Tribunal of International Commercial Arbitration of the Ukrainian Chamber Commerce and Trade

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1 Tribunal of International Commercial Arbitration of the Ukrainian Chamber Commerce and Trade - Particulars of the case - Position of the parties - Opinion of the Tribunal - Award PARTICULARS OF THE CASE Award of 19 October 2004 Translation [*] by Gayane Nuridzhanyan [**] The International Commercial Arbitral Tribunal at the Ukrainian Chamber of Commerce and Trade (hereinafter Tribunal) having considered: - The action brought by Claimant [Seller], a Ukrainian public corporation, against Respondent [Buyer], a German firm, for the recovery of 28, including 25, of the indebtedness and 2, as a penalty for the delay in payment; and - The counterclaim brought by the [Buyer] against the [Seller] for the cancellation of Contract #2/90-M of 20 September 2002 and recovery of 28, of the losses, rules as follows: The legal basis for the adjudication of the dispute by the Tribunal is Section 10 of Contract # 2 concluded by the parties on 20 September According to the Contract: "All dispute and disagreements which may arise out of the present contract or in connection with it shall be settled by the negotiations if possible. In case the parties are not able to reach an agreement within 30 days after the day when the first negotiations were held the case shall be submitted to the ICA Tribunal at the Ukrainian Chamber of Commerce and Trade, city of Kyiv, for the adjudication according to its Rules and substantive law of Ukraine. The language of the arbitration proceedings shall be Russian." According to Contract # 2 of 20 September 2002, the [Seller] undertook to produce and to deliver by motor transport on terms CPT - storehouse of the consignee (German territory) according to INCOTERMS 2000, the goods foreseen in the specifications to the Contract and the [Buyer] undertook to accept and to pay for the delivered goods. On 25 November and 13 December 2003, pursuant to the obligations under Contract # 2, the [Seller] dispatched for the [Buyer] contractual goods in the sum of 25, in accordance with Specifications # 18 and # 20 of the Contract. The [Buyer] has accepted the goods. However, the [Buyer] has not paid for them neither within the term provided by the Contract nor later.

2 In connection with non-payment for the delivered goods, the [Seller] lodged an action with the Tribunal on 13 February The proceedings in the case were commenced by virtue of the Resolution of the Tribunal's President of 23 February On 24 May 2004, the Tribunal received a statement of defense in which the [Buyer] asked the Tribunal to dismiss in full the [Seller]'s claim for the recovery of the penalty and to dismiss partly [Seller]'s claim for the recovery of the main sum in arrears, alleging that the main sum in arrears should be subject to reduction by 9, The [Buyer]'s statement of defense alleges that hawses delivered by the [Seller] in the amount of fifteen items turned out to be defective and unusable: in particular, the surface was damaged by the ropes and it had bulges and hollows which it was not supposed to have. - This is confirmed, in [Buyer]'s opinion, by the claims for replacement sent to it by the German shipbuilding company to whom it resold the hawses on 8 December 2003 and 12 October 2003 and by the claim for replacement (notice of defect) of the hawses in the amount of fifteen items sent to the [Seller] by the [Buyer] on 23 December In its statement of defense, the [Buyer] alleged that its expenses related to the delivery of the low-quality goods amounted to 9, (return transportation by the purchasers of defective hawses, payment of the customs duty, expenses on the conducting of expertise, etc.). Therefore, the [Buyer], referring to para. 9.4 of Contract # 2 as well as art. 50 of the UN Convention on Contracts for the International Sale of Goods and art. 678 of the Civil Code of Ukraine, demanded proportional reduction of the price of the goods delivered under Specifications # 18 and # 20 to the Contract by 9, Moreover, in [Buyer]'s opinion the penalty should not be recovered from the [Buyer] due to the absence of its fault since the [Seller] supplied defective goods. In addition to the statement of defense, the [Buyer] has submitted to the Tribunal a counterclaim on [Seller]'s cancellation of Contract # 2 of 20 September 2002 and seeking recovery from the [Seller] of 28, of the losses caused by the improper fulfilment by the [Seller] of its obligations under the Contract. The [Buyer] has presented the following support for its counterclaim: - The [Seller] notified the [Buyer] by letter of 14 November 2003 that, in connection with the reforming of the organizational structure of the factory, the latter would not produce casts and thus it considered the Contract avoided starting from 1 January 2004; - According to the Contract, the [Seller] was to deliver to the [Buyer] 300 tons of the goods; however, only 198 tons were in fact delivered; - By its letter of 2 February 2004, the [Buyer] informed the [Seller] that it did not consider the Contract avoided and demanded that the [Seller] continue deliveries under the Contract;

