Besides this, the First Respondent [Shipper] thought that the Agreement of 5 July 1996 was void, since it was not approved by the Board of Directors, because the sum of the transaction exceeds 5 per cent of the annual turnover of the company which is a violation of its by-laws.
During the hearing on 24 December 1997, the Second Respondent [Seller] submitted his explanations to the case where he believed that the First Respondent [Shipper] is responsible for the delay of delivery, which is confirmed by the Agreement of 5 July 1996, according to which responsibility for non-delivery is put on the First Respondent.
During the discussion of the issue of the validity of the Agreement, the First Respondent [Shipper] agreed to the view of Claimant [Buyer that this issue should be resolved on the basis of Art. 174 of the Russian Federation Civil Code.
3.1 Clause 13 of the contract of 6 October 1995 provides for resolving all disputes arising from the contract by the "Foreign Trade Arbitration Court" at the Russian Federation Chamber of Commerce and Trade in Moscow.
The review of this clause in Russian and in English brought the Tribunal to the conclusion that the parties had in their mind to resolve future disputes at the Tribunal. The Tribunal has subject jurisdiction to try the present dispute (para. 1(2) of the Rules of Tribunal). The Agreement of 5 July 1996 in the reference form kept effective the arbitration clause of the contract in relations between the Claimant [Buyer] and both Respondents.
Accordingly, the Tribunal considering the absence of any objections to the Tribunal's competence, concluded that it has the necessary competence to arbitrate the present dispute.
3.2 To determine the law applicable to issues not covered by the contract and the Agreement of 5 July 1996, the Tribunal applied the rules of conflict of laws of Fundamentals of Civil Law 1991, which were effective in Russia at the time of signing of the contract. By virtue of Article 166 of these Fundamentals, the rights and obligations under the international sales contracts are determined by the law of the country where the party - the seller in a sales contract - is established or has its main place of business.
Since, according to the abovesaid, Russian law is applicable to the contract and the Russian Federation is a Contracting State to the CISG as of 1 September 1991, the rules of this Convention should be applied to this situation in virtue of Art. 1(1)(b) CISG.
The conclusion is made relating to the Agreement of 5 July 1996 that Russian civil law is applicable on the basis of Art. 166(5) of the Fundamentals of Civil Law 1991, which refer to the law of the country where the party which has most importance for performance of the contract is established or has its main place of business.
3.3 The contract was signed by three legal entities: the Claimant as Buyer, the Second Respondent as Seller, and the First Respondent as Shipper, which is seen from the preamble and clause 14, and is confirmed by the signatures of the parties. Therefore, both Respondents cannot be considered as a cumulative seller to the existing contract. Accordingly, the Tribunal cannot agree with the allegation of the Claimant [Buyer] that the Respondents in this disputes are joint respondents.
The case materials confirm that the Second Respondent has received the prepayment on 18 December 1995.
3.4 The Agreement signed between the Claimant [Buyer] and both Respondents on 5 July 1996, which is a component part of the contract of 6 October 1995, terminated the contractual obligations concerning delivery of the goods and determined the mutual relations of the parties in connection with termination of obligation to deliver the goods.
On the basis of the mentioned Agreement, the First Respondent [Shipper], in particular, took an obligation to wire to the Claimant [Buyer] the sum of prepayment before 31 July 1996, but this obligation has not been fulfilled at the time of hearing of the case.
According to Art. 309 of the Russian Federation Civil Code, the Tribunal found that the prepaid sum should be recovered from the First Respondent [Shipper].
3.5 According to the clause 3.2 of the Agreement, non-performance of the obligation to return the sum of the principal debt, as well as to pay the penalty for delay of delivery of the goods calculated on 16 May 1996 put on the First Respondent [Shipper] the obligation to pay the whole sum of the debt including the penalty specified in clause 9 of the contract, calculated on the day of settlement of the debt, plus the losses suffered by the Claimant [Buyer].
