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Italian company won in Russian arbitration

Representing an Italian Company in Arbitration over a Canceled Contract and Refund of the Upfront Payment

INTELLECT-S represented an italian company involved in the supply of machinery and equipment in arbitration with its Russian customer which requested arbitration at the International Commercial Arbitration Court of the Russian Federation Chamber of Commerce and Industry (the "ICAC") under the arbitration agreement in a contract under which the Italian company was to supply and install its custom-made equipment and train the customer's personnel. The relief the customer sought was the refund of 30% of the contract value paid in advance before the Company proceeded to manufacture the equipment. The customer was to pay most of the price just before the delivery by a letter of credit (while the final contractual payment in cash was due after the startup).

The Russian customer paid 30% upfront but opened no LC, so the Italian company suspended the delivery. The customer, who initially referred to financial problems, asked the supplier to reconfigure the equipment to run the price down, but later alleged the non-delivery constituted a breach of contract, demanded its dissolution and claimed the upfront payment back. In our Italian client's view, the breach was the buyer's, so the contract could not be dissolved and no money could be refunded.

Our comment:

The arbitration involved the following questions:

  1. Applicable law: The governing law of the contract is Russian law. The plaintiff relied on Russian statutory and case law under which the dependence of one's party performance on the other party's consideration (and, in this case, the suspension of the delivery after the deadline for opening the LC has been missed) had to be expressly written into the agreement. Otherwise, as per the established practice of application of the Civil Code, they are not counter-obligations, so the failure to perform one of them could not suspend the performance of the other. Representing the Italian firm as the defendant, INTELLECT-s relied on the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980), which, being part of Russia's law, prevails over the national Civil Code and treats the matter differently, and the tribunal accepted the treatment.
  2. Applicability of the Convention: The contract provided, apart from the delivery of the equipment, starting-up and adjustment, which raised the question if the United Nations Convention on Contracts for the International Sale of Goods applied (it does when services are only accessory to the sale of goods under the contract). Addressing this matter, the tribunal considered the apportionment and timing of contractual payments and found that, where almost all of the price was to be paid before starting-up and adjustment, the core obligation was the obligation to deliver the goods (i.e. the sale) which made the Convention applicable.
  3. The buyer's faith: The tribunal also took into account the behavior of the buyer which had evaded its obligations, and also the fact that, following the notice of dissolution of the contract, the buyer had proposed to proceed with the transaction and asked the seller to reconfigure the equipment. That led the tribunal to hold that the Russian customer's demand for the refund was unfounded and inconsistent with its own behavior.
  4. Neutrality of the tribunal: It appeared in the course of the arbitration that the arbitrator appointed by the plaintiff held a university chair where one of the plaintiff's counsel was employed. Given courts' very strict arbitrator independence requirements, this connection could be an obstacle for the arbitration, but this risk was removed under the ICAC rules, and the parties and arbitrator demonstrated their mutual independence.

The arbitration tribunal of the Camber of Commerce awarded the case to our client. The three-month statutory appeal period has not yet expired, but the Russian customer has not yet appealed the award in court.

The case was carried out by Alexander Latyev, Head of practice, PhD, and Timote Suladze, Head of the Italian Desk, INTELLECT-S.

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