3 - In view of the [Seller]'s discontinuance of the deliveries under Contract # 2, the [Buyer] had to buy fifteen items of hawses from similar producers in Poland, however, at much higher price which caused additional expenses. The [Buyer]'s counterclaims contain a calculation of the expenses borne by the [Buyer] in the amount of 28, The expenses included: - 22, for the losses related to the difference between the price provided in the Contract and the price actually paid by the [Buyer] to the alternative suppliers in view of the necessity of the alternative purchases, including transport expenses; in expenses for the transportation of analogue devices for the hawses of other configurations from the other foundry; in expenses for the repair of the analogous devices for the hawses of other configurations; in expenses for the storage of the analogous devices in Berlin since December After the composition of the Tribunal was set, hearings were appointed on 19 July At the hearing, the [Seller]'s representative presented its reply to the [Buyer]'s statement of defense and [Seller]'s statement of defense to the [Buyer]'s counterclaim. In its reply to the [Buyer]'s statement of defense, the [Seller] alleges that: - The arguments of the [Buyer] presented in the [Buyer]'s statement of defense are unfounded since the subject of the dispute is non-payment for the goods delivered according to Specifications #18 and #20 of the Contract whereas the objections of the [Buyer] regarding the quality of the fifteen items of hawses delivered by the [Seller] have to do with Specification #16 of the Contract. - Moreover, the [Seller] believes that the [Buyer] has violated the conditions of the Contract by not sending for the [Seller]'s representatives during the acceptance of the goods. Therefore the fact of the delivery of defective goods is not duly confirmed. The certificate of independent expert examination is absent as well. In its statement of defense to the [Buyer]'s counterclaim, the [Seller] suggested that there were no grounds for satisfaction of the counterclaim since according to para. 1.1 of Contract # 2, the [Seller] undertook to produce and to deliver goods according to the specifications to the Contract and the [Buyer] undertook to accept and to pay for the goods on terms stipulated by the Contract. Hence, description (range), delivery terms of the goods as well as requirements as to its quality are determined by the parties in specifications. Since the parties have not signed the specification to the Contract for the delivery in 2004, they have not reached agreement on the essential conditions of that contract. Thus, the obligation to make deliveries in 2004 did not arise.

4 Moreover, at the Tribunal's hearings the [Seller] stated that it did not object to the avoidance of Contract # 2 and explained that the [Seller] has completely fulfilled its obligations for the delivery of the goods in compliance with the signed specification to Contract # 2. The [Buyer]'s representatives did not challenge and did not disprove documentarily the abovementioned fact. In their turn, [Buyer]'s representatives submitted to the Tribunal additional explanations with regard to the merits of the counterclaims which specified that necessary goods were alternatively purchases from two Polish suppliers. OPINION OF THE ARBITRAL TRIBUNAL Taking into consideration that: 1. On 20 September 2002, the parties concluded Contract # 2 according to which the [Seller] undertook to deliver and the [Buyer] undertook to accept and pay on terms stipulated in the Contract the iron castings and steel castings in compliance with the specifications. 2. According to Specifications # 18 of 22 August 2003 to Contract # 2, iron and steel castings (hawses and rollers) in the total sum of 61, were to be dispatched during the period from 12 September till 27 December Specification # 20 of 4 December 2003 to Contract # 2 foresaw delivery of the 1 item of iron casting (roller NG20) at a cost of Pursuant to the obligations under the Contract, the [Seller] dispatched for the [Buyer] in accordance with Specifications # 18 and # 20: - On 25 November 2003, four items of hawses A20 in the sum of 1,165.80; fortyeight items of hawses A12 in the amount of 9,081.60; and sixteen items of rollers NG12 in the amount of 2, The total cost of the goods delivered in this consignment amounted to 12,609; - On 13 December 2003, sixteen items of rollers NG12 in the amount of 2,361.60; one hawse A20 at the price of ; and one roller NG20 at the price of 205. The total cost of the goods delivered in this consignment amounted to 2,858.05; - On 13 December 2003, twenty-four items of hawses A20 in the sum of 6, and sixteen hawses A12 in the sum of 3, The total cost of the goods delivered in this consignment amounted to 10,022. The total amount of the goods dispatched on 25 November and 13 December 2003 under the abovementioned Specifications to Contract # 2 amounted to 25, The fact of the delivery of these goods is confirmed by the cargo customs declarations, bills of lading and accounts which have notes of Ukrainian customs. 4. According to para. 5.1 of Contract # 2, the [Buyer] undertook to pay for the delivered goods in euros by direct bank transfer to the [Seller]'s account on the basis of the bill (invoice) within 40 days from the dispatch date. According to para. 3.5 of the Contract, the dispatch date is to be considered the date of the registration of the bill of lading.