Having analyzed the provision of the Agreement on the correspondence of the penalty to the losses in cases of non-return of the prepayment, the Tribunal came to conclusion about the punitive nature of the penalty, that it is allowed by virtue of Art. 394 of the Russian Federation Civil Code. The Tribunal paid attention to the fact that clause 9 of the contract, which refers to the Agreement, provides for two possible penalties: first - in case of delay of delivery, in the amount of 5 percent per month of the sum of the prepayment made; second - in case of delay of payment, in the amount 0.1 percent per week of the sum of cost of the lot of goods.
According to the letter of the Claimant [Buyer] of 24 November 1997 concerning the amendments to the claims, the penalty previously asked for was increased in connection with its calculation from 20 February 1996 till 24 November 1997 (for 21 days of delay). Having heard this claim, the Tribunal came to conclusion that the Claimant [Buyer] mistakenly believes that it is necessary to calculate on the basis of the provision of the contract on the penalty for the delay of delivery. Since by virtue of the Agreement, the First Respondent [Shipper] assumed an obligation to return the prepaid sum, the Tribunal found it reasonable to found its decision on the basis of the contractual provision on the penalty for delay of payment. The Tribunal it found reasonable to grant the [Buyer]'s claim to recover the penalty for delay of payment during 21 months at the rate of penalty prescribed in the contract for such a breach.
3.6 The Respondents did not object to the claim of the Claimant [Buyer] regarding lost profit. Following from the provisions of the Agreement of 5 July 1996, the Tribunal believes that this claim should be granted and the requested sum should be recovered from the First Respondent [Shipper].
3.7 The Claimant [Buyer] asked to recover from the Second Respondent [Seller] annual interest calculated on the prepaid sum at the rate of 5.44 percent from 18 December 1995 till 5 July 1996 with reference to Art. 84 CISG and Art. 395 of the Russian Federation Civil Code, which provides for payment of interest in case of failure to perform the financial obligation in the amount defined as the credit rate at the place of creditor banking on the date of performance or (by the Tribunal's discretion) on the day of filing of the claim, or on the day of rendering of the judgment.
The Claimant [Buyer] presented to the Tribunal the report of the bank dated 19 February 1997 to support a rate of interest at the rate for short-term banking credits at the place of creditor (Claimant).
Deciding the issue about the possibility to recover the annual interest from the Second Respondent - seller to the contract, the Tribunal found the Claimant [Buyer]'s reference to Art. 84 CISG incorrect, since the obligation to return the prepayment was put on the First Respondent [Shipper] by virtue of the Agreement. It follows from the amended pleadings that the Claimant [Buyer] dismissed his claims regarding recovery of the annual interest from the First Respondent [Shipper]; the Tribunal therefore did not find a basis to grant the [Buyer]'s claim to recover interest from the First Respondent [Shipper], as well as from Second Respondent [Seller].
3.8	The Tribunal found the allegation of the First Respondent [Shipper] on the nullity of the Agreement of 5 July 1996 (since it was signed by the CEO without approval by the Board of Directors) unreasonable because, on the basis of Art. 174 of the Russian Civil Code, the Agreement might only be found void by the claim of a person, in whose interests the limitations were set. The First Respondent [shipper] agreed to the application of this Article of the Civil Code, and did not filed an action aimed at declaring the Agreement void.
* This is a translation of data on Proceeding 53/1997, dated 25 December 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. 77 [264-268]. All translations should be verified by cross-checking against the original text.
** Mykhaylo Danylko holds a Master of Laws (European Studies Program) from the Law School of International Business Science and Technology University, Kiev, Ukraine (July 2000); a Master of Management in Business of the Business School of International Science and Technology University, Kiev, Ukraine (June 2002); and has received his LL.M. in International and Comparative Law at the Pace University School of Law.

References: Art. 166
 Art. 1
 Art. 174
 Art. 174
 Art. 1
 Art. 166
 Art. 309
 Art. 394
 Art. 84
 Art. 395
 Art. 84
 Art. 174