5 Hence, the payment for the goods dispatched on 25 November 2003 was to be carried out in the amount of 12,609 not later than 4 January 2004 and, for the goods dispatched on 13 December 2003, was to be carried out not later than 22 January 2004 in the amount of 12, The [Buyer] accepted the delivered goods, however, it did not pay the [Seller] for the goods in violation of its obligations under the Contract. 6. According to the [Buyer], the non-payment of 25, for the goods is permissible, based on the fact that fifteen hawses C20 delivered to the [Buyer] turned out to be defective. Therefore, in [Buyer]'s opinion, it was entitled to deduct from the cost of that consignment the expenses borne in the amount of 9, In support thereof, the [Buyer]'s reference to art. 50 of the UN Convention on Contract for International Sale of Goods and art. 678 of the Civil Code of Ukraine mistakenly equates a buyer's right to a reduction of price with a buyer's rights to compensation of losses related to the removal of defects in the goods. [Buyer] seeks to justify its non-payment of the residual cost of the delivered goods in the above manner 7. The Tribunal does not agree with the arguments presented by the [Buyer]. - The subject of the [Seller]'s action claims is non-payment for the goods dispatched by the [Seller] on 25 November and 13 December 2003 under Specifications # 18 and # 20 to Contract # 2; - Specifications # 18 and # 20 to the Contract do not foresee delivery of the hawses C20 which the [Buyer] alleges to be of low quality. According to the [Seller]'s explanations, hawses C20 were delivered under Specification # 16 and were paid for by the [Buyer] which testifies that [Buyer]'s allegations with regard to the compensation of the incurred losses do not relate to the subject of the dispute; - The [Buyer] has not presented evidences of the low quality of the goods delivered under Specifications # 18 and # 20 to the Contract, payment for which constitutes the subject of the present dispute; - In fact, the [Buyer]'s statement presents a claim, not for the reduction of the price of the delivered goods which could have been brought for the offsetting of the analogous claim, but is a claim for the compensation of expenses incurred in connection with the delivery of allegedly defective goods under Specification # 16 to the Contract which is not subject of the present dispute. In order for this claim to be considered, it should have been registered according to the procedure established in para of the Rules of the Tribunal. This was not done by the [Buyer]. 8. Under such conditions, the [Seller]'s claim for the recovery from the [Buyer] of the indebtedness in the amount of 25, is well-founded and confirmed documentarily and therefore is subject to satisfaction. 9. The [Seller] as well claims recovery from the [Buyer] of penalties in the amount of 2, including:

6 - Penalties charged for the period from 4 January till 16 February 2004 (44 days) in the amount of 1, based on the main sum in arrears of 12,609; - Penalties charged for the period from 23 January till 16 February 2004 (25 days) in the sum of 966 based on the main sum in arrears of 12,609. [Seller]'s claim is based on para.9.1 of the Contract which provides that, in case of the delay in payment for the received goods the [Buyer] undertakes to pay the [Seller] a fine in the amount of 0.3% of the cost of the non-paid goods for each day of delay. The forfeit foreseen by the Contract is a penalty and not a fine since it is charged for each day of delay, but not once; therefore the claim for recovery of the fine on the basis of the Contract is in fact a claim for recovery of a penalty. Taking into consideration that the claim for recovery of the penalty in the amount of 2, is based on the Contract conditions and that the calculation of the penalty corresponds to the factual circumstances of the case, this claim shall be subject to satisfaction. 10. The [Buyer] has lodged a counterclaim based on [Seller]'s cancellation of Contract # 2 of 20 September 2002 and [Buyer] seeks recovery from the [Seller] of 28, of the losses caused by the unilateral refusal of the [Seller] to fulfill its obligations for the delivery of the goods in Contract # 2 foresees that it shall be valid till 31 December The Contract provides that its total sum shall amount to approximately 300,000 and that the total amount of the delivered goods shall amount to approximately 300 tons. According to the terms of Contract # 2, the parties shall determine the description (range) of the goods to be delivered, their amount, their qualitative characteristics, and the delivery terms in the specifications to the Contract. Moreover, according to para.4.3 of the Contract, the price of the goods shall be determined in the specifications (except for the steel hawses and rollers, the price of which is fixed in para. 4.3 of the Contract). The procedure of the agreement on the specifications by the parties is not provided in the Contract. The Contract as well does not foresee the obligation of either of the parties to send the specification draft to the other party. The representatives of the parties have explained at the hearings that the parties had made twenty specifications to the Contract for the delivery of the 198 tons of goods during the period from the time of the concluding of the Contract till December The obligations as to the delivery of the goods in conformity with the concluded specifications to the Contract are completely fulfilled by the [Seller]. However, specifications providing for the delivery of the goods in 2004 which would have fixed essential conditions of the Contract and would have constituted an integral part of the Contract were not signed by the parties. Therefore, the obligation of the [Seller] to deliver goods in 2004 did not arise. Since the [Seller] did not have an obligation to deliver goods in 2004, the [Buyer] is not entitled to compensation of the losses caused by non-delivery of goods in In its counterclaim, the [Buyer], invoking arts. 525 and 526 of the Civil Code of Ukraine and contending that the [Seller] was not entitled to unilaterally refuse to fulfil its obligations under the Contract, has not taken into consideration the fact that, by virtue of art. 525 of the

7 Civil Code of Ukraine, repudiation of the obligation is barred unless otherwise provided in the agreement or by the law. At the same time, para. 9.1 of Contract # 2 envisages that in case of the breach of the terms of payment the [Seller] is entitled to suspend delivery of the goods till the payment for the goods is completed in accordance with the conditions of the Contract. Thus, Contract # 2 provides a possibility of unilateral repudiation of the fulfilment of the obligation. As it follows from the materials of the case and explanations of the parties, the obligations for the delivery of the goods under the specifications concluded in 2003 were fully implemented by the [Seller]. As to the delivery of the goods in 2004, the [Seller] starting from 4 January 2004 (the date of the start of the payment delay) was entitled to unilaterally refuse further delivery of the goods. 13. Considering the above, the [Buyer]'s counterclaim for the recovery from the [Seller] of 28, of the losses is unfounded and shall not be satisfied. 14. As for the [Buyer]'s counterclaim for the cancellation of Contract # 2, it shall not be considered by the Tribunal since the arbitration fee for it was not paid. 15. In view of the full satisfaction of the action claims of the [Seller], according to para. 1, S.V of the Regulations on Arbitration Fees and Expenses the arbitration fee paid by the [Seller] shall be imposed on the adverse party, i.e., on the [Buyer], and shall be recovered from that party. Since the [Buyer]'s counterclaims for recovery of losses are fully denied, the expenses on the payment of the arbitration fees shall not be imposed on the [Seller] but shall be borne by the [Buyer]. AWARD Following the provisions of Contract # 2 of 20 September 2002; arts. 45, 46, 49, 50, 54, 61, 62, 74, 80 of the UN Convention on Contracts for the International Sale of Goods (Vienna, 1980); arts. 180, 188, 193, 226, 230, of the Commercial Code of Ukraine; arts. 651, 652, 712 of the Civil Code of Ukraine; art. 31 of the Law of Ukraine "On the International Commercial Arbitration"; arts. 8.2, of the Rules of the Tribunal; and para. 1, S. V of the Regulations on Arbitration Fees and Expenses, the Tribunal has decided: The [Buyer], German firm, is obliged immediately after receipt of the present award to pay to the [Seller], Ukrainian public corporation: - 25, [the debts], - 2, [penalty for the delay in payment], - 2, [the reimbursement of the expenses on payment of the arbitration fee] In total, the amount of the satisfied claims constitutes 30, The counterclaims lodged by the [Buyer] for the recovery from the [Seller] of 28, of the losses are rejected.

8 The claim for the cancellation of Contract # 2 of 20 September 2002 concluded between the [Seller] and the [Buyer] shall be left without consideration since the arbitration fee for it was not paid. The judgment is final. FOOTNOTES * All translations should be verified by cross checking against the original text. For purposes of this translation, Claimant of Ukraine is referred to as [Seller] and Respondent of Germany is referred to as [Buyer]. ** Gayane Nuridzhanyan, junior associate at the law firm Danylko, Kushnir, Solltys & Yakymyak, Attorneys & Counselors at Law, Kyiv, Ukraine < student at Kyiv International University with major in private international law; participant of Canada-Ukraine Parliamentary Program, member of Ukrainian team at 2005 Telders International Moot Court Competition, The Hague.